Credit Default Swap

298 results back to index


pages: 265 words: 93,231

The Big Short: Inside the Doomsday Machine by Michael Lewis

Alan Greenspan, An Inconvenient Truth, Asperger Syndrome, asset-backed security, Bear Stearns, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, facts on the ground, financial engineering, financial innovation, fixed income, forensic accounting, Gordon Gekko, high net worth, housing crisis, illegal immigration, income inequality, index fund, interest rate swap, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, medical residency, Michael Milken, money market fund, moral hazard, mortgage debt, pets.com, Ponzi scheme, Potemkin village, proprietary trading, quantitative trading / quantitative finance, Quicken Loans, risk free rate, Robert Bork, short selling, Silicon Valley, tail risk, the new new thing, too big to fail, value at risk, Vanguard fund, zero-sum game

It was a zero-sum bet: If you made $100 million, the guy who had sold you the credit default swap lost $100 million. It was also an asymmetric bet, like laying down money on a number in roulette. The most you could lose were the chips you put on the table; but if your number came up you made thirty, forty, even fifty times your money. "Credit default swaps remedied the problem of open-ended risk for me," said Burry. "If I bought a credit default swap, my downside was defined and certain, and the upside was many multiples of it." He was already in the market for corporate credit default swaps. In 2004 he began to buy insurance on companies he thought might suffer in a real estate downturn: mortgage lenders, mortgage insurers, and so on.

On March 19, 2005, alone in his office with the door closed and the shades drawn, reading an abstruse textbook on credit derivatives, Michael Burry got an idea: credit default swaps on subprime mortgage bonds. The idea hit him as he read a book about the evolution of the U.S. bond market and the creation, in the mid-1990s, at J.P. Morgan, of the first corporate credit default swaps. He came to a passage explaining why banks felt they needed credit default swaps at all. It wasn't immediately obvious--after all, the best way to avoid the risk of General Electric's defaulting on its debt was not to lend to General Electric in the first place. In the beginning, credit default swaps had been a tool for hedging: Some bank had loaned more than they wanted to General Electric because GE had asked for it, and they feared alienating a long-standing client; another bank changed its mind about the wisdom of lending to GE at all.

You could short the stocks of home building companies--Pulte Homes, say, or Toll Brothers--but that was expensive, indirect, and dangerous. Stock prices could rise for a lot longer than Burry could stay solvent. A couple of years earlier, he'd discovered credit default swaps. A credit default swap was confusing mainly because it wasn't really a swap at all. It was an insurance policy, typically on a corporate bond, with semiannual premium payments and a fixed term. For instance, you might pay $200,000 a year to buy a ten-year credit default swap on $100 million in General Electric bonds. The most you could lose was $2 million: $200,000 a year for ten years. The most you could make was $100 million, if General Electric defaulted on its debt any time in the next ten years and bondholders recovered nothing.


pages: 459 words: 118,959

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

activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, Blythe Masters, book value, buy and hold, Carl Icahn, cognitive dissonance, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, electricity market, family office, financial innovation, fixed income, forensic accounting, glass ceiling, Greenspan put, Long Term Capital Management, market bubble, money market fund, moral hazard, old-boy network, Pershing Square Capital Management, Ponzi scheme, profit motive, Savings and loan crisis, short selling, short squeeze, statistical model, stock buybacks, subprime mortgage crisis, white flight, zero-sum game

Although a company’s bankruptcy filing almost certainly results in someone losing money, there is no way of knowing that the person holding a credit-default-swap contract actually suffered a loss, the regulators reasoned. So credit-default swaps weren’t regulated—not as securities or gambling or insurance—and they proliferated at an astounding pace. Bond insurers got around the prohibition by setting up shell companies such as LaCrosse. American International Group (AIG) eventually sold protection on around $500 billion of risk through the credit-default-swap market. It conducted the business through a nonregulated unit called AIG Financial Products, headquartered in London.

During the second day of questioning, the SEC attorneys became less confrontational. They even sought Ackman’s opinion on a few topics, including the credit-default-swap market. “The problem with the credit-default-swap market,” Ackman said, “is that banks often have more information than their counterparties. That means they’re shifting risk to someone who knows less about the risk than they do.” But when Gotham made an investment—including one in the credit-default-swap market—“we want to know more than anyone in the world can know based on the public information,” Ackman explained. “And usually, by the way, most people don’t read the stuff anyway,” Ackman added.

Ackman and the fund’s analysts sought out companies with securities that were mispriced or misunderstood by the market. In MBIA’s case, the market believed in the permanence of the company’s triple-A rating. If it didn’t, then the bond insurer’s ability to write new business would have disappeared overnight. Ackman had placed his bet against MBIA principally in the credit-default-swap market. Credit-default swaps, or CDS contracts, are derivatives that allow parties to buy and sell protection against a default on a security. The contracts are essentially life insurance policies on companies. 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.


pages: 543 words: 157,991

All the Devils Are Here by Bethany McLean

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, Bear Stearns, behavioural economics, Black-Scholes formula, Blythe Masters, break the buck, buy and hold, call centre, Carl Icahn, collateralized debt obligation, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, Dr. Strangelove, Exxon Valdez, fear of failure, financial innovation, fixed income, Glass-Steagall Act, high net worth, Home mortgage interest deduction, interest rate swap, junk bonds, Ken Thompson, laissez-faire capitalism, Long Term Capital Management, low interest rates, margin call, market bubble, market fundamentalism, Maui Hawaii, Michael Milken, money market fund, moral hazard, mortgage debt, Northern Rock, Own Your Own Home, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, race to the bottom, risk/return, Ronald Reagan, Rosa Parks, Savings and loan crisis, shareholder value, short selling, South Sea Bubble, statistical model, stock buybacks, tail risk, Tax Reform Act of 1986, telemarketer, the long tail, too big to fail, value at risk, zero-sum game

Lo and behold, along came the product that would soon be the greatest capital reducer of them all: the credit default swap. In simplest terms, a credit default swap is designed to accomplish the same task as an interest rate or currency swap—move risk from a party that doesn’t want it to one that does. The risk in this case, however, is credit risk. A credit default swap is essentially an insurance policy against the possibility of default—credit protection, it came to be called. One party—a bank—would buy credit default swaps to protect against a default in its loan portfolio. A counterparty would sell the bank the credit default swap in return for a fee. So long as there was no default, the counterparty would keep collecting fees.

It was a natural development—at least from Wall Street’s point of view—but it evolved into one of the most unnatural and destructive financial products that the world has ever seen: the synthetic CDO. The key ingredient in a synthetic CDO was our old friend the credit default swap. For that matter, the key to shorting the mortgage market was the credit default swap. By 2005, credit default swaps on corporate bonds were ubiquitous, with a notional value of more than $25 trillion. (The notional value of credit default swaps peaked in 2007 at $62 trillion.) They were used by companies to protect against the possibility that another entity it did business with might default. They were used by banks to measure the riskiness of a loan portfolio, because their price reflected the market’s view of risk.

“We were extending credit,” says one member of the credit derivative team, “and nobody was putting a price on it.” A tradable market for credit default swaps would change that. Traders buying and selling credit protection would allow the market to gauge the riskiness of a loan. If the cost of the credit default swap increased, that meant the chance of a default was rising; if it decreased, then the odds were decreasing. Even before a tradable market existed, J.P. Morgan’s quants began using credit default swaps internally, to put a price on the risk of its own commercial loans. The old-line commercial lenders hated it, but this was exactly the kind of approach to risk that Weatherstone favored.


pages: 374 words: 114,600

The Quants by Scott Patterson

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, automated trading system, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, book value, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Carl Icahn, 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, Dr. Strangelove, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, Financial Modelers Manifesto, fixed income, Glass-Steagall Act, global macro, 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, Jim Simons, job automation, John Meriwether, John Nash: game theory, junk bonds, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, Mark Spitznagel, merger arbitrage, Michael Milken, military-industrial complex, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, proprietary trading, 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, Savings and loan crisis, Sergey Aleynikov, short selling, short squeeze, 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

The link between dying spouses and credit default swaps was quant wizardry at its best—and its worst. Li showed how this model could assign correlations between tranches of CDOs by measuring the price of credit default swaps linked to the underlying debt. Credit default swaps supply a single variable that incorporates the market’s assessment of how the loan will perform. The price of a CDS, after all, is simply a reflection of the view investors have on whether or not a borrower will default. Li’s model supplied a method to bundle the prices of many different credit default swaps in a CDO and spit out numbers showing the correlations between the tranches.

Weinstein thought it might be a good fit—the job was for a small desk, with little competition, at a firm making a big push into a field he was certain had plenty of room to grow. Soon after joining Deutsche, he was learning how to trade a relatively new derivative known as credit-linked notes. Eventually they would become more commonly called credit default swaps. Credit default swaps are derivatives because their value is linked to an underlying security—a loan. They were created in the early 1990s by Bankers Trust, but it wasn’t until the math wizards at J. P. Morgan got their mitts on them that credit derivatives really took off. When Weinstein arrived at Deutsche, only a few notes or swaps traded every day—light-years from the megatrillion-dollar trading in swaps that went on in cyberspace a decade later.

Another boom came in the form of a new breed of hedge funds such as Citadel—or Citadel copycats—that specialized in convertible-bond arbitrage. Traditionally, just as Ed Thorp had discovered in the 1960s, the strategy involved hedging corporate bond positions with stock. Now, with credit default swaps, there was an even better way to hedge. Suddenly, those exotic derivatives that Weinstein had been juggling were getting passed around like baseball cards. By late 2000, nearly $1 trillion worth of credit default swaps had been created. Few knew more about how they worked than the baby-faced card-counting chess whiz at Deutsche Bank. In a flash, thanks in part to Russia’s default and LTCM’s collapse, Weinstein went from being a bit player to a rising star at the center of the action, putting him on the fast track to becoming one of the hottest, highest-paid, and most powerful credit traders on Wall Street.


pages: 430 words: 109,064

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

Alan Greenspan, American ideology, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Bonfire of the Vanities, bonus culture, book value, break the buck, business cycle, business logic, buy and hold, capital controls, Carmen Reinhart, central bank independence, Charles Lindbergh, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency risk, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Glass-Steagall Act, Gordon Gekko, greed is good, Greenspan put, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, junk bonds, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, Martin Wolf, Michael Milken, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, proprietary trading, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, Savings and loan crisis, sovereign wealth fund, Tax Reform Act of 1986, The Myth of the Rational Market, too big to fail, transaction costs, Tyler Cowen, value at risk, yield curve

Orange County lost almost $2 billion on inverse floaters and similar trades that treasurer Robert Citron clearly did not understand; real-economy companies such as Procter & Gamble and Gibson Greetings similarly lost tens or hundreds of millions of dollars.75 But these transactions generated large fees for the dealers; Merrill Lynch alone made $100 million on deals with Orange County.76 One crucial innovation in the recent history of derivatives, which played an important role in creating the latest financial crisis, was the credit default swap. A credit default swap is a form of insurance on debt; the “buyer” of the swap pays a fixed premium to the “seller,” who agrees to pay off the debt if the debtor fails to do so. Typically the debt is a bond or a similar fixed income security, and the debtor is the issuer of the bond. Historically, monoline insurance companies provided insurance for municipal bonds, and Fannie Mae and Freddie Mac insured the principal payments on their mortgage-backed securities. With credit default swaps, however, now anyone could sell insurance on any fixed income security.

With credit default swaps, however, now anyone could sell insurance on any fixed income security. Credit default swaps were invented in the early 1990s by Bankers Trust, but were popularized by J.P. Morgan later in the decade as a way for banks to unload the default risk of their asset portfolios; this enabled them to lower their capital requirements, freeing up money that could be lent out again.77 Credit default swaps also provide a way for a bond investor to hedge against the risk of default by the bond issuer. But because there is no requirement that the buyer of a credit default swap own the debt in question, these derivatives are also a handy way to gamble on the chances of any company defaulting on its debts (similar to buying insurance on your neighbor’s house); this quality made them a new type of security that could be minted in infinite quantities and traded, providing another source of profit for derivatives dealers.

In comparison with MBS and CDOs, credit default swaps (insurance against default), introduced in chapter 3, are a relatively simple product, but they played a special role in the finance boom. Because the boom was based on creating, packaging, and selling debt, it depended on the assumption that borrowers would pay off their debts—or that someone else would pay in their place. Credit default swaps made it possible to insure any pool of mortgage loans or mortgage-backed securities, seemingly eliminating the risk of default. In 1997, J.P. Morgan (part of today’s JPMorgan Chase) pioneered the use of credit default swaps to shift the default risk of loans off of its balance sheet.


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

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

If any one of these factors had been absent, the damage wrought by them would likely have been much smaller or at least localized among a few firms. CREDIT DEFAULT SWAPS What really makes a systemic crisis systemic is when failures in one instrument lead to the failure of others. When mortgage-backed securities started to fail and to take firms with them, the contagion spread to, and through, a number of instruments, but the biggest of all was the market for credit default swaps (CDSs). Put simply, a credit default swap is insurance against the default of an issuer’s bonds and other debt obligations. CDSs were written against RMBS securities and against the bonds of financial institutions and all other kinds of debt issuers.

If you think that regulation in the form of ‘‘transparency’’ is sufficient on the grounds that the market can regulate itself as long as it has sufficient information, you place more faith in our ability to measure and predict market behavior than can reasonably be done. In a complex financial system, it’s difficult enough just to know who has sold credit default swaps to whom, let alone the consequences of their deterioration under specific market circumstances. Reforming the credit default swap market by making their trading and ownership transparent may help to solve the first problem (though even this premise is somewhat doubtful, as one chapter in this book discusses), but it won’t do anything to solve the second.

It is hard to argue that innovations that were at the center of the financial crisis—namely mortgage-backed securities and credit default swaps—were good for anyone. Some distinguished economists and bankers put the case more strongly. Paul Volcker, Alan Greenspan’s predecessor as Fed chairman and never a man to express half an opinion, has made clear his views on unrestrained innovation: I hear about these wonderful innovations in the financial markets, and. . . . I can tell you of two—credit-default swaps and collateralized debt obligations—which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of?


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Black Swan, Black-Scholes formula, bonus culture, book value, break the buck, buy and hold, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delayed gratification, diversification, Edmond Halley, facts on the ground, fear index, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, Greenspan put, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, proprietary trading, regulatory arbitrage, rent-seeking, Richard Thaler, risk free rate, risk tolerance, risk/return, Ronald Reagan, Salesforce, Savings and loan crisis, seminal paper, shareholder value, short selling, statistical model, subprime mortgage crisis, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

The nonfinancial companies whose activities in the globalized economy exposed them to financial uncertainty didn’t seem interested. The derivatives that were useful to them—futures, options, and swaps linked to commodities, currencies, and interest rates—had already been invented. It seemed to me as if the credit default swap was an invention searching for a real purpose. As it happened, the kind of companies that found credit default swaps most relevant were those that had lots of default risk on their books: the banks. Losing That Hate-to-Lose-Money Mind-set Back in the early 1990s, the world’s biggest banks were still firmly rooted in an old lending culture where the priority above all else was to loan money and get paid back with interest.

Now suppose you preferred to work with people who swore by the market approach to credit, as Peter Hancock did. The credit default swap was the trading world’s modern solution. This industry had already created a thriving business enabling clients to protect themselves from—or speculate on—fluctuating interest rates, currencies, and commodity risk using derivatives. Why not expand the innovation to handle credit? For instance, if Hancock had been able to buy a derivative that hedged J.P. Morgan against clients’ defaulting, the bank would have been spared the embarrassment of its Korean swap fiasco. Like foreign exchange options, credit default swaps could be easily detached from any underlying exposure that might “justify” their existence as a hedge.

In fixed income, a company might have hundreds of different bonds in the market, repayable in different currencies, and with myriad maturity dates and interest payment profiles. Which one should you buy or sell? You had to be a geek to figure it out. With credit default swaps, all that detail could be stripped away. As with equities, there was a single “reference entity” or “name,” Walmart Inc., whose potential for default drove the price of the swap contract. Better still, the default swap distilled this crucial credit information out of the hundreds of Walmart bonds. And for Sherwood, information was power. He realized that by combining trading in credit default swaps and corporate bonds on the same desk, Goldman would have its finger on the pulse of the world’s biggest corporate borrowers: not only could Goldman control its own exposure, but it would control its clients’ access to the market for credit.


pages: 257 words: 64,763

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

Alan Greenspan, banking crisis, Bear Stearns, Bernie Madoff, Bernie Sanders, business cycle, California energy crisis, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, do well by doing good, facts on the ground, financial deregulation, fixed income, Glass-Steagall Act, housing crisis, invisible hand, Long Term Capital Management, low interest rates, mega-rich, mortgage debt, new economy, old-boy network, Ponzi scheme, profit motive, Ralph Nader, rolling blackouts, Ronald Reagan, Savings and loan crisis, too big to fail, trickle-down economics

As for those “swaps” to which Gramm referred, scoffing at alarmists who thought “trillions” were at stake and that the swaps could “disrupt the financial system”—boy, did they ever. “The Monster That Ate Wall Street: How ‘credit default swaps’—an insurance against bad loans—turned from a smart bet into a killer” was the title and subheading of a Newsweek article on October 6, 2008, referring to credit default swaps, “which ballooned into a $62 trillion market . . . nearly four times the value of all stock traded on the New York Stock Exchange.” Of course in hindsight, Gramm’s glibness, whether cynical or naïve, seems patently absurd; the worrywarts were completely right.

However, some years before Glass-Steagall was dismantled, Phil’s wife played a key role, as a member of both the Reagan and the Bush I administrations, in shaping the rapid changes in the financial markets brought about by internationalization, computer-driven trading, and the introduction of a whole new discipline of “risk management,” whereby Wall Street wizards deployed complex mathematical models to create a vast array of new financial products, such as the now infamous credit default swaps and collateralized debt obligations. As was seen throughout the Reagan and later the Bush I and Bush II administrations, the Republicans had realized they could impose de facto deregulation of Big Business by appointing to influential federal commissions and agencies “watchdogs” who were sympathetic to the corporations they were supposed to be monitoring.

In addition, the law limited the SEC’s authority to regulate certain types of OTC derivatives.” “As a result, the market for OTC derivatives has largely gone unregulated,” the White House statement continued. “The downside of this lax regulatory regime for OTC derivatives—and, in particular, for credit default swaps (CDS)—became disastrously clear during the recent financial crisis.” Now they tell us. In a Washington Post op-ed, Summers and Obama Treasury secretary Timothy Geithner, a Rubin/Summers protégé in Clinton’s Treasury Department, bemoaned how “the most severe financial crisis since the Great Depression” was caused because the market “failed to perform its function as a reducer and distributor of risk.


The Trade Lifecycle: Behind the Scenes of the Trading Process (The Wiley Finance Series) by Robert P. Baker

asset-backed security, bank run, banking crisis, Basel III, Black-Scholes formula, book value, Brownian motion, business continuity plan, business logic, business process, collapse of Lehman Brothers, corporate governance, credit crunch, Credit Default Swap, diversification, financial engineering, fixed income, functional programming, global macro, hiring and firing, implied volatility, interest rate derivative, interest rate swap, locking in a profit, London Interbank Offered Rate, low interest rates, margin call, market clearing, millennium bug, place-making, prediction markets, proprietary trading, short selling, statistical model, stochastic process, the market place, the payments system, time value of money, too big to fail, transaction costs, value at risk, Wiener process, yield curve, zero-coupon bond

This is a linear trade as the profit is linearly related to the spot price. But it is leveraged because, if the price starts rising, the trader will have to commit an unknown size of funds to buying the underlying in order to fulfil his trading obligations. Credit default swaps As credit default swaps are an insurance product, they are leveraged trades. This is illustrated in Table 5.3. Suppose a five-year credit default swap trades at 200 basis points per annum. If spreads stay fairly constant, the buyer of protection will have paid about 1000 basis points over the life of the trade (equivalent to 10% of the notional). On the other hand, the seller of protection will pay 100% of the notional (less recovery) in the event of default.

This can be explained by taking an example of five-year bonds in Vodafone trading at 180 basis points spread to the underlying interest rate but the five-year credit default swap in the same company trading at 200 basis point spread. The basis (difference) is therefore 20 basis points. Someone who holds bonds and CDSs is paying 20 basis points. Now the impact on P&L caused by a change in the basis is defined as the bond basis delta. Credit default swap (CDS) deltas. This is the change in P&L caused by a change in the credit default swap rate. Foreign exchange. The change in P&L due to a change in foreign exchange rates. Interest rate deltas. The change in P&L caused by a change in interest rates.

A physical commodity option would pay out in some commodity, such as cocoa beans or palladium. This is a good example of how a financial product transcends the asset class and has the same features and cashflows across all asset classes. 30 THE TRADE LIFECYCLE Payout Starts Exercise Premium FIGURE 3.13 Cashflows on an American option trade 3.10 CREDIT DEFAULT SWAP A credit default swap (CDS) is a contract between two parties referencing an entity or asset: a buyer of protection, also known as the seller of risk; and a seller of protection also called the buyer of risk. A simple example would be: JPMorgan buys protection from Banco Santander referencing Ford Motor Credit (Ford Motor Credit is the reference entity).


pages: 478 words: 126,416

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

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, Cornelius Vanderbilt, corporate governance, Credit Default Swap, cross-subsidies, currency risk, dematerialisation, disinformation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Growth in a Time of Debt, Ida Tarbell, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jim Simons, John Meriwether, junk bonds, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, M-Pesa, market design, Mary Meeker, megaproject, Michael Milken, millennium bug, mittelstand, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, reality distortion field, regulatory arbitrage, Renaissance Technologies, rent control, risk free rate, risk tolerance, road to serfdom, Robert Shiller, Ronald Reagan, Schrödinger's Cat, seminal paper, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, vertical integration, Washington Consensus, We are the 99%, Yom Kippur War

A false belief in the security provided by such packaging stimulated demand for these assets. Further reassurance appeared to be provided by the development of a market in credit default swaps – derivative securities that would pay out if there was default on the underlying security. Little thought was given at the time to the capacity of the institutions that wrote these contracts to pay in the event of widespread defaults. Thus a downgrading of the credit rating of AIG in 2008 – which had insured over $500 billion of securities through credit default swaps – was devastating in its consequences for the perceived safety of bond portfolios. The insatiable demand for asset-backed securities led to the pursuit of assets of lower and lower quality.

The English traded risks; the Swiss mutualised them.12 The Swiss practised Gemeinschaft; the English, not knowing the meaning of Gesellschaft, equated it with wagering. The elision would have profound consequences. In 1997 Robin Potts QC was asked by the International Swaps and Derivatives Association (ISDA) to review the new market in credit default swaps. Were participants in this market the modern counterparts of the gentlemen of Lloyd’s – engaged in a wager? Or were the buyers and sellers of credit default swaps more akin to the Swiss villagers, sharing the risks of disease and disasters? Mr Potts expressed Michel Albert’s distinction in legal terms. He drew attention to the famous case of Carlill v. Carbolic Smoke Ball Company.

‘Mr Tourre put together a complex financial product that was secretly designed to maximize the likelihood that it would fail,’ it concluded.17 Collateralised debt obligations were bought, and credit default swaps sold, by people who made mistakes in their assessment of the underlying value of these securities. That is why they bought them. In most cases they did not really know what the securities were or how the payments would be determined. The growth of the market for credit default swaps followed closely the pattern set by the LMX spiral. Risky loans were bundled into packages, which were then split and rearranged into new packages, to a point at which no one could know the underlying nature of the security that had been offered or the revenues on which the returns were based.


pages: 280 words: 79,029

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

Affordable Care Act / Obamacare, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, behavioural economics, Black Monday: stock market crash in 1987, 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 engineering, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, impact investing, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, low interest rates, margin call, Mark Zuckerberg, McMansion, Minsky moment, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Savings and loan crisis, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Thales of Miletus, the long tail, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

Globalization increased the complexity of multinational companies’ operations, and the Asian debt crisis in the late 1990s drove home the risks of operating in emerging markets. Credit-default swaps promised a way for banks to reduce the impact of defaults, in the aftermath of a wave of bank failures experienced during America’s savings-and-loan crisis in the 1980s, because the sellers of a swap promised a payout if the borrower in question was unable to pay. Needs are not always so noble, of course. By making their lending seem less risky, credit-default swaps also meant that regulators were happy to allow banks to fund themselves with less equity capital. That in turn made banks more attractive propositions to equity investors, who would have to put up less money in order to get a return.

But even now it is hard to find fault with the concept, as opposed to the practical application, of many of the most demonized products of the recent past. Take securitization and credit-default swaps. It would be blinkered to argue they have no problems. By handing risks on to someone else, securitization gives banks an incentive to loosen their underwriting standards; they won’t be the ones picking up the pieces. The protection afforded by credit-­default swaps may similarly blunt the incentives for lenders to be careful when they extend credit, because they will get a payout in the event of a borrower defaulting. But the downsides should not obscure the good.

They are then sliced into different tranches: the most senior tranches of CDOs of mortgage-backed securities were given high ratings during the most recent US housing boom because the performance of all the different mortgages in the pool was thought to be diversified. Counterparty risk: The risk that the other party to a contract will not live up to its obligations. The counterparty risk in an interest-rate swap is that one of the parties to the swap will not pay up. Credit-default swap: A credit-default swap is a form of insurance against default by a bond issuer. Credit ratings: An evaluation by a credit-rating agency of the creditworthiness of a debtor. Ratings are widely used by investors and are embedded in international rules, including those on how much equity banks have to use to fund themselves.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, benefit corporation, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, 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, financial engineering, fixed income, geopolitical risk, Glass-Steagall Act, Greenspan put, high net worth, Hyman Minsky, interest rate derivative, invisible hand, junk bonds, Ken Thompson, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Martin Wolf, Michael Milken, 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 and loan crisis, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

Equally distressing to the banks, Wall Street had constructed an alternative way of speculating against troubled corporations, via derivatives, and this wholly unregulated market doubled back on its Wall Street creators with a vengeance. Credit default swaps had been invented by financial engineers at Bankers Trust as a form of insurance on corporate defaults.af The initial purpose was supposedly as a hedging vehicle. A bank that had lent money to General Motors could hedge its risk by purchasing a credit default swap from another party who believed that the loan would be repaid. Thus, if GM defaulted on the loan, the bank would recoup its investment via the swap. Unfortunately, such hedges dulled the bank’s incentive to perform the one function for which society depended on it: thoughtfully rationing credit to worthy borrowers.

INDEX Adelson, Mark adjustable rate mortgages option ARMs rate freeze on proposed affordable housing Age of Markets American International Group (AIG) accounting scandals assets bailouts. See AIG bailouts Ben Bernanke and board of Warren Buffett and CDOs and collateral calls on compensation at corporate structure of credit default swaps and credit rating agencies and Jamie Dimon and diversity of holdings employees, number of Financial Products subsidiary Timothy Geithner and Goldman Sachs and insurance (credit default swap) premiums of JPMorgan Chase and lack of reserve for losses leadership changes Lehman Brothers and losses Moody’s and Morgan Stanley and New York Federal Reserve Bank and Hank Paulson and rescue of.

See home foreclosure(s) foreign investors France Frank, Barney Freddie Mac and Fannie Mae accounting problems of affordable housing and Alternative-A loans bailout of Ben Bernanke and capital raised by competitive threats to Congress and Countrywide Financial and Democrats and Federal Reserve and foreign investment in Alan Greenspan and as guarantor history of lack of regulation of leadership changes leverage losses mortgage bubble and as mortgage traders Hank Paulson and politics and predatory lending and reasons for failures of relocation to private sector Robert Rodriguez and shareholders solving financial crisis through statistical models of stock price of Treasury Department and free market Freidheim, Scott Friedman, Milton Fuld, Richard compensation of failure to pull back from mortgage-backed securities identification with Lehman Brothers Lehman Brothers’ bankruptcy and Lehman Brothers’ last days and long tenure of Hank Paulson and personality and character of Gamble, James (Jamie) GDP Geithner, Timothy AIG and bank debt guarantees and Bear Stearns bailout and career of China and Citigroup and financial crisis, response to Lehman Brothers and money markets and Morgan Stanley and in Obama administration Hank Paulson and TARP and Gelband, Michael General Electric General Motors Germany Glass-Steagall Act Glauber, Robert Golden West Savings and Loan Goldman Sachs AIG and as bank holding company Warren Buffett investment in capital raised by capital sought by compensation at credit default swaps and hedge funds and insurance (credit default swap) premiums of job losses at leverage of Merrill Lynch and Stanley O’Neal’s obsession with Hank Paulson and pull back from mortgage-backed securities short selling against stock price of Wachovia and Gorton, Gary government, U.S. See also specific agencies as absent from Wall Street bailouts by.


pages: 291 words: 91,783

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

addicted to oil, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Bear Stearns, Bernie Sanders, Bretton Woods, buy and hold, carried interest, classic study, clean water, collateralized debt obligation, collective bargaining, computerized trading, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, desegregation, diversification, diversified portfolio, Donald Trump, financial innovation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Greenspan put, illegal immigration, interest rate swap, laissez-faire capitalism, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, medical malpractice, military-industrial complex, money market fund, moral hazard, mortgage debt, Nixon triggered the end of the Bretton Woods system, obamacare, passive investing, Ponzi scheme, prediction markets, proprietary trading, prudent man rule, quantitative easing, reserve currency, Ronald Reagan, Savings and loan crisis, Sergey Aleynikov, short selling, sovereign wealth fund, too big to fail, trickle-down economics, Y2K, Yom Kippur War

He saw derivatives like credit default swaps—insurance-like contracts that allow a lender to buy “protection” from a third party in the event his debtor defaults—as brilliant innovations that not only weren’t risky, but reduced risk. “Greenspan saw credit derivatives as a device that enhanced a risk-free economic environment,” says Greenberger. “And the theory was as follows: he’s looking at credit derivatives, and he’s saying everyone is going to have insurance against breakdowns … But what he didn’t understand was that the insurance wasn’t going to be capitalized.” In other words, credit default swaps and the like allowed companies to sell something like insurance protection without actually having the money to pay that insurance—a situation that allowed lenders to feel that they were covered and free to take more risks, when in fact they were not.

“Then I turn around and I call up AIG and I’m like, ‘Hey, where would you credit default swap this bond?’ And they’re like, ‘Oh, we’ll do that for LIBOR plus ten.’ ” Miklos pauses and laughs, recalling the pregnant pause on his end of the phone line as he heard this offer from AIG. He couldn’t believe what he’d just heard: it was either a mistake, or they had just handed him a mountain of money, free of charge. “I hear this,” he says, “and I’m like, ‘Uh … okay. Sure, guys.’ ” Here we need another digression. The credit default swap was a kind of insurance policy originally designed to get around those same regulatory capital charges.

The credit default swap was a kind of insurance policy originally designed to get around those same regulatory capital charges. Ironically, Miklos had once been part of a famed team at JPMorgan that helped design the modern credit default swap, although the bank envisioned a much different use for them back then. A credit default swap is just a bet on an outcome. It works like this: Two bankers get together and decide to bet on whether or not a homeowner is going to default on his $300,000 home loan. Banker A, betting against the homeowner, offers to pay Banker B $1,000 a month for five years, on one condition: if the homeowner defaults, Banker B has to pay Banker A the full value of the home loan, in this case $300,000.


pages: 305 words: 69,216

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

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

But they also could, and many did, buy a form of insurance, issued in great quantity by, among many other firms, the American International Group, against declines in the value of mortgage-backed securities, as well as of other investments. This form of insurance, called "credit-default swaps," had originally been intended as insurance against bond defaults, of which there was a long history on the basis of which premiums could be computed with reasonable confidence. But AIG and other financial firms (not limited to insurance companies and commercial banks, the traditional issuers of credit insurance, such as conventional mortgage insurance, as distinct from insurance of securitized debt) began issuing credit-default swaps to insure against losses in the value of mortgage-backed securities, which lacked such a history.

The banks didn't know how meager their equity cushion had become and therefore how much they could lend without incurring a high risk of bankruptcy, since as we know lending is increasingly risky the more leverage the lender has in its capital structure. A further complication was that banks that had bought the insurance side of credit-default swaps did not know their exposure. When Lehman Brothers collapsed, issuers of credit-default swaps all over the world were on the hook because Lehman had purchased many swaps. It had issued many swaps as well, and its equity, devoured by the collapse of the mortgagebacked securities, which it had held in great quantity, was insufficient to enable it to pay the debts that it had insured.

Banks realized this and tried to reduce the riskiness of their loan portfolios without reducing profit by devices such as securitized debt (notably securities backed by residential mortgages) and credit-default swaps (insurance against defaults), which dispersed risk and therefore reduced the risks borne by a particular bank. These instruments did reduce risk, but also increased it, making the net effect on the banking industry's risk unclear; for example, banks both issued and bought credit-default swaps —they were insurers of defaults as well as being insured against them. The riskiness of secnritized debt was hard to assess because of the complexity of the securities, a single one of which might be backed by hundreds or even thousands of mortgages on houses scattered all over the country.


pages: 322 words: 77,341

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

Alan Greenspan, asset-backed security, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, junk bonds, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, low interest rates, 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, off-the-grid, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, South Sea Bubble, statistical model, Tax Reform Act of 1986, The Great Moderation, the payments system, too big to fail, tulip mania, Tyler Cowen, value at risk

Buffett was horribly right about the risks. The irony is that he wasn’t even talking here about the category of derivative which turned out to be the most destructive of all, the credit default swap, or CDS. I am going to arraign a number of culprits for the crash: derivatives are one of the main ones, but among derivatives, it was CDS which were the chief baddy, the gang leader, the Mafia don, the most destructive of the WMDs. As with some other culprits in the crisis, credit default swaps were a new thing, invented by bankers seeking newer, sexier ways of making newer, sexier profits. When I first began to study the world of the City, I found it hard to come to grips with the idea that financial instruments are “invented,” cooked up in the same way as works of art or scientific theories—but the fact is that they are.

Morgan put them together to create securitized bundles of credit default swaps—bundles of insurance against default—and selling them to investors. The investors would get the streams of revenue, according to the level of risk and reward they chose; the bank would get insurance against its loans and fees for setting up the deal. There was one final component of the J.P. Morgan team’s invention. It set up an offshore shell company, called a special purpose vehicle, or SPV, to fulfill the role supplied by the EBRD in the first credit default swap. The shell company would assume $9.7 billion of J.P. Morgan’s risk; then it would sell off that risk to investors in the form of securities paying differing rates of interest.

Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest rate swaps, and credit default swaps greatly increased the volume of transactions that bankers could make money on. And the aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.


Risk Management in Trading by Davis Edwards

Abraham Maslow, asset allocation, asset-backed security, backtesting, Bear Stearns, Black-Scholes formula, Brownian motion, business cycle, computerized trading, correlation coefficient, Credit Default Swap, discrete time, diversified portfolio, financial engineering, fixed income, Glass-Steagall Act, global macro, implied volatility, intangible asset, interest rate swap, iterative process, John Meriwether, junk bonds, London Whale, Long Term Capital Management, low interest rates, margin call, Myron Scholes, Nick Leeson, p-value, paper trading, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, statistical model, stochastic process, systematic trading, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond

It works less well in cases of a single large trading partner who has a very low probability of default. (See Figure 9.1, Unexpected Loss.) KEY CONCEPT: CREDIT DEFAULT SWAPS (CDS) Credit Default Swaps (CDSs) are financial instruments that are closely associated with credit markets. Hedge funds and trading desks can use these instruments to either speculate on the possibility of corporate default or to protect themselves from defaults. Credit default swaps are derivatives whose value is based on corporate bonds issued by some corporation. In event of a default, the CDS issuer (the CDS seller) will take possession of the corporate bond and give a payoff to the buyer.

Contracts that are not considered derivatives may contain clauses that are considered derivatives for accounting purposes. These embedded derivatives might act like forwards, options, or any other type of derivative. For example, a contract between two firms might specify that a minimum quantity of a standardized product is purchased at a certain price. Credit Default Swaps (CDS). Credit default swaps are derivatives whose value is based on corporate bonds issued by some corporation. In the event that the issuer of the bond defaults, the CDS issuer will take possession of the corporate bond and give a payoff to the CDS buyer. In compensation for taking on this risk, the CDS seller will receive a series of payments from the CDS buyer.

For example, spreads based of bond markets might assume that default events occur twice a year (when bond payments are due). This would correspond to m = 2 Market-Based A second way to estimate default probabilities is to look directly at the prices of credit default swaps (CDS) or corporate bonds. It is possible to calculate the survival assumption embedded in the market prices of bonds and credit default swaps assuming that the risk of default is the only reason that a corporate bond will sell for less than a similar risk‐free bond. The logic behind this assumption is that a rational investor should be indifferent between the two investments as long as the present value of the cash flow incorporates the possibility of loss.


pages: 468 words: 145,998

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

Alan Greenspan, asset-backed security, bank run, banking crisis, Bear Stearns, break the buck, Bretton Woods, buy and hold, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Doha Development Round, fear of failure, financial engineering, financial innovation, fixed income, housing crisis, income inequality, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, money market fund, moral hazard, Northern Rock, price discovery process, price mechanism, regulatory arbitrage, Ronald Reagan, Saturday Night Live, Savings and loan crisis, short selling, sovereign wealth fund, technology bubble, too big to fail, trade liberalization, young professional

The market stayed strong through the day, with the Dow closing up 290 points, or 2.6 percent, at 11,511. But Lehman’s shares dropped $2.05, to $14.15, while its credit default swaps edged up to a worrisome 328 basis points. And the markets still did not know that Lehman’s talks with KDB were collapsing. I had hoped that the GSE takeovers would give Lehman a bit of breathing room, but I was wrong. Tuesday, September 9, 2008 I arrived at the office shortly after 6:00 a.m. and headed straight to the Markets Room. Lehman’s shares were headed toward single digits, and its credit default swaps were under pressure. I went to Ken Wilson’s office to get the latest on Dick Fuld.

Meantime, the company was still weighed down by substantial market and credit risks from its holdings of residential mortgage-backed securities and the credit default swaps it had written on residential MBS. It had even used its securities lending program to purchase residential MBS. It turned out AIG’s third-quarter losses were going to be $24.5 billion pretax—even worse than we had expected. We needed to act quickly to inject $40 billion of TARP capital into AIG to avoid a rating downgrade that would trigger $42 billion in collateral calls and finish the company off. The Fed’s restructuring plan would shift AIG’s worst mortgage-related assets and credit default swaps into two new Fed vehicles, called Maiden Lane II and Maiden Lane III, which together would hold $52.5 billion.

As a result, this book has many heroes. I’ve also tried to tell this story so that it could be readily understood by readers of widely varying degrees of financial expertise. That said, I am sure it is overly simplified in some places and too complex in others. Throughout the narrative, I cite changes in stock prices and credit default swap rates, not because those numbers matter in and of themselves, but because they are the most effective way to represent the plummeting confidence and rising sense of crisis in our financial markets and our economy during this period. I now have heightened respect for anyone who has ever written a book.


pages: 342 words: 99,390

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

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

Was there any better insurance? One day in October 2004, Pellegrini, still nervous about his standing at the firm, got up the nerve to approach Paulson in the hallway to tell his boss that there might be a better way to protect the firm’'s portfolio. Why not buy credit-default swaps? Paulson and his team weren’'t very familiar with the world of credit-default swaps, beyond a vague understanding that these instruments provided insurance against losses from debt investments. Though trading of CDS contracts had soared in volume in recent years, it was a complicated, esoteric world. Paulson was one of many investors who shied away from using these “"derivative”" investments, described as such because their value derives from the change in some underlying asset.

He asked Pellegrini to research how the firm could buy CDS contracts on financial companies, which Paulson was especially worried about due to all their borrowed money. In truth, Pellegrini didn’'t know that much about how credit-default swaps were traded, other than watching others do it at Tricadia. So he arranged for tutorials by various brokerage firms on the ins and outs of credit-default swaps. The fund made its first purchase of CDS protection on a company called MBIA, Inc., which insured all those mortgage bonds backed by aggressive loans. The annual cost of insuring $100 million of MBIA’'s debt was a puny $500,000.

Dimon bounded over, a warm smile on his face. This was Greene’'s chance. He could hardly contain himself. “"Hey, Jamie. My biggest position is shorting subprime credit through credit-default swaps. I’'ve done four hundred million with you guys.”" Dimon had a blank look on his face. “"What’'s that?”" he asked. Greene was taken aback. Dimon was among the most important players in the financial markets. But he didn’'t seem to know much about credit-default swaps. Even the $400 million figure didn’'t grab his attention. Dimon kept glancing at the tennis match below, where Roger Federer was fending off Novak ÐDjokovićc in the finals.


pages: 1,073 words: 302,361

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

"Friedman doctrine" OR "shareholder theory", "RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Alan Greenspan, asset-backed security, Bear Stearns, Bernie Madoff, Bob Litterman, book value, business cycle, buttonwood tree, buy and hold, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, diversified portfolio, do well by doing good, fear of failure, financial engineering, financial innovation, fixed income, Ford paid five dollars a day, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, junk bonds, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, managed futures, margin call, market bubble, mega-rich, merger arbitrage, Michael Milken, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, proprietary trading, risk tolerance, Ronald Reagan, Saturday Night Live, short squeeze, South Sea Bubble, tail risk, time value of money, too big to fail, traveling salesman, two and twenty, value at risk, work culture , yield curve, Yogi Berra, zero-sum game

It also required that the insured and insurer agree on how much collateral should be posted to make up for the loss of value in the securities being insured. At this moment, Greenberg said, Sullivan should have pretty much shut down the credit-default swap operation at AIGFP: “When the AAA credit rating disappeared in spring 2005, it would have been logical for AIG’s new management to have exited or reduced its business of writing credit-default swaps,” he explained. With little effort, Greenberg ticked off in rapid fire the litany of mistakes then made by Sullivan, Cassano, and company: Rather than curtailing the selling of credit-default swaps, AIGFP ratcheted up exponentially its issuance of them, and no longer just on corporate debt but on a whole new explosion of risk that Wall Street was madly underwriting through the issuance of increasingly risky mortgage-backed securities tied to so-called subprime and Alt-A mortgages.

One of the more intriguing opportunities that Birnbaum spied in the market by the end of 2005 was the increasing use of credit-default swaps, or CDS—a form of insurance that could be bought on whether a debt would in fact be paid—in the mortgage or any other debt market. Increasingly, insurance companies, such as AIG, or other Wall Street firms were willing to sell protection on whether the mortgages that went into mortgage-backed securities would in fact be paid. To get the insurance, buyers had to pay premiums to the issuers, as they did to obtain any other form of insurance. Instead of buying life insurance, or fire insurance on your house, or auto insurance on your car, buying a credit-default swap allowed investors to make bets on whether people ended up paying their mortgages.

The supposed genius of the synthetic CDO was that instead of having to accumulate mortgages in a warehouse until you had enough to build and then sell a CDO, Goldman could create the CDO virtually overnight using credit-default swaps, those insurance contracts offering a holder protection on whether a debt security would fail or not. It would be as if you could buy and sell the idea of selling cakes without actually having to buy the ingredients for the cakes, make them, and then sell them. Warren Buffett might consider this one of the eureka moments in the creation of financial weapons of mass destruction, as he referred to derivatives and credit-default swaps. “This was the trade, basically,” Sparks said. “CDOs were writing protection on CDS and doing synthetic CDOs.


pages: 545 words: 137,789

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

Abraham Wald, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Andrei Shleifer, anti-communist, AOL-Time Warner, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, book value, Bretton Woods, British Empire, business cycle, capital asset pricing model, carbon tax, Carl Icahn, 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 engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, George Akerlof, Glass-Steagall Act, 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, junk bonds, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Nixon triggered the end of the Bretton Woods system, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, precautionary principle, price discrimination, price stability, principal–agent problem, profit maximization, proprietary trading, 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 Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Tax Reform Act of 1986, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, Two Sigma, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

However, it didn’t prevent him, in the period after 1998, from repeating his previous arguments to head off efforts to regulate derivatives trading. Brooksley E. Born, the then-head of the Commodity Futures Trading Commission (CFTC), tried to bring credit default swaps, which offered investors protection against the possibility of a bond defaulting, under the regulatory jurisdiction of the CFTC. Such a move would have involved establishing some minimal capital requirements for Wall Street firms that bought and sold credit default swaps, and forcing them to disclose more information. “Recognizing the dangers . . . was not rocket science, but it was contrary to the conventional wisdom and certainly contrary to the economic interests of Wall Street at the moment,” Born told Stanford Magazine in early 2009.

Which brings us to the final ingredient of the subprime alphabet soup. J.P. Morgan has much to answer for—the firm, not the man. As well as unleashing VAR models on an unsuspecting public, it played a key role in developing credit insurance in the form of credit default swaps (CDSs). The word “swaps” is used in the derivatives business, and it has caused a lot of unnecessary confusion. Credit default swaps aren’t really swaps at all; they should be called credit insurance contracts. As with VAR, Morgan didn’t invent the concept of credit insurance—the late Bankers Trust also has claims to that honor—but it turned it into a major industry.

Once Morgan had demonstrated how to do this with bank loans, the obvious next step was to apply the same technique to different types of credit products, such as mortgage-backed securities. This didn’t prove too difficult, and between 1998 and 2004, the issuance of credit default swaps increased exponentially. The two most popular products were “single-name CDSs,” which provided their holders with protection against the default of a particular loan or bond, and “basket CDSs,” which insured a basket of loans or bonds. Since credit default swaps weren’t regulated, there was plenty of scope for creativity. An important development was the creation of CDSs that didn’t have anything to do with the issuer of the underlying debts.


pages: 519 words: 155,332

Tailspin: The People and Forces Behind America's Fifty-Year Fall--And Those Fighting to Reverse It by Steven Brill

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 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, behavioural economics, Bernie Madoff, Bernie Sanders, Blythe Masters, Bretton Woods, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carl Icahn, 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, deal flow, Donald Trump, electricity market, ending welfare as we know it, failed state, fake news, financial deregulation, financial engineering, financial innovation, future of work, ghettoisation, Glass-Steagall Act, Gordon Gekko, hiring and firing, Home mortgage interest deduction, immigration reform, income inequality, invention of radio, job automation, junk bonds, knowledge economy, knowledge worker, labor-force participation, laissez-faire capitalism, low interest rates, Mahatma Gandhi, Mark Zuckerberg, Michael Milken, military-industrial complex, mortgage tax deduction, Neil Armstrong, new economy, Nixon triggered the end of the Bretton Woods system, obamacare, old-boy network, opioid epidemic / opioid crisis, paper trading, Paris climate accords, performance metric, post-work, Potemkin village, Powell Memorandum, proprietary trading, quantitative hedge fund, Ralph Nader, ride hailing / ride sharing, Robert Bork, Robert Gordon, Robert Mercer, Ronald Reagan, Rutger Bregman, Salesforce, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, stock buybacks, Tax Reform Act of 1986, tech worker, telemarketer, too big to fail, trade liberalization, union organizing, Unsafe at Any Speed, War on Poverty, women in the workforce, working poor

It is considered to be against public policy, because you would be incented to kill that stranger or steer him to an incompetent doctor, and because, well, it’s just a bet, which is usually restricted to licensed casinos. Yet that is how dozens of investors who bought the synthetic credit default swaps made vast fortunes when the credit markets crashed, and how the hedge funds, banks, and other investors that sold them the synthetic credit default swaps suffered crushing losses. Regulators didn’t do anything about synthetic credit default swaps either. In 2005, the notional value, or the amount of money at risk, in all credit default swaps, real or synthetic, totaled $67 trillion. The actual value of the assets underlying all the securities (or loans) was only $15 trillion.

They wanted to get in on the action but were not in the business of buying or selling MBSs or CDSs for their own accounts, in most cases because they were wary of the assets—the homes and their debtor owners—behind the mortgages. Enter the synthetic credit default swap, a variation on credit default swaps, which became popular once CDSs picked up steam with the rise in the real estate market in the early 2000s. A synthetic credit default swap was simply a bet that something would happen that the people making the bets had nothing to do with—in this case, that the mortgage-backed securities would pay out or would go bad. It was synthetic in that the buyer was insuring against a bad event (the defaults) that he had no actual interest in protecting against, and the seller was betting that the bad event would not happen.

Before long, many banks were setting up units to sell the credit default swaps themselves, meaning they were insuring against the risk borne by other banks and financial institutions. One actual insurance company, American International Group, or AIG, emerged as the biggest CDS player of all. For AIG, the business was better than actual insurance, because real insurance is regulated: Insurance companies have to prove, using actuarial tables that gauge risk, that they have the funds available to pay off a life insurance or homeowner policy. A credit default swap was not considered insurance by any of the regulators who could have interceded, in part because, until it was too late, none of them appreciated the volume of the bets being made.


Global Financial Crisis by Noah Berlatsky

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

Thus, an investor could buy a bunch of mortgages (or a small piece of a bunch of mortgages) which were guaranteed to pay back a certain return. The banks were so sure that these mortgage-based securities would always pay that they even sold insurance on the investments. These insurance contracts were called credit default swaps. A credit default swap (CDS) means an investor in mortgage-based securities would pay a certain amount of money to the bank on a regular basis as long as the securities made money. If the securities ever stopped making money, though, the bank would have to pay the investor a large sum. CDSs were very popular because they made investors feel safer, and banks were certain they would never have to pay on them; investments would never default because housing prices would go up forever, or so they believed.

When the bubble burst and housing prices did start to go down, banks found themselves in a precarious position. Much of the banks’ money was invested in mortgages that were now shown to be bad debts. To make matters worse, the banks had in many cases promised to pay other investors through credit default swaps if these loans went bad. The resulting strain caused a series of catastrophic failures of large banks in the United States. Bear Stearns, a large investment bank, first noted publicly that it was having trouble because of subprime 17 The Global Financial Crisis loans in July 2007. On September 7, 2008, Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), the two largest mortgage lenders in the United States, had to be bailed out by the U.S. government.

For example, a currency futures contract lets you . . . lock into a specific foreign exchange rate. It’s a sensible move if you trade abroad and do not wish to carry the risk of a sudden change in exchange rates. Recent decades brought much trickier—and riskier—derivatives, such as “over-the-counter credit default swaps (CDS).” Sound complex? It is. Derivatives could . . . be used to circumvent regulations that protect investors and the public. Credit derivatives permit lenders to transfer their credit risks (mortgage defaults) to third parties, such as hedge funds. Thus banks can do more business. In the 1990s and 2000s, credit derivatives became a massive global gamble.


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

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

Net repo funding to banks and broker-dealers Source: Federal Reserve Board Financial Accounts of the United States The Arc of the Crisis ARC OF THE CRISIS The financial crisis unfolded in several phases. Bank credit default swap spreads and Libor-OIS spread Sources: Libor-OIS: Bloomberg Finance L.P.; bank CDS spreads: Bloomberg Finance L.P., IHS Marki Notes: Credit default swap spreads are equal-weighted averages of JPMorgan Chase, Citigroup, Wells Fargo, Bank of America, Morgan Stanley, and Goldman Sachs. Libor-OIS spread used throughout is the spread between the 3-month London Interbank Offered Rate and the 3-month USD overnight indexed swap rate.

The Fed tried to apply foam on the runway by stating its willingness to lend to banks and investment banks against just about any form of collateral. But the explosion was devastating anyway. The cost of insuring the bonds of Morgan Stanley and Goldman Sachs doubled on Monday, as markets lost confidence in the investment bank business model. The run also extended into the commercial banking sector. Citi’s credit default swaps spiked, reflecting growing market fears that even too-big-to-fail banks might fail, and spooked depositors withdrew twice as much from Washington Mutual as they had withdrawn after the run on IndyMac. Even the industrial giant General Electric struggled to roll over its commercial paper, a troubling sign that the financial virus had infected the broader economy.

AIG insured the lives, health, property, vehicles, and retirement accounts of 76 million customers, including 180,000 businesses that employed more than two thirds of the American workforce. And thanks to its irresponsible Financial Products division, which resembled a hedge fund grafted on to a traditional insurance company, AIG also had $2.7 trillion worth of derivatives contracts, mostly credit default swaps insuring troubled financial instruments. If it collapsed, the other systemic banks and nonbanks would lose their disaster insurance when they needed it most. It seemed like everyone was exposed to AIG, and no one was sure how exposed anyone else was, so an AIG default could inspire runs on just about any other financial firm.


pages: 206 words: 70,924

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

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

For instance, we may wish to insure against the default of a portfolio of subprime mortgages with an insured value of $50,000,000. The seller of a credit default swap written for $40,000,000 on this $50,000,000 receives the equivalent of a put price as a premium and is obliged to pay the purchaser of the swap the difference, or $10,000,000, if the portfolio value falls to less than $40,000,000. The insurance role for such credit default swaps is obvious. The investor can purchase a policy that limits the downside risk. However, these credit default swaps can also be purchased by an investor who does not own the underlying portfolios. Such a purchase is a speculation on another’s misfortune, but also provides an opportunity for liquidity and more efficient valuations through a very broad insurance market, with low transaction costs and relatively simple contracting.

This new financial market, once the sleepy domain of farmers and food processors concerned about price stability for the future delivery of agricultural commodities, now represents an annual market value that rivals the combined size of the world’s economies. There is now a much greater volume of trading in these derivatives, in commodities futures and in options markets, in credit default swaps and mortgage-backed securities, in foreign exchange futures and bond futures than in the traditional market for corporate securities. Yet, before the publication of the theory from the great minds Fischer Black and Myron Scholes, we knew little about how to price such financial derivatives.

In 1973, on the cusp of the publication of the Black-Scholes formula and the creation of the CBOE, no one could have reasonably imagined that derivatives markets could come to affect us all in incredibly profound ways, both positively and negatively. Derivatives markets are more esoteric than the underlying securities from which they derive their value. These are instruments that allow us the option to buy a stock at a future date, or a contract to deliver or accept a commodity at some future date. They could be the credit default swaps that are bets, according to some, or insurance hedges, according to others, that other instruments will default. In every case, the derivative can serve some useful purpose as a hedge or insurance for those who must hold or market the underlying security. However, just as we can sell short a stock we do not own and have not borrowed (a naked short), derivatives traders may not have to own the underlying security, and most likely will have little or no interest in the underlying security.


pages: 422 words: 113,830

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

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

By year’s end, as bank and investment bank losses began to pile up, some exporters began to fear that problems might spread into the corporate credit markets, principally through credit default swaps with their purpose of allowing risk managers and speculators to bet on a company’s ability to repay debt. The New York Times half-joked that if 2007 was the year readers and reporters learned about CDOs and SIVs, 2008 might be the year of credit default swaps. Unfortunately, it is entirely relevant to note the greed factor: the amount of money the financial sector was making out of these hot new products and huge volumes, at least until mid-2007.

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

To be sure, the notional value shown in Figure P.2 gives a much overstated picture of the real sums at risk in any plausible default scenario. Several attempts have been made in the latter direction. Using 2007 data, the Bank for International Settlements first broke out the notional values: a total of $596 trillion split between interest rate derivatives ($393 trillion), credit default swaps ($58 trillion), and currency derivatives ($56 trillion) with the remainder put into an unallocated category. Then, to assess real-world vulnerability, the BIS set what they called net risk at $14.5 trillion, and put a plausible gross credit exposure at $3.256 trillion.14 Abstract as these trillion-dollar references may seem to laypeople, global fears of a second wave of exotic financial implosions took shape during 2008.


pages: 566 words: 155,428

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

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, book value, break the buck, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial engineering, financial innovation, fixed income, friendly fire, full employment, Glass-Steagall Act, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, junk bonds, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market clearing, market fundamentalism, McMansion, Minsky moment, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, Paul Volcker talking about ATMs, price mechanism, proprietary trading, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, vertical integration, working-age population, yield curve, Yogi Berra

Never Again: Legacies of the Crisis Notes Sources Index LIST OF ACRONYMS AND ABBREVIATIONS ABCP: asset-backed commercial paper ABS: asset-backed securities AIG: American International Group AIG FP: AIG Financial Products AMLF: Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility ANPR: Advance Notice of Proposed Rulemaking ARM: adjustable-rate mortgage ARRA: American Reinvestment and Recovery Act (2009) BofA: Bank of America CBO: Congressional Budget Office CDO: collateralized debt obligation CDS: credit default swaps CEA: Council of Economic Advisers CEO: Chief Executive Officer CFMA: Commodity Futures Modernization Act (2000) CFPA: Consumer Financial Protection Agency CFPB: Consumer Financial Protection Bureau CFTC: Commodity Futures Trading Commission CME: Chicago Mercantile Exchange CP: commercial paper CPFF: Commercial Paper Funding Facility CPI: Consumer Price Index CPP: Capital Purchase Program DTI: debt (service)-to-income ratio ECB: European Central Bank EMH: efficient markets hypothesis ESF: Exchange Stabilization Fund FCIC: Financial Crisis Inquiry Commission FDIC: Federal Deposit Insurance Corporation FHA: Federal Housing Administration FHFA: Federal Housing Finance Agency FICO: Fair Isaac Company FOMC: Federal Open Market Committee FSA: Financial Services Authority (UK) FSLIC: Federal Savings and Loan Insurance Corporation FSOC: Financial Stability Oversight Council G7: Group of Seven (nations) GAAP: generally accepted accounting principles GAO: Government Accountability Office GDP: gross domestic product GLB: Gramm-Leach-Bliley Act (1999) GSE: government-sponsored enterprise H4H: Hope for Homeowners HAFA: Home Affordable Foreclosure Alternatives Program HAMP: Home Affordable Modification Program HARP: Home Affordable Refinancing Program HAUP: Home Affordable Unemployment Program HHF: Hardest Hit Fund HOLC: Home Owners’ Loan Corporation HUD: Department of Housing and Urban Development IMF: International Monetary Fund ISDA: International Swaps and Derivatives Association LIBOR: London Interbank Offer Rate LTCM: Long-Term Capital Management LTRO: Longer-Term Refinancing Operations LTV: loan-to-value (ratio) MBS: mortgage-backed securities MOM: my own money NBER: National Bureau of Economic Research NEC: National Economic Council NINJA (loans): no income, no jobs, and no assets NJTC: new jobs tax credit OCC: Office of the Comptroller of the Currency OFHEO: Office of Federal Housing Enterprise Oversight OMB: Office of Management and Budget OMT: Outright Monetary Transactions OPM: other people’s money OTC: over the counter OTS: Office of Thrift Supervision PDCF: Primary Dealer Credit Facility PIIGS: Portugal, Ireland, Italy, Greece, and Spain QE: quantitative easing Repo: repurchase agreement S&L: savings and loan association S&P: Standard and Poor’s SEC: Securities and Exchange Commission Section 13(3): of Federal Reserve Act SIFI: systemically important financial institution SIV: structured investment vehicle SPV: special purpose vehicle TAF: Term Auction Facility TALF: Term Asset-Backed Securities Loan Facility TARP: Troubled Assets Relief Program TBTF: too big to fail TED (spread): spread between LIBOR and Treasuries TIPS: Treasury Inflation-Protected Securities TLGP: Temporary Liquidity Guarantee Program TSLF: Term Securities Lending Facility UMP: unconventional monetary policy WaMu: Washington Mutual PREFACE When the music stops . . . things will be complicated.

There is no agreed-upon definition of the shadow banking system, but the institutions involved on the eve of the crisis included nonbank loan originators; the two government-sponsored housing agencies, Fannie Mae and Freddie Mac; other so-called private-label securitizers; the giant investment banks (who were often securitizers, too); the aforementioned SIVs; a variety of finance companies (some of which specialized in housing finance); hedge funds, private equity funds, and other asset managers; and thousands of mutual, pension, and other sorts of investment funds. The markets involved included those for mortgage-backed securities (MBS), other asset-backed securities (ABS), commercial paper (CP), repurchase agreements (“repos”), and a bewildering variety of derivatives, including the notorious collateralized debt obligations (CDOs) and the ill-fated credit default swaps (CDS). (Sorry about the alphabet soup—explanations to come.) By most estimates, the shadow banking system was far larger than the conventional banking system. Imagine leaving all that financial activity almost totally unregulated—like a bunch of wild animals running around without zookeepers.

“Derivative” is a generic term for any security or contract whose value is derived from that of some underlying natural security, such as a stock or a bond. Instead of owning the asset, and either profiting or losing as its price rises or falls, a derivative is a bet on some aspect of its behavior. One simple example is the call option, which we examined in the last chapter. Shortly, we will examine a credit default swap (CDS), whose value depends on whether some underlying bond goes into default. Other common types of derivatives are written on the basis of interest rates or currency values. In addition to the nature of the underlying security, derivatives are also classified by whether they are standardized and traded on organized exchanges, much like stock options on NYSE-listed stocks, or customized and traded over the counter (OTC), as most CDS are.


pages: 701 words: 199,010

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

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

It is difficult to determine the consequences of this decision. It may have been the reason AIG Financial Products became so heavily involved in credit default swap transactions. AIG sold CDS that effectively insured every mortgage pool against defaults. Unlike traditional insurance contracts, the CDS didn’t force AIG to set aside a large amount of capital against potential future losses, nor did the company have to post collateral. AIG’s CDS protection let other banks continue betting on the housing market. AIG’s position in credit default swaps rose to $500 billion. The entire market jumped from $6.4 trillion in 2004 to $58 trillion by 2007.

A rule to add a risk officer to report directly to the board per se won’t do this. He will just tick a box and mistakes will go on as usual. —Robert Merton interview, Nobel prizewinner in economics, July 9, 2011 Large insurance companies’ use of credit-default swaps is another example of misusing derivatives. AIG and other insurers sold credit protection on mortgage pools using a derivative known as the credit-default swap (CDS). Traditional insurance is based on pooling many independent risks, but AIG was insuring the interlinked housing market. Given the probability of losses, AIG should have put many reserves aside, but it did not.

Finally, many of the customized OTC derivatives are nonliquid contracts that were accumulated on a large scale by one large institution without hedging them. AIG engaged in this activity with credit default swaps. What They Propose The new legislation requires the creating of a centralized platform for the clearing of all swap transactions, which includes interest rate swaps, foreign-exchange swaps, credit default swaps, security-based swaps, and many other transactions. The SEC will regulate security-based swaps and mixed swaps, while the CFTC will regulate all other swaps. The CFTC and SEC must review all swap contracts in the marketplace and will determine which swaps in the marketplace should be cleared on the exchange.


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

Andrei Shleifer, asset-backed security, Bear Stearns, behavioural economics, Bernie Madoff, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, collapse of Lehman Brothers, compensation consultant, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, desegregation, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, market bubble, Menlo Park, mental accounting, Michael Milken, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, short selling, Silicon Valley, stock buybacks, the new new thing, The Predators' Ball, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

We will introduce the concept of financial “looting” of firms; how it can occur for profit; and, furthermore, how relatively small opportunities to loot for profit can bring huge risks into the financial system. Appendix: The Credit Default Swap Sideshow If you go to the circus, you and your children may find that your favorite exhibits—the best magic shows, and so on—are not in the big tent, but rather at the sideshows. Let’s now go to the Credit Default Swap Tent. In the Big Tent, which we have described, the banks had discovered that they had the ability to make mortgages, and then as a form of alchemy, with the help of the ratings agencies, they could turn these mortgages into gold: by creating assets that were sufficiently complicated that the ratings agencies could, out of real—or pretended—ignorance, rate them highly.

In the Big Tent, which we have described, the banks had discovered that they had the ability to make mortgages, and then as a form of alchemy, with the help of the ratings agencies, they could turn these mortgages into gold: by creating assets that were sufficiently complicated that the ratings agencies could, out of real—or pretended—ignorance, rate them highly. If the overall value of the derivative assets was more than what the banks loaned out to make the collection of mortgages, there was money on the table. The creation of this magic was boosted by the presence of a new form of derivative contract: credit default swaps (CDSs). Such a derivative can be devised for any asset with fixed payments, such as a bond or any mortgage-backed asset. In the event of a default, the owner of the swap is paid the face value of the asset; but then he surrenders it (i.e., he “swaps” it) to the seller. It’s a form of insurance.

It is truly remarkable that so few economists foresaw what would happen.2 There are about 2¼ million article and book listings regarding finance and economics on Google Scholar.3 That may not indicate enough economist-monkeys to randomly type Hamlet, but it should have been enough to generate quite a few papers that would tell how Countrywide, WaMu, IndyMac, Lehman, and many, many others would in short order flame out and crash. We should have known that their positions in mortgage-backed securities and credit default swaps were fragile. At the time we should have also foreseen the future vulnerabilities of the euro. We believe this huge lacuna tells us that economists (including those in finance) systematically ignore or downplay the role of trickery and deception in the working of markets. We have already put our finger on a simple reason why they were so ignored: economists’ understanding of markets systematically excludes them.


pages: 620 words: 214,639

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

Alan Greenspan, asset-backed security, Bear Stearns, book value, call centre, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, Deng Xiaoping, diversification, Financial Instability Hypothesis, fixed income, Glass-Steagall Act, Hyman Minsky, Irwin Jacobs, Jim Simons, John Meriwether, junk bonds, Long Term Capital Management, low interest rates, margin call, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, mutually assured destruction, Myron Scholes, New Journalism, Northern Rock, proprietary trading, Renaissance Technologies, Rod Stewart played at Stephen Schwarzman birthday party, Savings and loan crisis, savings glut, shareholder value, sovereign wealth fund, stock buybacks, too big to fail, traveling salesman, uptick rule, vertical integration, Y2K, yield curve

“Yep,” Sedacca wrote on the Minyanville Web site, which is dedicated to helping investors comprehend the financial world. “The great credit unwind is upon us. Credit default swaps on all brokers, particularly Lehman and Bear Stearns, are blowing out, big time.” Sedacca, the forty-eight-year-old president of Atlantic Advisors, a $3.5 billion investment management company and hedge fund, had been watching his Bloomberg screens on a daily basis as the cost of insuring the short-term obligations—known in Wall Street argot as “credit default swaps”—of both Lehman and Bear Stearns had increased steadily since the summer of 2007 and then more rapidly in February 2008.

And I think it was Monday when our credit default swaps spreads started to really, really spike. I think a lot of people attributed that to the rumors around Goldman. Goldman was not willing to stand on the other side of the trade. Goldman [was] saying that we had DK'd”—essentially failed to make good—“on a trade, which was—the rumor might have been a real rumor, but the fact that we DK'd on a trade was not true. And so that clearly started, at least in my mind, what happened so quickly that week. It became very apparent—not what was going to happen, but what was happening as our credit default swaps started to just gap out huge.

He explained how a number of unusual factors had come together to undermine the country's economic foundation: the irresponsible availability of credit to the less-than-creditworthy, allowing them to buy homes, cars, and other goods and services they could not afford but thought they needed; a historic and ongoing increase in real-estate values; a “rapid innovation” on Wall Street that made credit risk easier to manufacture, to trade, and, in theory, to hedge. He said these insurance policies—the dreaded credit default swaps—gave investors the appearance of having hedged their bets. “These instruments allowed investors to buy insurance or protection against a broader range of individual credit risks, such as the default by a homeowner or a company,” he said. But “as underwriting standards deteriorated over this period, this exposure grew.”


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

"World Economic Forum" Davos, Alan Greenspan, AOL-Time Warner, asset-backed security, bank run, Bear Stearns, Black Monday: stock market crash in 1987, book value, business cycle, Carl Icahn, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, diversification, fixed income, Glass-Steagall Act, high net worth, hiring and firing, if you build it, they will come, it's over 9,000, junk bonds, 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, Savings and loan crisis, short selling, sovereign wealth fund, value at risk

But he knew it mattered terribly, and he was aware that deregulation in this instance might or might not be in our best interest. As a matter of fact, he was not all that crazy about the repeal of Glass-Steagall either. Let me just recap the significance of the CFMA, which would not be passed until the end of the year. A major purpose was to deregulate the entire business of trading a credit default swap (CDS). This is nothing more than a bet—for instance, that a mortgage company will go broke and its bond value will sink to, say, 4 cents on the dollar. We’re talking about a bet that would allow a big bondholder to go to an investment bank and say, “I hold $1 billion worth of bonds in Countrywide.

That was the place from which he had, to all intents and purposes, removed himself. In the process, he had become separated from the most modern technology and the ultramodern trading of credit derivatives—CDO (collateralized debt obligations), RMBS (residential mortgage-backed securities), CLO (collateralized loan obligations), CDS (credit default swaps), and CMBS (commercial mortgage-backed securities). Stories about long-departed commanders were legion. There were mind-blowing tales of the Fuld temper, secondhand accounts of his rages, threats, and vengeance. It was like hearing the life story of some caged lion. Tell the truth, I ended up feeling pretty darn glad I wasn’t meeting him.

We, however, whose entire expertise was in the distressed-debt market, could see the signs, and Larry McCarthy was all set to throw a barrel at them, because Beazer was the one company that fitted all of our criteria. We decided to deploy 100,000 shares at $75 each and wait for the property market to cave in, which we thought it surely must. The only problem was, when? Larry McCarthy took out $500 million worth of protection in the form of a five-year credit default swap. That meant he agreed to pay a 1.8 percent* carry on the $500 million, which was $9 million annually. However, if Beazer filed for bankruptcy, Lehman would be paid the $500 million,† provided the counterparty on the other side of the trade had the ability to pay. In addition, we all bought equity options—another bet that Beazer would crash, but in this case in the form of puts, which came into play if the stock went down.


pages: 491 words: 131,769

Crisis Economics: A Crash Course in the Future of Finance by Nouriel Roubini, Stephen Mihm

Alan Greenspan, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bond market vigilante , bonus culture, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, dark matter, David Ricardo: comparative advantage, debt deflation, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, Glass-Steagall Act, global pandemic, global reserve currency, Gordon Gekko, Greenspan put, Growth in a Time of Debt, housing crisis, Hyman Minsky, information asymmetry, interest rate swap, invisible hand, Joseph Schumpeter, junk bonds, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Martin Wolf, means of production, Minsky moment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, Northern Rock, offshore financial centre, oil shock, Paradox of Choice, paradox of thrift, Paul Samuelson, Ponzi scheme, price stability, principal–agent problem, private sector deleveraging, proprietary trading, pushing on a string, quantitative easing, quantitative trading / quantitative finance, race to the bottom, random walk, regulatory arbitrage, reserve currency, risk tolerance, Robert Shiller, Satyajit Das, Savings and loan crisis, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, subprime mortgage crisis, Suez crisis 1956, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, too big to fail, tulip mania, Tyler Cowen, unorthodox policies, value at risk, We are all Keynesians now, Works Progress Administration, yield curve, Yom Kippur War

Among the instruments thus removed from regulation were credit default swaps, which permitted a purchaser to buy “insurance” to protect against defaults on bonds both very simple (such as those issued by an automaker) and extremely complex (collateralized debt obligations backed by pools of mortgage-backed securities). Credit default swaps, which mushroomed to reach a notional value of over $60 trillion by 2008, became one of the most important sources of “systemic risk”—perils that threaten the entire financial system. (For more on credit default swaps, see chapter 8.) The push for deregulation also took place outside Congress.

Then a London-based company called Markit Group introduced something called the ABX Index, which measured stress in the market for subprime securities. It did so by measuring the prices of a basket of credit default swaps, used to transfer the risk of default on securities derived from subprime home loans. The goal, a company spokesman said, was “visibility and transparency.” Using the ABX, one could measure the cost of buying insurance—in the form of credit default swaps—against defaults of tranches of mortgage-backed securities and CDOs rated from an abysmal BBB to a supposedly high-grade AAA. Over the course of 2007, the ABX Index went into a free fall, as bottom-of-the-barrel tranches lost upwards of 80 percent of their value.

Over the previous two decades, bankers and traders had increasingly been rewarded with bonuses tied to short-term profits, giving them an incentive to take excessive risks, leverage up their investments, and bet the entire bank on astonishingly reckless investment strategies. That’s precisely what happened in the recent crisis: financial wizards set up “insurance” in the form of credit default swaps (see chapter 8). These swaps yielded staggering profits and bonuses in good times but set firms like AIG up for catastrophic collapse when the sailing got rough. Yes, traders were greedy—and arrogant and foolish too—but that alone would not have triggered the financial equivalent of a nuclear meltdown had the bonus system not become the dominant kind of compensation in the financial sector.


pages: 482 words: 149,351

The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Airbnb, airline deregulation, Alan Greenspan, anti-communist, bank run, banking crisis, Basel III, Bear Stearns, benefit corporation, 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, export processing zone, failed state, fake news, falling living standards, family office, financial deregulation, financial engineering, financial innovation, forensic accounting, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global supply chain, Global Witness, high net worth, Ida Tarbell, income inequality, index fund, invisible hand, Jeff Bezos, junk bonds, Kickstarter, land value tax, late capitalism, light touch regulation, London Whale, Long Term Capital Management, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, megaproject, Michael Milken, Money creation, 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, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, pushing on a string, race to the bottom, regulatory arbitrage, rent-seeking, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, Savings and loan crisis, seminal paper, 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, stock buybacks, Suez crisis 1956, The Chicago School, Thorstein Veblen, too big to fail, Tragedy of the Commons, transfer pricing, two and twenty, vertical integration, Wayback Machine, wealth creators, white picket fence, women in the workforce, zero-sum game

We’ve kept your loans in house, so can you please do your next M and A [mergers and acquisitions] transactions with us,’ yet still be able to dance around the capital requirements. In other words, to have their cake and eat it. And here we return to the wild world of derivatives, credit default swaps, Boca Raton – and London. The mechanism that the bankers invented during the wild weekend in Florida was based around the credit default swap, which enables players to bet (or insure themselves) against the possibility that a bond or a loan will actually go into default. A bank could keep loans on its balance sheet, use CDSs to insure those loans against default, then tell the regulators that these loans were insured and it had shed the risk, enabling it to obtain more lenient capital requirements.

So by law you are allowed to insure your own life, but not a stranger’s. Credit default swaps involved the same problem: you could use them to insure a loan against default (against the death of a company, as it were). Using CDSs, for instance, you could easily and secretly build up huge incentives to destroy a perfectly healthy company or destabilise a government – at the time financial institutions were being investigated for their role in destabilising Greece. See Wolfgang Munchau, ‘Time to outlaw naked credit default swaps’, Financial Times, 28 February 2010. Naked CDSs are where you can take out insurance on the bonds without actually owning them.

Naked CDSs are where you can take out insurance on the bonds without actually owning them. On Robin Potts and insurable interest, see John Kay, ‘Of cows, communities and credit default swaps: Why gambling with CDS should be banned’, Financial Times, 6 April 2010; and Kay, Other People’s Money, pp.61–3 and 72. 26. The $60 trillion number comes from ‘OTC derivatives market activity in the second half of 2007’, Bank for International Settlements, May 2008, p.1. The market value of these swaps was about $2 trillion. See also Oskari Juurikkala, ‘Credit Default Swaps and Insurance: Against the Potts Opinion’, Journal of International Banking Law and Regulation 3, 2011, pp.132–9; and John Cassidy, How Markets Fail, p.282. 27.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

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

One other growing class of derivatives deserves mention, especially since Alan Greenspan sang its praises into 2008: credit default swaps (CDS). These were originally designed to hedge against losses should a company enter bankruptcy. The purchaser pays a premium for bankruptcy protection. Credit default swaps would appeal to General Motors bondholders who wanted to hedge—hold an “insurance” policy— against General Motors declaring bankruptcy. The original intention expanded. Credit default swaps were written for other derivatives, such as CDOs. The complications of credit default swaps written on CDOs that combined several CDOs (CDOs squared) were recreational mathematics played with other people’s money. 21 Gillian Tett, “The Unease Bubbling in Today’s Brave New Financial World,” Financial Times (London edition), January 19, 2007, p. 36.

His predictions overshadowed his successor’s attempts to establish credibility. He told the Bond Market Association that “credit default swaps are becoming the most important instrument I’ve seen in decades. … For 1 Margaret Mitchell, Gone with the Wind (New York: Scribner, 1936), pp. 241–242. 2 Roddy Boyd and Niles Lathem, “Want Alan Greenspan to Come to Dinner? That’ll Be $250,000 …” New York Post, February 9, 2006. 315 decades we used to have monetary crises because banks” could “freeze up.” Credit default swaps “lay off all these loans.”3 Greenspan could not have been more wrong if he tried, but he was speaking to the bond industry, so his listeners enjoyed the quotable endorsement.

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


pages: 320 words: 87,853

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

Adam Curtis, Affordable Care Act / Obamacare, Alan Greenspan, algorithmic trading, Amazon Mechanical Turk, American Legislative Exchange Council, asset-backed security, Atul Gawande, bank run, barriers to entry, basic income, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, business cycle, business logic, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, Chuck Templeton: OpenTable:, cloud computing, collateralized debt obligation, computerized markets, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, data science, Debian, digital rights, don't be evil, drone strike, Edward Snowden, en.wikipedia.org, Evgeny Morozov, Fall of the Berlin Wall, Filter Bubble, financial engineering, financial innovation, financial thriller, fixed income, Flash crash, folksonomy, full employment, Gabriella Coleman, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, Ian Bogost, informal economy, information asymmetry, information retrieval, information security, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, John Bogle, Julian Assange, Kevin Kelly, Kevin Roose, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, machine readable, Marc Andreessen, Mark Zuckerberg, Michael Milken, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, Philip Mirowski, precariat, profit maximization, profit motive, public intellectual, quantitative easing, race to the bottom, reality distortion field, recommendation engine, regulatory arbitrage, risk-adjusted returns, Satyajit Das, Savings and loan crisis, search engine result page, shareholder value, Silicon Valley, Snapchat, social intelligence, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, technological solutionism, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, vertical integration, WikiLeaks, Yochai Benkler, zero-sum game

Recall that, in the 1990s, it was big news for AIG to lose less than a tenth of a billion dollars on swaps. By 2008, AIG had amassed a credit default swap portfolio of tens of billions of dollars and was happily collecting premiums from fi rms who wanted to insure their shaky securities.61 It had nowhere near that amount of money at hand.62 Those who had bought insurance from AIG confidently registered on their own balance sheets a guarantee that any lost revenue would be made up by AIG’s credit default swaps.63 The fantasy here was that a private entity like AIG could take on the essentially public function of an agency like the FDIC: to make the insured whole even after catastrophic failures of their counterparties.

In the aggregate, this “noise” should cancel out as a clear price signal emerges. The inventors of credit default swaps hoped that their derivative could achieve in debt markets what stock exchanges were (theoretically) realizing in equity markets.109 The ultimate goal was to set exact prices on a wide array of financial risks. The financial engineers saw this as a great triumph of human ingenuity, a technology of risk commodification that would vastly expand societal capabilities to plan and invest. In the giddy days of the real estate bubble, investors who bought both a CDO and a credit default swap likely felt like Midas, guaranteed gains no matter how the future turned out.

But rather than improving internal processes at companies they could not fully understand (let alone control), financiers started insuring against bad outcomes. “Financial engineers” crafted “swaps” of risk,55 encouraging quants (and regulators) to try to estimate it in ever more precise ways.56 A credit default swap (CDS), for instance, transfers the risk of nonpayment to a third party, which promises to pay you (the first party) in case the debtor (the second party) does not.57 This innovation was celebrated as a landmark of “price discovery,” a day-by-day (or even second-by-second) tracking of exactly how likely an entity was to default.58 114 THE BLACK BOX SOCIETY As with credit scores, the risk modeling here was deeply fallible, another misapplication of natural science methods to an essentially social science of finance.


pages: 311 words: 99,699

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

"World Economic Forum" Davos, accounting loophole / creative accounting, Alan Greenspan, asset-backed security, bank run, banking crisis, Bear Stearns, Black-Scholes formula, Blythe Masters, book value, 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 engineering, financial innovation, fixed income, Glass-Steagall Act, housing crisis, interest rate derivative, interest rate swap, inverted yield curve, junk bonds, Kickstarter, locking in a profit, Long Term Capital Management, low interest rates, McMansion, Michael Milken, money market fund, mortgage debt, North Sea oil, Northern Rock, Plato's cave, proprietary trading, Renaissance Technologies, risk free rate, risk tolerance, Robert Shiller, Satyajit Das, Savings and loan crisis, short selling, sovereign wealth fund, statistical model, tail risk, The Great Moderation, too big to fail, value at risk, yield curve

Feldstein and some others putting their money on the contrarian view helped to make a lively new business of trading in default swaps take off. By 2005 there were more tools available to conduct such trading, too. In the early years, bankers who wanted to trade credit default swaps generally used only contracts that related to single names. From 2004 onward, though, indices of credit default swaps sprang up, known as “CDX” in the US and “iTraxx” in Europe. They tracked the cost of insuring against default on a basket of companies, offering a handy way for investors to evaluate trends in pricing, in the same way that the S&P 500 shows how the whole equity market is moving.

This book explores the answer to the central question of how the catastrophe happened by beginning with the tale of a small group of bankers formerly linked to J.P. Morgan, the iconic, century-old pillar of banking. In the 1990s, they developed an innovative set of products with names such as “credit default swaps” and “synthetic collateralized debt obligations” (of which more later) that fall under the rubric of credit derivatives. The Morgan team’s concepts were diffused and mutated all around the global economy and collided with separate innovations in mortgage finance. These then played a critical role in both the great credit bubble and its subsequent terrible bursting.

In most sectors of finance, well-established rules governed deals. But the credit derivatives concept was so new that they had to be crafted on the fly; Masters was making history as she went. Nobody quite knew what the fees paid to the EBRD should be or even quite what to call this “product.” Eventually though, the deal was done, and it was dubbed a “credit default swap,” which, as the business spread, was shortened to CDS. Hancock and the team were jubilant. The Exxon deal showed that a substantial credit derivatives contract could be made to work. And it was not the only one. As Masters was cutting her deal with the EBRD, Robert Reoch, a British banker who worked on Winters’s team in London, cut a deal with Citibank asset management that transferred the risk attached to Belgian, Italian, and Swedish government bonds.


pages: 309 words: 95,495

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

Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, Boeing 747, book value, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, Eyjafjallajökull, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, foreign exchange controls, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, junk bonds, Kenneth Rogoff, lateral thinking, Lewis Mumford, London Whale, Long Term Capital Management, market bubble, Michael Milken, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, proprietary trading, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, scientific management, subprime mortgage crisis, tail risk, technology bubble, TED Talk, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

It works when only a few people buy it; when everyone does, it not only makes the catastrophe more likely, it threatens the survival of the system. This became apparent when, twenty years later, an almost identical problem erupted over the use of another financial innovation: credit default swaps, or CDSs. J.P. Morgan hit upon the idea of the credit default swap in 1994. As Gillian Tett recounts in her book Fool’s Gold, Exxon (now Exxon Mobil) had asked for a $4.8 billion credit line to handle an expected fine for the Exxon Valdez oil spill. This was more than J.P. Morgan was comfortable committing to a single client, but it didn’t want to say no, so it asked the European Bank for Reconstruction and Development to take on the credit risk of the loan in exchange for a fee.

Nassim Nicholas Taleb, a former derivatives trader, philosopher, and author, has argued that we should strive to be “antifragile,” a word he came up with to describe people or things that “thrive and grow when exposed to volatility, randomness, disorder, and stressors.” Many financial contracts “are antifragile: they are explicitly designed to benefit from market volatility.” Options and credit default swaps, for example, go up in value when the underlying market becomes more volatile or default becomes more likely. The catch, of course, is that the gain to the holder of the option, or the credit default swap, or the insurance policy, is a loss to the seller. If enough people buy such policies, a catastrophic loss will wipe out the insurers. And the more people who buy such insurance, the fewer will actually be protected in the event of a catastrophe.

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


pages: 261 words: 64,977

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

Affordable Care Act / Obamacare, Alan Greenspan, bank run, Bear Stearns, big-box store, bonus culture, business cycle, carbon tax, classic study, collateralized debt obligation, collective bargaining, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Deng Xiaoping, false flag, financial innovation, General Magic , Glass-Steagall Act, housing crisis, invisible hand, junk bonds, Kickstarter, low interest rates, money market fund, Naomi Klein, obamacare, Overton Window, payday loans, profit maximization, profit motive, road to serfdom, Robert Bork, Ronald Reagan, shareholder value, strikebreaker, The Chicago School, The Myth of the Rational Market, Thorstein Veblen, too big to fail, union organizing, Washington Consensus, white flight, Works Progress Administration

Then there were the geniuses at the next few steps of the process, who bundled those subprime mortgages into bonds and those bonds into collateralized debt obligations—and then sold credit default swaps to insure against the possibility of their failure.2 The gospel of deregulation, meanwhile, had become such an irresistible ideological juggernaut that no amount of real-world failure could call it into question. Under the guidance of this doctrine, our leaders removed certain derivatives from regulatory oversight; they watered down requirements that banks balance their risk with safe assets; they exempted credit default swaps from regulation as insurance products; they dialed back the Federal Reserve’s regulatory powers; and they struck down a rule that required hedge-fund advisers to register with the Securities and Exchange Commission.

And although nearly everything in high finance is related to everything else, Fannie and Freddie are not the same as AIG, which is an insurance company that acted like a hedge fund, investing in mortgage-related securities and issuing credit default swaps. These were the businesses that got AIG into trouble. It is true that AIG owned a subsidiary that originated subprime mortgages—all the Wall Street playaz did—but to my knowledge no one has ever thought to blame AIG’s travails on that subsidiary. Government regulations, for their part, never required anyone to make risky mortgage loans and they certainly never forced anyone to invest in securities based on risky mortgage loans. The credit-default-swaps business was almost completely unregulated. * One of the photos of himself that Beck includes in his first book, The Real America, shows the right-wing showman directing a radio drama while striking virtually the same pose as Welles in one of the photos taken of the latter during his Mars-invasion broadcast

Just the opposite: in defending “capitalism,” the leaders of the latest conservative uprising don’t really bother with the actually existing capitalism of the last few years, even though capitalism’s particulars have made for scary headlines on the front pages of every newspaper in the land. They generally do not discuss credit default swaps or the deregulatory triumphs that made them so destructive. They do not have much to say about the massive oil spill in the Gulf of Mexico—the news story that shared the front pages with conservative primary victories all through the summer of 2010—nor about “foreclosuregate,” the revelation a few months later that banks had cut all sorts of legal corners in order to hustle borrowers in default out of their houses as quickly as possible.


pages: 198 words: 53,264

Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, AOL-Time Warner, asset allocation, Bear Stearns, behavioural economics, bitcoin, Bretton Woods, buy and hold, buy low sell high, Carl Icahn, cognitive bias, cognitive dissonance, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, endowment effect, financial engineering, financial innovation, fixed income, global macro, hindsight bias, index fund, initial coin offering, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, Kickstarter, Long Term Capital Management, loss aversion, low interest rates, Market Wizards by Jack D. Schwager, mega-rich, merger arbitrage, multilevel marketing, Myron Scholes, Paul Samuelson, Pershing Square Capital Management, quantitative easing, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, Robert Shiller, short squeeze, Snapchat, Stephen Hawking, Steve Jobs, Steve Wozniak, stocks for the long run, subprime mortgage crisis, transcontinental railway, two and twenty, value at risk, Vanguard fund, Y Combinator

With this information, Paulson was ready to go to work.9 The problem was that you can't short a house, so they had to figure out a different way to bet against the market. They learned about credit default swaps, insurance contracts that allow you to bet against the debt of companies. His first foray into shorting the housing market was purchasing credit default swaps on MBIA Inc., which insured mortgage bonds. For $500,000 a year, Paulson could purchase $100 million worth of insurance against the debt of MBIA Inc.10 In 2005, he bought more credit default swaps, this time on two big lenders, Countrywide Financial and Washington Financial. But if he thought that one of the biggest scores of all time would be easy, he quickly realized how long it could take for these things to play out.

But if he thought that one of the biggest scores of all time would be easy, he quickly realized how long it could take for these things to play out. Home prices stopped rising in September 2005,11 but his credit default swaps kept losing money. If you're going to win the equivalent of the lottery, with returns of 1,000% or more, you have to bet against consensus. And I don't mean that one or two of your friends disagree with you. I mean everybody disagrees with you to the point that they think you're insane. Imagine, for example, that you think Apple is worth zero. That the entire operation is a fraud, and that the $240 billion worth of cash they say they have doesn't exist.

One hedge fund investor said, “Paulson was a merger‐arb guy and suddenly he has strong views on housing and subprime. The largest mortgage guys including Vranos at Ellington, one of the gods of the market, were far more positive on subprime.”12 But Paulson didn't care about all that. He just kept buying credit default swaps like there was no tomorrow. Other traders thought Paulson was crazy and that this could be the folly that shuts him down. Interested in hearing from housing experts, Paulson brought in an analyst from Bear Stearns who assured them that they used sound models to predict mortgage solvency and housing prices.


pages: 475 words: 155,554

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

"World Economic Forum" Davos, Alan Greenspan, 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, bond market vigilante , book value, Boris Johnson, British Empire, capital controls, carbon credits, carbon footprint, carbon tax, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, Crossrail, currency risk, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, Eyjafjallajökull, financial deregulation, financial engineering, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, high-speed rail, hiring and firing, inflation targeting, Irish property bubble, junk bonds, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, low interest rates, margin call, market clearing, megacity, megaproject, Mikhail Gorbachev, mini-job, mittelstand, Money creation, 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, tail risk, 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, WikiLeaks, working-age population, zero-sum game

The Greek government’s debts shrunk by €107 billion, one-third of the total. Most bondholders did agree voluntarily to this offer. It was, after all, an offer that they could not really refuse. But the Greek government also invoked special clauses that forced some otherwise unwilling debtors to take a hit. This triggered credit default swaps (see here) – bets or insurance on a country going bust. This had been a ‘red line’ that Brussels officials vowed not to cross in the first deal. By early 2012 Greece was not just officially in default – it was the world’s biggest sovereign defaulter. Greece’s national debt had been heading for a completely unsustainable 160 per cent of its GDP at the end of the decade.

A clue was to be provided nine months later, not so far away – in Cyprus (see here). 2 Of Fiscal Criminals and Bond Vigilantes Dramatis personae Nick Clegg, UK Liberal Democrat leader Sir Mervyn King, governor of the Bank of England (2003–13) David Cameron, then leader of the UK Opposition James Carville, adviser to President Clinton Brian Edmonds, bond trader, Cantor Fitzgerald Anonymous hedge fund credit default swap trader George Soros, financier and philanthropist Jim Rickards, ex-Long-Term Capital Management (LTCM), lawyer, economist, trader Gordon Brown, British prime minister (2007–10) Jesse Norman, Conservative MP, member of the Treasury Select Committee Rachel Lomax, deputy governor of the Bank of England (2003–08) Dick Moore, mayor of Elkhart, Indiana, USA Robert Lucas, Nobel Prize in Economics.

By 2011 US bond traders were a little more understanding of the deficits of their government than their predecessors had been in the 1980s and 1990s. By the time of the crisis, James Carville’s reincarnation of choice would have moved from the large investment-bank bond trading floors to the smaller trade in credit default swaps (CDSs) at a small hedge fund. CDSs had become an instrument to take a view in debt markets that previously would have required buying and selling a bond. The prices and market insight from CDSs were very helpful for regulators and central banks as measures of market default risk – and they were more quantitative and timely than the rankings of the credit-rating agencies.


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

Abraham Maslow, Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, bread and circuses, Bretton Woods, business cycle, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, Cornelius Vanderbilt, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, disinformation, diversification, double helix, Edward Glaeser, financial deregulation, financial engineering, 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, general purpose technology, George Akerlof, Gini coefficient, Glass-Steagall Act, 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, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, language acquisition, Large Hadron Collider, liberal capitalism, light touch regulation, Long Term Capital Management, long term incentive plan, Louis Pasteur, low cost airline, low interest rates, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, meritocracy, Mikhail Gorbachev, millennium bug, Money creation, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, plutocrats, power law, price discrimination, private sector deleveraging, proprietary trading, 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, Ronald Reagan, Rory Sutherland, Satyajit Das, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, systems thinking, tail risk, 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, three-masted sailing ship, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, work culture , working poor, world market for maybe five computers, zero-sum game, éminence grise

Over the same period, bank assets jumped from twice to five times British GDP, with bankers resisting demands for more self-insurance of deposits.14 Bankers believed that they were containing possible negative consequences through diversifying risk in bundles of disparate income-earning assets where the chance of default was not corelated in so-called ‘structured investment vehicles’; that the assets were carefully valued through new mathematical models; that the likelihood of default had been insured against via credit default swaps; and, as a bonus, that important tax savings had been secured by placing the investments off shore. In effect, they thought they had created a new alchemy – the lead of poorly rated bonds and assets was turned into the gold of ‘Triple A’ ratings.15 As just 1 per cent of corporate bonds received a Triple A rating, compared to an astonishing 60 per cent of structured investment vehicles, evidently the world’s credit-rating agencies agreed.16 However, the business model in which the agencies were paid by the investment banks issuing the securities, rather than the investors who were buying them, was profoundly flawed.

But failure was never more likely because their belief that they held less risk was delusional, a fundamental error compounded by vastly expanding their balance sheets but underwriting them with ever less capital. It turned out that financial randomness was a fairy tale. The risk of default was co-related when general economic conditions turned adverse, despite the confident assertions by bankers that there was no such correlation. Credit default swaps turned out not to be proper insurance contracts, and the mathematical models which predicted that calamitous events were outside any normal distribution of risk proved to be bunk. The entire edifice – intellectual and business – was riddled with mistakes. The IMF has estimated that the aggregate support its member states were forced to offer their financial systems was around $9 trillion in recapitalisation, guarantees and special liquidity provision.

As everybody was individually guarding against risk, luminaries like Alan Greenspan claimed that the system as a whole was not risky, even as it created a growing mountain of credit and debt. Moreover, inflation targeting would ensure that there was no consequent inflation. All of these assumptions exploded to devastating effect in 2008. If the 1980s were the decade of interest and currency swaps, the 1990s were the decade of securitisation, and the 2000s the decade of credit default swaps. The great investment banks vied with each other to find the most innovative diversification and hedging techniques. Hedging risk has always had a dual character. Insurance has had the socially useful purpose of allowing protection against the chance of loss, but also the chance to make money on what is essentially gambling.


pages: 280 words: 73,420

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino by Jim McTague

Alan Greenspan, algorithmic trading, automated trading system, Bear Stearns, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, Bretton Woods, buttonwood tree, buy and hold, computerized trading, corporate raider, creative destruction, credit crunch, Credit Default Swap, financial innovation, fixed income, Flash crash, High speed trading, housing crisis, index arbitrage, junk bonds, locking in a profit, Long Term Capital Management, machine readable, margin call, market bubble, market fragmentation, market fundamentalism, Myron Scholes, naked short selling, Nixon triggered the end of the Bretton Woods system, pattern recognition, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, uptick rule, Vanguard fund, Y2K

Goldman Sachs was a badly tarnished institution in 2009 in the aftermath of the taxpayer bailout of Wall Street, and its reputation would sink even lower in 2010 with revelations that it had bet against the success of investments it had sold to its clients. The public was steamed in March 2009 when it learned that Goldman Sachs had finagled the government into bailing out counterparties involved in credit default swap deals with troubled insurance giant AIG, which was the recipient of more than $80 billion in taxpayer funds. The public was in an anti-Wall Street mood owing to the financial cataclysm caused by its investment bankers. It felt that Goldman Sachs should take a financial hit as a consequence of its high-risk investments and viewed it as a manipulative scheming firm with too much power in Washington, DC.

In the United States, both the equities and futures markets spent the morning and early afternoon of May 6 in negative territory. The S&P Volatility Index (VIX) was up 31.7%, the fourth largest, single-day increase ever. Gold prices were up and Treasury yields were down, indicating a flight to quality.8 The cost of buying protection in the credit default swaps market against the possible collapse of Greek bonds became progressively more expensive. Big institutional investors were bidding up the cost of such insurance. The increase in pricing coincided with a press conference by officials of the European Central Bank at 8:30 a.m. in which they failed to mention a possible purchase of Greek bonds to prop up that nation, which news investors were hoping to hear.9 Between 9:30 a.m., when the U.S. market opened, and 2:00 p.m., the DJIA already had fallen 161 points to 10,712 or 1.5%, and the S&P had fallen 33 points to 1,145, or down 2.9%.

A renaissance man with degrees in science and law, Hu in 1993 had written a forward-looking piece for the Yale Law Review predicting that big financial institutions would make significant mistakes employing relatively new products called derivatives. This was 5 years before the blowup of Long Term Capital Management, a hedge fund that had made interest rate bets using the exotic products and 15 years before insurer AIG would blow itself up dealing in the exotic products. Part of Hu’s thinking was that credit default swaps, which decoupled loans from the actual lender, led to “empty creditor” situations, undermining what it meant to be a debt holder. The SEC had been dominated by lawyers who were more interested in writing regulations than actually riding herd on the markets. Economists had been second-class citizens—dishwashers as opposed to cooks.


pages: 241 words: 81,805

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

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

The most obvious example is perhaps writing insurance. The insurance company, or writer of an insurance policy, takes a premium, or income, for accepting the risk of having to pay out if the event that is being insured against occurs. In the financial markets a credit default swap is a form of insurance against default by a borrower. The buyer of the credit default swap (CDS) pays a premium to insure a bond (loan) against the risk of default. If the borrower does default on the bond, the CDS buyer is compensated by the seller of the CDS. (However, note that, unlike with a normal insurance contract, the buyer of the CDS does not actually have to own the bond or loan he is insuring against default.)

Indeed, there exists a range of sophisticated carry trades that use financial derivatives to gain an income that depends directly on a relative lack of volatility of the underlying asset prices. Carry trades can include everything from undertaking classic currency carry positions, writing insurance or selling credit default swaps, buying higher-yielding equities or junk debt on margin, taking out buy-to-rent mortgages to finance property investments, to writing put options on equities or equity indexes or buying exchange-traded funds that do so—but that is not all. Carry trades can also include dealings such as companies issuing debt to buy back their own equity or private equity leveraged buyouts, plus a whole gamut of more complex financial strategies and financial engineering.

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


pages: 253 words: 79,214

The Money Machine: How the City Works by Philip Coggan

activist fund / activist shareholder / activist investor, algorithmic trading, asset-backed security, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, bond market vigilante , bonus culture, Bretton Woods, call centre, capital controls, carried interest, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, foreign exchange controls, Glass-Steagall Act, guns versus butter model, Hyman Minsky, index fund, intangible asset, interest rate swap, inverted yield curve, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", joint-stock company, junk bonds, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, low interest rates, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, proprietary trading, purchasing power parity, quantitative easing, reserve currency, Right to Buy, Ronald Reagan, shareholder value, South Sea Bubble, sovereign wealth fund, technology bubble, time value of money, too big to fail, tulip mania, Washington Consensus, yield curve, zero-coupon bond

Traditionally, there was not much they could do if they believed the outlook for corporate bonds and loans was deteriorating. But now they can buy credit default swaps; if it looks likely that more borrowers will default, premiums will rise. That will push the speculators into profit. Similarly, those who believe the corporate bond market can do well can take the other side of the deal. If premiums fall, they will profit. The scope for big gains would be much greater than could be achieved by just holding the bonds themselves. Some people worry that the credit default swap market could lead to a crisis in the event of a lot of corporate failures. In some cases, the value of outstanding swaps is much greater than the value of bonds in issuance.

What swaps have done is to open up the world’s capital markets to a wide range of borrowers. It is now possible for a UK borrower, say, to pick a particular world market where borrowing seems cheap, borrow there and still, through a swap, end up with the sterling debt it really wants. CREDIT DEFAULT SWAPS For investors, interest-rate risk is not the only danger they face. There is also the possibility that the borrower will not repay the loan or bond. In the old days, there was not much that the investor could do about this. Bond investors could at least sell their holdings if they felt bad news was due; loan investors were usually stuck.

Bond investors could at least sell their holdings if they felt bad news was due; loan investors were usually stuck. The best protection was to have a diversified portfolio of bonds or loans and hope that the good payers outweighed the defaulters. But the financial markets are remarkably ingenious at finding ways to insure against risk. The credit default swap is their latest wheeze. It is like an insurance policy against default. One party pays a premium to another; in return, the seller agrees to pay up if the borrower defaults. The higher the premium, the riskier the company. This small idea created a market with some $62 trillion of outstanding contracts by the end of 2007.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

activist fund / activist shareholder / activist investor, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Black-Scholes formula, book value, Brownian motion, business cycle, buy and hold, buy low sell high, buy the rumour, sell the news, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, currency risk, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, global macro, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, junk bonds, late capitalism, law of one price, Long Term Capital Management, low interest rates, managed futures, margin call, market clearing, market design, market friction, Market Wizards by Jack D. Schwager, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, Phillips curve, price discovery process, price stability, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, short squeeze, SoftBank, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, systematic trading, tail risk, technology bubble, time dilation, time value of money, total factor productivity, transaction costs, two and twenty, value at risk, Vanguard fund, yield curve, zero-coupon bond

While the equity hedge partially protects against the risk of default, this hedge often does not fully cover the loss on the convertible bond in case of default. Each bond’s default risk can be hedged by buying credit default swap (CDS) protection (if CDSs are traded for that firm) or by selling straight corporate bonds. However, buying protection on all convertible bonds in a portfolio is expensive and associated with large transaction costs. Alternatively, a convertible arbitrage trader can make sure that her portfolio is well diversified, largely diversifying away idiosyncratic credit risk. Changes in marketwide credit risk can then be hedged with a credit default swap index such as CDX or iTraxx. Convertible bonds also face risks in connection with takeovers and other corporate events.

See also funding costs; transaction costs coupons: bond prices and, 242; bond returns and, 180, 243; of convertible bonds, 269, 270, 271, 277, 283, 287, 288; inflation and, 179; reinvestment of, 179n crash risk, 31–32; implied volatility and, 239; liquidity spiral and, 82; volatility and, 58 credit carry trades, 188 credit cycles, 7t, 16 credit default swap index, 283 credit default swaps (CDSs), 241; capital structure arbitrage with, 312; credit return and, 180; fixed income arbitrage involving, 13, 260–61; to hedge convertible bond default risk, 283; in overheated economy, 191 credit returns, 180–81 credit risk, 260; of convertible bonds, 283; of credit carry strategy, 188; in event-driven investment, 292; Scholes on, 264 credit risk premium, 168, 260 credit spread, 180–81, 260; of distressed firms, 311; in overheated economy, 191 crises.

John Maynard Keynes expressed this risk well: The markets can remain irrational longer than you can remain solvent. Typical examples of fixed-income arbitrage trades include on-the-run versus off-the-run Treasury bonds, yield curve trading, betting on swap spreads, mortgage trades, futures-bond basis trades, and trades on the basis between bonds and credit default swaps (CDS). Another classic arbitrage trade is convertible bond arbitrage. Convertible bonds are corporate bonds that can be converted into stock at a prespecified conversion ratio. A convertible bond can be viewed as a package of a straight corporate bond and a call option on the company’s stock.


pages: 218 words: 62,889

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

Alan Greenspan, algorithmic trading, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, 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, critique of consumerism, cryptocurrency, currency risk, democratizing finance, digital capitalism, distributed ledger, diversification, Double Irish / Dutch Sandwich, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, gig economy, Glass-Steagall Act, global macro, Gordon Gekko, high net worth, Hyman Minsky, independent contractor, information asymmetry, initial coin offering, interest rate derivative, interest rate swap, Joseph Schumpeter, junk bonds, Kenneth Arrow, litecoin, London Interbank Offered Rate, London Whale, Long Term Capital Management, margin call, market fundamentalism, Michael Milken, mortgage debt, new economy, Northern Rock, offshore financial centre, Paul Samuelson, peer-to-peer lending, plutocrats, Ponzi scheme, Post-Keynesian economics, 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

Goldman’s now well-known Abacus affair centred on a set of esoteric financial instruments known as synthetic collateral debt obligations (or CDOs). A very simplified explanation of what a synthetic CDO is was helpfully provided by Matt Levine of Bloomberg: 1. Some investors put money in a ‘pot’. 2. The pot writes a credit default swap to an investment bank – in this case, Goldman Sachs Group Inc. – insuring Goldman against the risk of default of some mortgage bonds (called the ‘reference portfolio’). 3. Goldman pays premiums for the credit default swap, and those payments are passed along to the CDO investors. 4. If some of the reference mortgage bonds default, then the ‘pot’ pays some money to Goldman. This reduces the ‘pot’ (and the premiums that Goldman pays to the investors). 5.

Acknowledgements Discover More About the Authors Bibliography References and Notes To Michael and Sasha Explore book giveaways, sneak peeks, deals, and more. Tap here to learn more. ABBREVIATIONS AND TERMS AIG: American Insurance Group. CDO: Collateralized default obligations. CDS: Credit default swap. A financial contract whereby a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds. This is achieved by the issuer of the bonds insuring the buyer’s potential losses as part of the agreement. EMT: Efficient market theory.

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. In the abstract world of economics, where a bank is a responsible intermediary, this invention was ingenious and effective. But in the real-life business of finance, with lack of regulations, tough competition and greed, the invention became a perfect tool of moneymaking through sabotage.


pages: 593 words: 189,857

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

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, 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, currency risk, David Brooks, Doomsday Book, eurozone crisis, fear index, financial engineering, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, Greenspan put, housing crisis, Hyman Minsky, illegal immigration, implied volatility, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, low interest rates, 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, proprietary trading, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, Savings and loan crisis, savings glut, selection bias, Sheryl Sandberg, short selling, sovereign wealth fund, stock buybacks, tail risk, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

One of the best examples of our accomplishments, but also of the limits of our accomplishments, was in the realm of derivatives. BY 2005, the market in over-the-counter derivatives had quadrupled since Brooksley Born had started warning about them seven years earlier. Investors were gobbling up an array of new products, from “credit default swaps” to “synthetic CDOs.” But there was still no single authority over derivatives, or over the banks and securities firms that manufactured and sold them. All this worried me. In some ways, derivatives were just another form of risk taking, like simple bank loans or any other financial transactions.

Every morning, the New York Fed’s market room sent around a dashboard of about fifty economic and financial indicators. Most were heading the wrong way. Mortgage-backed securities were still bleeding. Rating agencies were belatedly downgrading them, leading to margin calls, forced asset sales, and more bleeding. Prices for credit default swaps—derivative contracts insuring against the failure of a firm or default of a security—were rising. Ambac, MBIA, and other large monoline insurers that stood behind many mortgage securities faced downgrades as well; even the dull municipal bonds they backed were starting to wobble. The New York state insurance commissioner, Eric Dinallo, had tracked me down in Davos, frantically informing me that the monolines were in trouble and that Charlie Gasparino was criticizing him on CNBC for not doing something about it.

We hoped that would reduce the danger of an uncontrolled run. We were also concerned that the spaghetti-like tangle of overlapping positions in derivatives markets could create uncertainty if another major firm failed. To shrink the plate and untangle some of the spaghetti, we encouraged the Fourteen Families to “tear up” offsetting trades of credit default swaps, getting dealers who had bought and sold the same insurance contract to step out of the offsetting trades and match up the counterparties. That way, if the dealer in the middle failed, the other firms wouldn’t be exposed. We ended up eliminating about one-third of the outstanding contracts.


pages: 302 words: 86,614

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds by Maneet Ahuja, Myron Scholes, Mohamed El-Erian

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset allocation, asset-backed security, backtesting, Bear Stearns, Bernie Madoff, book value, Bretton Woods, business process, call centre, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, en.wikipedia.org, family office, financial engineering, fixed income, global macro, high net worth, high-speed rail, impact investing, interest rate derivative, Isaac Newton, Jim Simons, junk bonds, Long Term Capital Management, managed futures, Marc Andreessen, Mark Zuckerberg, merger arbitrage, Michael Milken, Myron Scholes, NetJets, oil shock, pattern recognition, Pershing Square Capital Management, Ponzi scheme, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, Savings and loan crisis, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, stock buybacks, systematic bias, systematic trading, tail risk, two and twenty, zero-sum game

Weinstein joined Deutsche Bank in January 1998, when the market for credit derivatives—financial contracts for hedging (or speculating) against a company’s default—was in its infancy. “Not only was it brand new, but few people understood the mechanics of how to price a credit default swap,” says Weinstein. A CDS is the most common credit derivative. “Foreign exchange derivatives, interest rate derivatives, equity derivatives—those instruments had been around for 25 years before J. P. Morgan and Deutsche began figuring out how to structure and trade credit default swaps.” This was an ideal situation for young Weinstein. For years, while his peers had all followed equities, Weinstein had been fascinated by the complexity of credit.

He explained that, in 2005, he and his team had become concerned about weak credit underwriting standards and excessive leverage among financial institutions believing that credit was fundamentally mispriced. “To protect our investors against the risk in the financial markets, we purchased protection through credit default swaps on debt securities we thought would decline in value due to weak credit underwriting. As credit spreads widened and the value of these securities fell, we realized substantial gains for our investors.” Paulson explained this as if it were just that simple. The funny thing is, to Paulson, it was that simple.

Paulson began to suspect that shorting credit could be the strategy that could give him the outsized performance he was looking for without taking excessive risk. Slowly, Paulson and his team were able to piece together how housing prices, and the trillion-dollar market built around them, were doomed to collapse like a house of cards. This gave Paulson the green light to begin purchasing protection through credit default swaps on debt securities he felt would decline in value due to weak credit underwriting. The subprime mortgage securitization market was uniquely suited to buying credit protection. The typical subprime securitization was divided into 18 tranches, ranging from “AAA” to “BB,” with each lower tranche subordinate to the one above.


pages: 402 words: 110,972

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

"World Economic Forum" Davos, AI winter, Alan Greenspan, algorithmic trading, AOL-Time Warner, Apollo 11, asset allocation, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, Bob Litterman, book value, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Charles Babbage, citizen journalism, collateralized debt obligation, Cornelius Vanderbilt, 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, electricity market, Emanuel Derman, en.wikipedia.org, experimental economics, fake news, financial engineering, financial innovation, fixed income, Ford Model T, Gordon Gekko, Hans Moravec, Herman Kahn, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, Ivan Sutherland, Jim Simons, John Bogle, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, machine readable, machine translation, 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, military-industrial complex, 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, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, semantic web, Sharpe ratio, short selling, short squeeze, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, stock buybacks, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, tontine, too big to fail, transaction costs, Turing machine, two and twenty, Upton Sinclair, value at risk, value engineering, Vernor Vinge, Wayback Machine, yield curve, Yogi Berra, your tax dollars at work

It goes one step further by quickly placing the assets in the hands of multiple private managers (who would be accountable to the American people, the shareholders) rather than a small cadre of government officials. What about the $60⫹ trillion in credit default swaps? Many people fear that if major insolvent institutions are allowed to fail and potentially default on their derivative contracts insuring bonds Structural Ideas for the Economic Rescue 323 (credit default swaps), that it would create a chain reaction of derivative defaults, asset write-downs, and further bank failures. This is a valid concern, but existing bailout plans only defer the problem.

Look at the bottom of any business television channel or web site. You can see the details of every trade in every stock, within seconds. Regulators can track down parties involved in suspicious trades via automated clearing systems. In marked contrast, we see absolutely nothing at all about trading in the collateralized debt obligations (CDOs), credit default swaps (CDSs), and mortgage-backed securities (MBSs) that created this mess, even though the total size of those markets is a multiple of the size of the stock market. Trades and quotes in these securities, holdings, and holders are all unknown and largely unknowable, even in today’s electronic markets.

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


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, Bernie Madoff, book value, 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, Future Shock, Glass-Steagall Act, government statistician, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, junk bonds, light touch regulation, Long Term Capital Management, low earth orbit, low interest rates, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Neil Armstrong, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, plutocrats, Ponzi scheme, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Ronald Reagan, tail risk, too big to fail, trickle-down economics, value at risk, yield curve

Some of these were motivated by ordinary credit-driven concerns. Others were bullish on the mortgage market but simply had to cap the total volume of their exposures. And so on. There was a huge variety of different motivations. But there was one common solution for their needs: the credit default swap or CDS. Forget about the intricacies of the terminology. Credit default swaps operate exactly like regular insurance‌—‌in this case, insurance against credit risk and default. You pay your premium year after year. If the asset you’ve insured goes bad, then the insurance pays out. So if, for example, you bought a mortgage-backed security full of subprime mortgage assets, you might (when you came to your senses) decide to insure yourself against the possibility of default.

Nevertheless, I want to keep my personal view strictly to one side, so we’ll focus here instead on what the financial markets themselves expect, using the most recent data available. The data we’ll use rely on credit default swaps, which as we’ve already seen are essentially a way to buy insurance against the risk of default. Because these swap prices are publicly displayed, it’s possible to see what insurance premiums are being demanded and paid. Clearly, the higher the premiums charged, the higher is the implicit risk of default. Indeed, it’s possible to use credit default swap pricing to estimate the ‘cumulative probability of default’ for all sovereign debt markets. The cumulative probability of default (CPD) is exactly what it sounds like.

Some smart guys on the Street noticed that the pattern of payouts on insurance schemes (a chain of small regular premiums followed by a potentially large one-off insurance payout) looked very like the pattern of payments on a CDO (a chain of small regular interest payments followed by a large final repayment of principal). Using a little financial magic it proved to be possible to turn those credit default swaps into a ‘synthetic’ CDO. In plain language, all those people taking out insurance against defaults were making bets on one side of the mortgage market, while the synthetic CDO enabled investors to bet on the other side of the market. In effect, that synthetic CDO created mortgage risk out of nowhere.


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

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

These debt promises are sold to different investors, although sometimes the investment bank itself might buy some.32 The desire to shift risk away from the original mortgage lender thus lengthens the chain of transactions and increases the scope for defaults to trigger domino effects. If the banks or other institutions that buy the mortgage securities borrow from money market funds, the chain of transactions is even longer.33 The use of so-called credit default swaps is another example of how attempts to manage risk can create additional complexity and fragility. A credit default swap (CDS) is a kind of insurance contract. The buyer of a CDS pays a periodic premium to the seller. In return, the seller promises to reimburse the buyer if the loan or portfolio of loans on which the CDS is written does not perform as it had promised.

See Community Reinvestment Act Cranston, Alan, 252n35 credibility: of ban on bailouts, 139; of threat of allowing bank failures, 75–76, 139, 264n65; of threat of closing banks for capital violations, 189 credit cards: interest rates on, 104, 276n11; payments through, 49, 150 credit crunches: causes of, 5, 301n54; fears of, in delay of regulation, 171–72; in financial crisis of 2007-2009, 5, 211, 301n54 credit default swaps (CDSs): at AIG, 69, 73–74, 255n1, 259n34, 334n44; definition of, 68, 255n1; and interconnectedness, 68–69; origins of term, 259n34; regulation of, 259n34; risks of, 73–74; in risk-weighting approach, 185 Crédit Immobilier de France, bailout of, 74 credit insurance, risks of, 73–74. See also AIG; credit default swaps credit limits, regulations on, 88, 268n24 Crédit Lyonnais: cost of bailout of, 318n7; failure of, 55–56, 252n37 creditors: benefits of guarantees to, 129, 142; collateral used by, 164, 301n57; covenants of, 141; default as problem of, 36, 244n3; deposit insurance and, 62, 163; lending through repo (repurchase) agreements, 164; motivations for short-term lending by, 163–65; response to default, 35–36 credit ratings: guarantees in, role of, 9, 143, 235nn31–32, 290n28; for mortgage-related securities, 156–57, 185; risks hidden in, 124–25, 156–57, 222, 296n29; in securitization of mortgages, 259n33 credit risks: AIG and, 74, 161; definition of, 313n64; in financial crisis of 2007-2009, 157, 185; in risk-weighted approach, 183, 313n64, 313n66 creditworthiness assessments, 50; careless-ness in, 56, 277n12; challenges of, 50; economizing on, 249n13; hard versus soft information in, 50, 248n9; for mortgages, 56, 58, 248n9, 277n12 criminal proceedings, 208, 215, 228, 321n27 crony capitalism, 331n19 culture of banking: complacency in, 206; greed in, 208–9, 328n6; lying in, 328n5; return on equity in, 115, 125–28, 284–85nn29–30; unethical behavior in, 209, 328n6, 329n8 Cumming, Christine, 262n60, 263n62 currency, and risk of sovereign default, 276n6 currency boards, 294n15, 333n39 currency swaps, 260n37 Curry, Timothy, 252n34, 289n20, 293n3 Das, Satyajit, 230n9, 253n42, 259n34, 260nn37–38, 260n41, 261n43, 261n46, 261n50, 262nn52–53, 284n24, 284n29, 285n37, 286n40, 308n41, 323n38, 328n5, 329n6, 329n8 Dattel, Danny, 252n36 Davies, Richard, 270n31, 290n29, 291n34 Davydenko, Sergei A., 245n13 debit cards, 49, 150 debt, treated as equity, 187–88.

Basel II, concluded in 2004, was considered to be doing it properly, but the financial crisis showed that Basel II was flawed.61 Basel III attempts to correct some of the flaws in Basel II, but it has not changed the overall approach.62 The risk-weighting approach is extremely complex and has many unintended consequences that harm the financial system. It allows banks to reduce their equity by concentrating on investments that the regulation treats as safe. Banks might also use derivatives to shift the risks of their investments to others, and this can increase interconnectedness. An example would be a bank’s purchase of credit default swaps in order to insure against the credit risk of debt securities held by the bank. As we saw in Chapter 5, such credit insurance served to justify treating mortgage-related securities as perfectly safe; it was also a source of systemic risk and played an important role in the government’s decision to bail out AIG.


pages: 351 words: 102,379

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

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Andy Kessler, Asian financial crisis, Bear Stearns, Berlin Wall, book value, break the buck, BRICs, business cycle, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, Dr. Strangelove, Emanuel Derman, Fall of the Berlin Wall, fear of failure, financial engineering, fixed income, Glass-Steagall Act, Goldman Sachs: Vampire Squid, housing crisis, indoor plumbing, invisible hand, junk bonds, Ken Thompson, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Michael Milken, Mikhail Gorbachev, money market fund, moral hazard, naked short selling, NetJets, Northern Rock, oil shock, paper trading, proprietary trading, risk tolerance, Robert Shiller, rolodex, Ronald Reagan, Savings and loan crisis, savings glut, shareholder value, short selling, sovereign wealth fund, supply-chain management, too big to fail, uptick rule, value at risk, éminence grise

Building computer models based on years of historical data on corporate bonds, they concluded that this new device—a credit default swap—seemed foolproof. The odds of a wave of defaults occurring simultaneously were remote, short of another Great Depression. So, absent a catastrophe of that magnitude, the holders of the swap could expect to receive millions of dollars in premiums a year. It was like free money. Cassano, who became head of the unit in 2001, pushed AIG into the business of writing credit default swaps. By early 2005, it was such a big player in the area that even Cassano had begun to wonder how it had happened so quickly.

Under European banking regulations, financial institutions had been allowed to meet capital requirements by entering into credit default swap agreements with AIG’s financial products unit. Using the swaps, the banks had essentially wrapped AIG’s triple-A credit rating around riskier assets, such as corporate loans and residential mortgages, allowing the banks to take on more leverage. If AIG were to fail, however, those protective wrappers would vanish, forcing the banks to mark down assets and raise billions of dollars—a frightening prospect in the current markets. And the numbers were staggering: Halfway though 2008, AIG had reported more than $300 billion in credit default swaps involved in this wrapping procedure, which it politely called “regulatory capital relief.”

On this morning, however, he was fanning the flames, telling Fuld the latest rumor swirling around the trading floor: A bunch of “hedgies,” Wall Street’s disparaging nickname for hedge fund managers, had systematically taken down Bear Stearns by pulling their brokerage accounts, buying insurance against the bank—an instrument called a credit default swap, or CDS—and then shorting its stock. According to Russo’s sources, a story making the rounds was that the group of short-sellers who had destroyed Bear had then assembled for a breakfast at the Four Seasons Hotel in Manhattan on Sunday morning, clinking glasses of mimosas made with $350 bottles of Cristal to celebrate their achievement.


pages: 398 words: 105,917

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

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

The US government’s later Financial Crisis Inquiry Commission would pin the blame on ‘its enormous sales of credit default swaps [which] were made without putting up the initial collateral, setting aside capital reserves, or hedging its exposure’.43 In other words, AIG-FP had drastically underestimated its potential losses. Details that would later emerge of its dealings with its largest credit default swap counterparty, Goldman Sachs, revealed the helpful role of its auditor, PwC, in the under-reporting. When the events of 2007 hit the value of Goldman’s CDO portfolio, the bank had reckoned that the credit default swaps it had entered into with AIG-FP as insurance against such losses were going to have to pay out.

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

A CDO could have up to fifteen tranches, each of which would be separately traded. But that wasn’t enough. The tranches could themselves be parcelled up into securities, so-called ‘CDOs squared’. Then, multiplying the size of the market, all these instruments could be betted against using ‘credit default swaps’ (CDSs). This was a financial derivative equating to an insurance policy that paid out if a particular security or tranche defaulted, but without any requirement to hold the underlying asset (a bit like having fire insurance on somebody else’s house). Finally, these CDSs too could be packaged up, re-sliced and sold on as ‘synthetic CDOs’.


pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, buy and hold, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, currency risk, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, equity risk premium, Exxon Valdez, foreign exchange controls, forensic accounting, Glass-Steagall Act, global reserve currency, high net worth, index fund, inflation targeting, information security, intangible asset, interest rate derivative, interest rate swap, inverted yield curve, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, proprietary trading, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, risk free rate, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

If there is a default, the buyer will give his or her bonds to the seller of protection and will receive their full value. A credit default swap index is a standardised credit security and so may be more liquid than credit default swaps, which are traded over the counter. It can be cheaper to use an index for hedging bonds than it would be to use a variety of CDSs for the purpose. Unfortunately, like any free-ranging financial instrument, the CDS is not always a reliable hedge. In the two Bear Stearns hedge funds that came close to collapse in mid-2007, as discussed earlier, credit default swaps, mainly through an index, were used as a hedge, and should have provided some protection against a decline in the value of bonds held, but in March of that year, both the bonds and hedges deteriorated at the same time, according to a Bear Stearns note to investors.

The global market size of credit derivatives has grown from US $180 billion in 1996 to US $5 trillion in 2004 and an estimated US $20.2 trillion in 2006, and will reach an estimated US $33 trillion by 2008, according to the British Bankers’ Association’s (BBA) Credit Derivatives Report 2006. The London market share had dipped from 45 per cent to below 40 per cent over the period. But this level of market share shows that London remains attractive as a key centre for trading in credit derivatives, according to the BBA. Credit default swap The single-name credit default swap (CDS) was the first credit derivative. It is a bilateral over-the-counter contract in which the seller agrees to make a payment to the buyer in the event of a specified credit event on a reference entity, in exchange for a fixed payment or series of fixed payments. Credit events will be specified in the contract and may include restructuring, default or bankruptcy.

The notional global amount outstanding of interest rate swaps and options and cross-currency swaps grew by 18 per cent to US $250.8 trillion during the first six months of 2006, according to a 2006 mid-year market survey by the International Swaps and Derivatives Association. The notional amount of credit default swaps grew by 52 per cent to US $26.0 trillion. On-exchange versus OTC derivatives An exchange-traded contract has the advantage of being standardised, which makes it much cheaper and means that you can move a large deal quickly, with very little price impact. There is no counterparty risk when you are dealing with the exchange.


pages: 459 words: 103,153

Adapt: Why Success Always Starts With Failure by Tim Harford

An Inconvenient Truth, Andrew Wiles, banking crisis, Basel III, behavioural economics, Berlin Wall, Bernie Madoff, Black Swan, Boeing 747, business logic, car-free, carbon footprint, carbon tax, Cass Sunstein, charter city, Clayton Christensen, clean water, cloud computing, cognitive dissonance, complexity theory, corporate governance, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, Deep Water Horizon, Deng Xiaoping, disruptive innovation, double entry bookkeeping, Edmond Halley, en.wikipedia.org, Erik Brynjolfsson, experimental subject, Fall of the Berlin Wall, Fermat's Last Theorem, financial engineering, Firefox, food miles, Gerolamo Cardano, global supply chain, Great Leap Forward, Herman Kahn, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, Jarndyce and Jarndyce, John Harrison: Longitude, knowledge worker, loose coupling, Martin Wolf, mass immigration, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Netflix Prize, New Urbanism, Nick Leeson, PageRank, Piper Alpha, profit motive, Richard Florida, Richard Thaler, rolodex, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, South China Sea, SpaceShipOne, special economic zone, spectrum auction, Steve Jobs, supply-chain management, tacit knowledge, the market place, The Wisdom of Crowds, too big to fail, trade route, Tyler Cowen, Tyler Cowen: Great Stagnation, Virgin Galactic, web application, X Prize, zero-sum game

The problem in all of these cases is that the safety system introduced what an engineer would call a new ‘failure mode’ – a new way for things to go wrong. And that was precisely the problem in the financial crisis: not that it had no safety systems, but that the safety systems it did have made the problems worse. Consider the credit default swap, or CDS – a three-letter acronym with a starring role in the crisis. Credit default swaps are a kind of insurance against a loan not being repaid. The first CDS was agreed between JP Morgan and a government-sponsored development bank, the European Bank for Reconstruction and Development, in 1994. JP Morgan paid fees to the EBRD, and in exchange the EBRD agreed to make good any losses in the almost unimaginable event that the oil giant Exxon defaulted on a possible $4.8 billion loan.

The bank would be legally obliged to sell its assets at the same time as other banks were doing the same. It was like a mountaineer, cautiously scaling a cliff while roped to a reckless team, and suddenly finding himself pulled into the abyss by his own safety harness. The insurance companies and their web of credit default swaps acted as the rope. Rather than reducing risk, credit default swaps instead contrived to magnify it and make it pop up in an unexpected place. The same thing was true of other financial safety systems – for instance the infamous collateralised debt obligations, or CDOs, which repackaged financial flows from risky ‘subprime’ mortgages.

In a narrow sense, it was a sensible deal: the EBRD had idle cash and was seeking some low-risk income, while JP Morgan had plenty of useful things it could do with its own funds, but banking regulations dictated that it must set aside nearly half a billion dollars just in case there was a problem with the Exxon loan. The CDS deal offloaded the risk to the EBRD, liberating JP Morgan’s cash. It did so with the explicit permission of the regulators, who felt that this was a safe way of managing risk. There were two ways in which these credit default swaps led to trouble. The first is simply that having insured some of their gambles, the banks felt confident in raising the stakes. Regulators approved; so did the credit-rating agencies responsible for evaluating these risks; so did most bank shareholders. John Lanchester, a chronicler of the crisis, quips, ‘It’s as if people used the invention of seatbelts as an opportunity to take up drunk-driving.’


pages: 180 words: 61,340

Boomerang: Travels in the New Third World by Michael Lewis

Apollo 11, Bear Stearns, Berlin Wall, Bernie Madoff, Carmen Reinhart, Celtic Tiger, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, fiat currency, financial engineering, financial thriller, full employment, German hyperinflation, government statistician, Irish property bubble, junk bonds, Kenneth Rogoff, Neil Armstrong, offshore financial centre, pension reform, Ponzi scheme, proprietary trading, Ronald Reagan, Ronald Reagan: Tear down this wall, South Sea Bubble, subprime mortgage crisis, the new new thing, Tragedy of the Commons, tulip mania, women in the workforce

Back in 2004, the biggest Wall Street investment banks had created the instrument of their own destruction, the credit default swap on the subprime mortgage bond. The credit default swap enabled investors to bet against the price of any given bond—to “short” it. It was an insurance policy, but with a twist: the buyer didn’t need to own the insured asset. No insurance company can legally sell you fire protection on another person’s house, but the financial markets can and will sell you default insurance on another person’s investments. Hundreds of investors had dabbled in the credit default swap market—a lot of people had thought, at least in passing, that the debt-fueled U.S. housing boom was unsustainable—but only fifteen or so had gone all in, and placed enormous bets that vast tracts of American finance would go up in flames.

Should I wait until I see the whites of their eyes before I position myself, or should I position myself now? The answer is now. Because the moment people think it [national default] is a possibility, it’s expensive. If you wait, you have to pay up for the risk.” When we met, he had just bought his first credit default swaps on the countries he and his team of analysts viewed as the most likely to be unable to pay off their debts: Greece, Ireland, Italy, Switzerland, Portugal, and Spain. He made these bets directly with the few big Wall Street firms that he felt were least likely to be allowed to fail—Goldman Sachs, J.P.

I wrote the book about the U.S. subprime mortgage crisis and the people who had made a fortune from it, but began to travel to these other places, just to see what was up. But I traveled with a nagging question: how did a hedge fund manager in Dallas even think to imagine these strange events? Two and a half years later, in the summer of 2011, I returned to Dallas to ask Kyle Bass that question. Greek credit default swaps were up from 11 basis points to 2300; Greece was just about to default on its national debt. Ireland and Portugal had required massive bailouts; and Spain and Italy had gone from being viewed as essentially riskless to nations on the brink of financial collapse. On top of it all, the Japanese Ministry of Finance was about to send a delegation to the United States to tour the big bond investment funds such as Pimco and BlackRock—to see if they could find someone, anyone, willing to buy half a trillion dollars’ worth of ten-year Japanese government bonds.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

"there is no alternative" (TINA), Adam Curtis, Alan Greenspan, Alvin Roth, An Inconvenient Truth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, bond market vigilante , bread and circuses, Bretton Woods, Brownian motion, business cycle, capital controls, carbon credits, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, democratizing finance, disinformation, do-ocracy, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, Flash crash, full employment, George Akerlof, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kickstarter, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Phillips curve, Ponzi scheme, Post-Keynesian economics, precariat, prediction markets, price mechanism, profit motive, public intellectual, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, savings glut, school choice, sealed-bid auction, search costs, Silicon Valley, South Sea Bubble, Steven Levy, subprime mortgage crisis, tail risk, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, tontine, too big to fail, transaction costs, Tyler Cowen, vertical integration, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

Matt Taibbi had some fun pointing out that even wives of the rich and famous were bestowed enormous opportunities to enrich themselves off TALF, a program nominally instituted to support the rancid securities the Fed had permitted to proliferate over the previous decade.56 But few have acknowledged that this was precisely the Depression remedy promoted by Milton Friedman: keep the rich from suffering writedowns or defaulting on their debts so the so-called money supply does not contract inordinately, and everything else will just work itself out fine. Yves Smith has made the important point that Bernanke tends to justify the sites and instances where the Fed has intervened largely by insisting that private contracts have to be respected; but this is yet another Big Lie from Foggy Bottom. If the contracts favored the banks, such as the credit default swaps written by AIG, then it was permissible to stretch the Fed legal charter by essentially nationalizing an insurance company, or purchasing mortgage-backed securities. (Saving AIG reveals the Bernanke excuse that “we had no legal authority” to save Lehman to be bootless.) However, whenever it was the banks themselves that violated sanctity of contract, from the total travesty of riding roughshod over the chain of title in mortgage securitization, to the defrauding of clients and investors, to reverse long-established principles of creditor hierarchy, then the Fed looked the other way.

When he filed his “Executive Branch Financial Disclosure Report” on January 20, 2009, listing a net worth of $17–$39 million, he prompted a flurry of newspaper and blog accounts of his outsized speaker fees and favors done for the financial sector from the late 1990s onward.93 Summers has enjoyed an extremely checkered career in many respects, dating from his controversial tenure as chief economist at the World Bank in 1990, but had nonetheless risen to political prominence due to the long-term patronage of Robert Rubin, formerly co-chair of Goldman Sachs, secretary of the Treasury, and later gray eminence at Citigroup and other Wall Street institutions. During the Clinton administration, Rubin and Summers played a now-infamous role in quashing Brooksley Born at the CFTC in 1998 when she proposed reining in the proliferating markets in credit default swaps. Indeed, many of the most significant neoliberal bank deregulations that led up to the crisis happened during the joint watch of Rubin, Summers, and Greenspan. When Rubin left the Treasury in 1999 for Citigroup, he persuaded Clinton to name Summers as his replacement. Rubin lobbied for Summers to be appointed president of Harvard, a term that ended rather inauspiciously in 2006 with accusations of economics faculty fraud from the federal government.94 Summers did not suffer from these contretemps, however; he was taken on board at Taconic Capital Advisors, a Goldman alumni hedge fund,95 and began earning $5 million a year working one day a week at the hedge fund D.

Among other ties to the key crisis institutions, he had been on the board of AIG for twenty-two years, only to conveniently resign from his duties on June 30, 2009. He had also been chair of its finance committee and risk management, and therefore was formally directly responsible for the disastrous AIG Financial Products division, whose credit default swaps and other unsustainable derivatives brought down the company. For his services there he accrued more than $6 million, and has apparently never suffered any ostracism for saddling the Treasury with a shell of a remnant of an insurance behemoth that is still hemorrhaging money. Indeed, none of this seemed an obstacle to President Obama appointing him to his Presidential Economic Recovery Advisory Board in 2009, and his Tax Policy task force thereafter.


pages: 318 words: 99,524

Why Aren't They Shouting?: A Banker’s Tale of Change, Computers and Perpetual Crisis by Kevin Rodgers

Alan Greenspan, algorithmic trading, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black-Scholes formula, buy and hold, buy low sell high, call centre, capital asset pricing model, collapse of Lehman Brothers, Credit Default Swap, currency peg, currency risk, diversification, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, fixed income, Flash crash, Francis Fukuyama: the end of history, Glass-Steagall Act, Hyman Minsky, implied volatility, index fund, interest rate derivative, interest rate swap, invisible hand, John Meriwether, latency arbitrage, law of one price, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, Minsky moment, money market fund, Myron Scholes, Northern Rock, Panopticon Jeremy Bentham, Ponzi scheme, prisoner's dilemma, proprietary trading, quantitative easing, race to the bottom, risk tolerance, risk-adjusted returns, Silicon Valley, systems thinking, technology bubble, The Myth of the Rational Market, The Wisdom of Crowds, Tobin tax, too big to fail, value at risk, vertical integration, Y2K, zero-coupon bond, zero-sum game

In days gone by a bank was defined by its great vaults, its glossy headquarters or its extensive branch network. Increasingly, a bank’s true crown jewels are held in the form of bits and bytes in unremarkable data centres on light industrial estates in anonymous suburbs. Similarly, the multi-headed menagerie of mortgages, mortgage-backed bonds, collateralised debt obligations and credit default swaps that teems and writhes through the story of the 2008 Great Financial Crisis was nothing more than a huge number of legal contracts represented abstractly in the innards of thousands of computers. To understand banking, therefore, you must understand how computers have changed and redefined the industry – how they have eaten it.

Thus did advances in computer power allow investors access to leverage in a new, alternative asset class in ways that would have been impossible only a few years previously. But for all this business’s growth, it was a sideshow compared to the credit markets, where similar, but much larger and more important developments were taking place. Alphabet Soup One such development was the headlong progress of the credit default swap or CDS market. JPMorgan had invented the CDS in the mid-1990s. We had traded a few of them on Russian debt in my time at Bankers Trust. But by 2003 they were everywhere. Deutsche Bank, a leader in the field, had seen an increase of 250 per cent in volumes from 2000 to 2002,8 a growth which had helped the Credit department to be the biggest by revenue in the investment bank.9 From around this time, at the annual Barcelona conference (where the Rolling Stones were the floor show in 2007), the power of the Credit department meant that presentations by its representatives were always the main event – the rest of us mere seething support acts.

An accountant once asked one of our weather derivatives traders if weather derivatives were cash settled. ‘Normally, yes,’ came the reply, ‘it’s tricky to take delivery of rainfall.’ CCP A Central Counterparty (e.g. the London Clearing House) that stands between all transactions between market participants for various financial products. CDS Credit default swap: a financial instrument whereby the seller, in return for a stream of cash flows, is obliged to recompense the buyer for any losses resulting from default (or other credit event) on a predetermined ‘reference security’ like a bond or a loan. CDO Collateralised debt obligation: a type of structured bond that pays out the cash flows arising from a pool of underlying assets, normally bonds.


pages: 1,066 words: 273,703

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

"there is no alternative" (TINA), "World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bond market vigilante , book value, Boris Johnson, bread and circuses, break the buck, Bretton Woods, Brexit referendum, BRICs, British Empire, business cycle, business logic, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, company town, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial engineering, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, high-speed rail, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, inverted yield curve, junk bonds, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, low interest rates, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, military-industrial complex, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, opioid epidemic / opioid crisis, paradox of thrift, Peter Thiel, Ponzi scheme, Post-Keynesian economics, post-truth, predatory finance, price stability, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, Steve Bannon, structural adjustment programs, tail risk, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

For other clients, the investment bankers were hard at work figuring out how to hedge against fluctuations in currencies and interest rates. They developed swaps, for instance, that allowed clients to trade excessive exposures in currencies. They made instruments that allowed one client to take on the risk of fluctuating interest rates while another client opted for fixed rates. In the 1990s a team at J.P. Morgan devised the credit default swap (CDS), which offered protection against the risk of nonpayment and allowed lenders to fine-tune their lending risk.28 At the same time, the investment banks progressively increased their own trading activity. They discovered the profits to be made through volume and leverage. The returns were extraordinary.

What the private issuers discovered was that if scrutinizing conventional mortgages was profitable, subprime was even more so.40 The financial engineering was more elaborate and one could charge more money for the services. The techniques of the fixed-income investment bankers were now brought fully into play. A surprisingly large share even of nonconforming private label MBS could still attract an AAA rating once combined in structured products. To manage the risks, the production of credit default swaps (CDS), once the preserve of bespoke investment banks, was industrialized. Mainline insurers like AIG offered CDS insurance on exotic securitized products. Given the quality of the underlying mortgages, not all the tranches were good. But that stimulated the investment banks to expand the collateralized debt obligation (CDO) business.

After Lehman, the next link in the shadow banking chain to come under acute pressure was AIG, the insurer. In a dramatic burst of expansion from the 1990s onward, the Financial Products division of AIG had developed into a major player in the derivatives markets. In total in 2007 it had a book of $2.7 trillion in derivatives contracts.22 Of this total, credit default swaps accounted for $527 billion. Of these, $70 billion were on mortgage-backed securities, and of those, $55 billion had exposure to dangerous subprime. Given its inside knowledge of the property market, AIG had stopped writing new CDS already in 2005. But given the relatively small size of the portfolio and the AAA rating of the assets it had written CDS on, it had not thought it necessary to insulate itself against losses.


The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics by Rod Hill, Anthony Myatt

American ideology, Andrei Shleifer, Asian financial crisis, bank run, barriers to entry, behavioural economics, Bernie Madoff, biodiversity loss, business cycle, cognitive dissonance, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, different worldview, electricity market, endogenous growth, equal pay for equal work, Eugene Fama: efficient market hypothesis, experimental economics, failed state, financial innovation, full employment, gender pay gap, Gini coefficient, Glass-Steagall Act, Gunnar Myrdal, happiness index / gross national happiness, Home mortgage interest deduction, Howard Zinn, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, liberal capitalism, low interest rates, low skilled workers, market bubble, market clearing, market fundamentalism, Martin Wolf, medical malpractice, military-industrial complex, minimum wage unemployment, moral hazard, Paradox of Choice, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, positional goods, prediction markets, price discrimination, price elasticity of demand, principal–agent problem, profit maximization, profit motive, publication bias, purchasing power parity, race to the bottom, Ralph Nader, random walk, rent control, rent-seeking, Richard Thaler, Ronald Reagan, search costs, shareholder value, sugar pill, The Myth of the Rational Market, the payments system, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, ultimatum game, union organizing, working-age population, World Values Survey, Yogi Berra

This was met in part by credit rating agencies assigning grades to securitized bundles – a lucrative job which had its own perverse incentives to give overly generous ratings. But it was also met by the development of credit default swaps – ways of insuring against default by the ultimate borrowers upon whom the value of the securities depended. The value of these credit default swaps was estimated in 2008 to be around $62 trillion and involved complex interrelationships between financial institutions.8 It might be helpful to think of credit default swaps as like a fire insurance policy on a house. The householder pays a small sum – say $300 a year – to insure a home worth, say, $300,000.

Similarly, the financial institutions that insured the mortgage-backed securities against default thought that the risk of any one householder defaulting on his or her mortgage was independent of any other householder defaulting. So, by issuing lots of credit default swaps, they were ‘diversifying’. But this reasoning ignores the possibility of a systemic event – such as a real estate bubble bursting – creating huge swathes of mortgage defaults. The financial institutions that issued the credit default swaps faced a catas­ trophic liability. It was this which led to Lehman Brothers going bankrupt on 261 Postscript depended on keeping the stock market bubble going.’ The bubble Stiglitz is referring to is the stock market bubble of the late 1990s – the one that burst in August 2000.

As a result, on 16 September 2008 AIG was bailed out and given (what grew to be) a $182 billion loan, and was effectively ‘nationalized’ by the government, which received in return 79.9 per cent of its equity.9 Now, one could say that the growth of the credit default swap market was one way in which financial institutions evolved to avoid regulation. But the unsupervised growth in this market was due to the last – and perhaps most important – piece of deregulation (also introduced by Phil Gramm) – the Commodity Futures Modernization Act (CFMA) of 2000. This legislation guaranteed that the credit default swaps would not be regulated like other ‘futures contracts’.10 It also whacked the Securities and Exchange Commission’s budget when they asked for more funding to oversee all these new types of deals.11 This illustrates a crucial point: it is not sufficient to have regulations in place.


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

affirmative action, Alan Greenspan, Albert Einstein, Andrei Shleifer, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Boeing 747, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, Cass Sunstein, central bank independence, classic study, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency risk, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, Great Leap Forward, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, junk bonds, Kenneth Rogoff, libertarian paternalism, low interest rates, low skilled workers, Malacca Straits, managed futures, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Sam Peltzman, school vouchers, seminal paper, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, tech worker, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

One attraction of catastrophe bonds for investors is that their payout is determined by the frequency of natural disasters, which is not correlated with the performance of stocks, bonds, real estate, or other traditional investments. Even the much-maligned credit default swaps have a legitimate investment purpose. A credit default swap is really just an insurance policy on whether or not some third party will pay back its debts. Suppose your husband pressures you to loan $25,000 to your ne’er-do-well brother-in-law so that he can finally complete his court-man-dated anger management program and turn his life around. You have grave concerns about whether you will ever see any of this money again. What you need is a credit default swap. You can pay some other party (presumably with a more favorable view of your brother-in-law’s creditworthiness) to enter into a contract with you that promises to pay you $25,000 in the event that your brother-in-law does not pay back the cash.

Financial products are to speculation what sporting events are to gambling. They facilitate it, even if that is not their primary purpose. This is what went wrong with credit default swaps. The curious thing about these contracts is that anyone can get into the action, regardless of whether or not they are a party to the debt that is being guaranteed. Let’s stick with the example of your loser brother-in-law. It makes sense for you to use a credit default swap to protect yourself against loss. However, that same market also allows the rest of us to bet on whether or not your brother-in-law will pay back the loan.

The demise of the investment bank Lehman Brothers, which declared bankruptcy on September 15, 2008, ushered in “the financial crisis,” which deserves its frequent description as the worst economic downturn since the Great Depression. How did it happen? How did so many consumers, who are supposed to have a rational understanding of their own well-being, end up crushed by a housing “bubble”? Who were the knuckleheads who loaned them all that money? Why did Wall Street create things like “CDOs” and credit-default swaps, and why did they prove so devastating to the financial system? Chapter 2 makes the case that most of the reckless behavior that led to the financial crisis was predictable, given the incentives built into the system. Why did mortgage brokers originate so many reckless loans? Because it wasn’t their money!


pages: 353 words: 88,376

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

Albert Einstein, asset allocation, asset-backed security, book value, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, fear index, financial engineering, fixed income, Glass-Steagall Act, implied volatility, index fund, intangible asset, interest rate swap, inventory management, inverted yield curve, junk bonds, London Interbank Offered Rate, low interest rates, margin call, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk free rate, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, short squeeze, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

The result is a slowdown in growth that leads to a prolonged recession (or slower recovery), which is compounded as banks hold tight to the banking reserves. Related Terms: • Bankruptcy • Debt • Subprime Meltdown • Bear Market • Recession Credit Default Swap (CDS) What Does Credit Default Swap (CDS) Mean? A swap designed to transfer the credit exposure of fixed-income products between parties. Investopedia explains Credit Default Swap (CDS) The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the creditworthiness of the product. When this is done, the risk of default is transferred from the holder of the fixed-income security to the seller of the swap.

Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private investors or governments). Investopedia explains Credit Derivative As an example, a bank concerned that one of its customers may not be able to repay a loan can protect itself against loss from default by transferring the credit risk to another party while keeping the loan on its books. Related Terms: • Credit Default Swap • Derivative • Yield • Credit Rating • Securitization Credit Rating What Does Credit Rating Mean? An assessment of the creditworthiness of individuals and corporations. It is based on the history of borrowing and repayment as well as the availability of assets and the extent of liabilities.

Investopedia explains Swap If companies in different countries have regional advantages on interest rates, a swap will benefit both firms. For example, one firm may have a lower fixed interest rate while another has access to a lower floating interest rate. To take advantage of this situation, the companies would do an interest rate swap. Related Terms: • Arbitrage • Credit Default Swap • Interest Rate Swap • Commodity • Currency Swap Swing Trading What Does Swing Trading Mean? A style of trading that is used to capture quick gains in a stock over a one- to four-day trading period. It is done to capitalize on the shortterm swings in the market. Investopedia explains Swing Trading Traders must make quick trading decisions to exploit these shortterm price swings in the stock market.


pages: 246 words: 74,341

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

accounting loophole / creative accounting, Alan Greenspan, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, business cycle, capital controls, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, Greenspan put, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, low interest rates, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, money market fund, moral hazard, mortgage tax deduction, Naomi Klein, National Debt Clock, new economy, Northern Rock, Own Your Own Home, precautionary principle, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

But investment banks were not the only ones to collapse during this fateful week. A huge stash of new financial weapons of mass destruction had just been discovered, and something was now going very wrong with them, potentially causing a series of explosions throughout the financial system. They were "credit-default swaps" (CDSs), a kind of insurance policy that you can take out against the risk of a company or a security collapsing. The history of the CDS begins at the Boca Raton, a pink luxury hotel in Florida where about 80 people from J. P. Morgan & Co. took part in a conference in 1994. Legend has it that the young, successful bankers partied so wildly that they ended up throwing each other into the pool fully dressed.

What if only a tiny proportion of default swaps were to default, and the related losses were to cause a bank to collapse, which would trigger more CDSs, creating new losses and triggering new CDSs, and so on in a long series of explosions that might end up knocking out the entire financial system? That is why dark glances were now being cast at AIG, the American International Group. It was not only the world's largest insurer, with 116,000 employees and operations in 116 countries, but also a leading seller of credit-default swaps. On the same day that Lehman went down-Monday, September 15-the rating agencies downgraded AIG. Since it had been able to apply tiny margins to its insurance agreements only on the strength of its earlier grade, AIG was now forced to raise new collateral to the tune of many billions of dollars in short order, and its stock fell by 60 percent as soon as the stock market opened.

Blankfein was particularly worried, because if AIG collapsed, his bank would lose around $20 billion worth of insurance policies, according to reports in the New York Times. But it never came to that. Instead, there was yet another large-scale government intervention. On that Tuesday, the Fed made $85 billion available to AIG in exchange for the departure of its CEO and an opportunity to buy a majority share of the company stock.37 Credit-default swaps have been characterized as engines of doom, but if you take a closer look at them, you find that, if correctly used, they may in fact be a good insurance solution. Blaming them for, say, the poor quality of the mortgages they insured is a bit like being against fire insurance because houses lack smoke detectors.


pages: 289 words: 77,532

The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders by Kate Kelly

"Hurricane Katrina" Superdome, Alan Greenspan, Bakken shale, bank run, Bear Stearns, business cycle, commodity super cycle, Credit Default Swap, diversification, fixed income, Gordon Gekko, index fund, light touch regulation, locking in a profit, London Interbank Offered Rate, Long Term Capital Management, margin call, oil-for-food scandal, paper trading, peak oil, Ponzi scheme, proprietary trading, risk tolerance, Ronald Reagan, side project, Silicon Valley, Sloane Ranger, sovereign wealth fund, supply-chain management, the market place

It was the fall of 2008, the period during which Andurand made so much money as the oil market sunk toward its low point, and financial firms were all under scrutiny as the U.S. banks flailed. Nobody in the financial markets wanted to take any risk. But Glencore, an infamous trading firm known equally for its opacity and its high tolerance for risk, was now especially vulnerable. By October, the price of a standard credit default swap, or CDS, on its debt—an insurance-like policy that would pay the holder if Glencore couldn’t pay its creditors—had zoomed past its already heightened levels, fueling the increasingly widespread belief that it was about to go under. Like any trading company, Glencore borrowed heavily to finance its operations, and depended on a steady flow of credit to keep the lights on.

As he left the meeting, Beard called his office in London. Above and beyond the commodity contract trading they were doing to hedge their exposure to price swings in physical energy trades, he wanted his team to put on a massive speculative bet that the price of oil would fall further. Glencore credit default swaps at that time had been trading at the relatively calm level of about €150,000. By contrast, the swap prices attached to the major U.S. investment banks—the cost of purchasing an insurance policy that would pay its keeper if the banks defaulted and couldn’t pay their debts—were growing vastly more expensive.

He never revisited the United States. His reputation remained stained even upon his death from a stroke, in 2013, as did those of Clinton and the lobbyists who had helped secure his pardon. The commodity rout of 2008 was probably Glencore’s toughest period since Rich’s ill-fated zinc gamble in 1992. The company’s credit default swap, or insurance-against-default, prices had retreated from their stratospheric levels, and Glencore was bringing in nearly $5 billion in net income, an amount just shy of 2007’s. But its publicly traded bonds were still only barely above investment grade. The landscape had also changed. Commodity prices were still at their lows, credit to help finance transactions was much harder to secure as banks grew more parsimonious about sharing their resources, and the troubles with BP and other companies had left the company more vulnerable to rivals.


The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number (Bloomberg) by Liam Vaughan, Gavin Finch

Alan Greenspan, asset allocation, asset-backed security, bank run, banking crisis, Bear Stearns, Bernie Sanders, Big bang: deregulation of the City of London, buy low sell high, call centre, central bank independence, collapse of Lehman Brothers, corporate governance, credit crunch, Credit Default Swap, eurozone crisis, fear of failure, financial deregulation, financial innovation, fixed income, interest rate derivative, interest rate swap, Kickstarter, light touch regulation, London Interbank Offered Rate, London Whale, low interest rates, mortgage debt, Neil Armstrong, Northern Rock, performance metric, Ponzi scheme, Ronald Reagan, social intelligence, sovereign wealth fund, subprime mortgage crisis, urban sprawl

Libor was also the benchmark for billions of dollars of interest-rate futures contracts traded on the Chicago Mercantile Exchange (CME), placing it squarely within the CFTC’s purview. While Termine and Lowe quietly gathered intelligence, the Journal was working on a follow-up that would help focus their minds. On May 29, 2008, the paper published a piece that compared movements in Libor since the start of the financial crisis with another barometer of stress: banks’ credit default swaps prices.5 CDS contracts are a type of financial derivative that allow investors to bet on the likelihood that an institution will default on its publicly traded debt. They are used by credit investors as a form of insurance but are also bought and sold by hedge funds and other financial speculators to take bets on a company’s fortunes.

Huertas had spent most of his career at Citigroup, one of the firms identified by the Journal as making dubious Libor submissions. On May 29, 2008, the afternoon the second Journal story appeared, Huertas had ordered his team to undertake an analysis of the newspaper’s methodology,which compared banks’Libor submissions with their credit default swap prices to suggest lowballing was rife. They came back with a list of minor errors with the paper’s analysis, including that the reporters had compared three-month Libors with six-month CDS prices,and confused Citibank, a subsidiary, with Citigroup, the holding company. No matter that the broad thrust of the reporters’ work turned out to be on the money.

This proper discussion has overflowed into commentary No One’s Clean-Clean 59 in the media, and the BBA believes that it needs to correct a number of misunderstandings and misperceptions. Commentators in the press, the BBA suggested, were blind to the intricacies of financial markets and had jumped to conclusions. Comparing Libor with other barometers of market strength, as the Journal had done with credit default swaps, was misguided because of the many differences among them. And lenders who complained they were unable to borrow cash at the rates banks posted to Libor were being unrealistic: As smaller, riskier institutions, their interest payments were inevitably going to be higher than the panel banks.


pages: 419 words: 130,627

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

"World Economic Forum" Davos, Alan Greenspan, AOL-Time Warner, bank run, Bear Stearns, Blythe Masters, Bonfire of the Vanities, book value, business logic, 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, Glass-Steagall Act, Greenspan put, housing crisis, interest rate swap, Jeff Bezos, John Meriwether, junk bonds, Kickstarter, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, Michael Milken, money market fund, moral hazard, negative equity, Nelson Mandela, Northern Rock, profit motive, proprietary trading, 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

There were a lot of people who took the bet; they just didn’t match AIG’s level of recklessness. There have been some suggestions that the interplay between a company’s bonds and its credit default swaps actually exacerbated problems—George Soros wrote convincingly about this phenomenon in the New York Times—but that phenomenon was arguably on the margin of a much larger problem: abandonment of risk management controls in pursuit of higher profits. When it came time for the first big test of credit default swaps—in the aftermath of Lehman Brothers’ bankruptcy—the settlement of those contracts took place without incident on October 21, 2008. Dimon has endorsed the creation of a central clearinghouse so derivatives exposures can be more closely monitored.

Winters also reduced the credit lines the bank was extending to other banks’ SIVs from $12 billion to $500 million. With regard to structured products, Winters was no neophyte. 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.

The system had gone completely nuts.” By late 2006, Winters had concluded that it was no longer worth the risk to underwrite or hold any such product on the company’s books. At the time, CDOs were yielding just 2 percentage points more than Treasuries. To hedge the CDO risk, JPMorgan Chase needed to buy credit default swaps, but the cost of those was rising. (In this, at least, the market was getting it right. Investors in CDOs might be taking too little yield, but sellers of insurance on those CDOs were starting to demand more money, even though it ultimately proved to be nowhere near enough.) Winters had no problem convincing Dimon of his concerns, and the bank began to pull back from all asset-backed CDO underwriting, while also selling the majority of subprime mortgages originated by the bank during the year.


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, Alan Greenspan, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, Black Monday: stock market crash in 1987, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, junk bonds, liquidity trap, London Whale, Long Term Capital Management, low interest rates, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, Navinder Sarao, negative equity, new economy, Northern Rock, obamacare, Phillips curve, price stability, proprietary trading, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, stock buybacks, tail risk, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

Born, a highly respected lawyer with twenty years of experience in practicing derivatives law, had been appointed in 1996 by President Bill Clinton to head a small agency called the Commodity Futures Trading Commission (CFTC). Born was alarmed at the incredible growth and opaque nature of the over-the-counter derivatives market, which included CDOs, mortgage-backed securities (MBS), credit default swaps (CDS), and many other sliced-and-diced products. In May 1998, Born’s agency published in the Federal Register a “concept release,” a paper on proposed rule changes asking dealers and participants in the derivatives market to voluntarily submit information. The reaction was swift and furious.

Since financial managers’ pay is set relative to their peers, everyone follows the same path. A herd instinct takes over. But if something went wrong, the results could be ruinous. The more crowded the trade, the greater the chance an unexpected turn in prices would cascade from institution to institution and potentially throughout the entire system. Rajan pointed to credit default swaps—a type of insurance—as examples of financial innovations that posed enormous danger. Some of the financial institutions making bets using CDSs also held some of the same underlying securities on their books. If these failed, the risk would be magnified, putting the banking system itself in peril.

Instead of I Love Lucy reruns, I watched the BBC as thousands of Brits queued to withdraw one billion pounds from Northern Rock, the biggest UK bank run in over a century. Markets sniff out the weakest links in the system. The cost of protecting the debt of big U.S. investment banks became the train wreck I couldn’t stop watching. I began following bank credit default swaps. These insurance securities could be used to bet for or against the survival of any financial entity—for example, the sovereign debt of Iceland or the corporate bonds of General Motors. Propped up on a mountain of pillows, I tracked bank CDSs in a spreadsheet. My Economic Letter on subprime mortgages, published on November 1, was the first article the reading public would see with my name on it since I had vanished into the invisibility of the Fed.


pages: 362 words: 116,497

Palace Coup: The Billionaire Brawl Over the Bankrupt Caesars Gaming Empire by Sujeet Indap, Max Frumes

Airbnb, Bear Stearns, Blythe Masters, book value, business cycle, Carl Icahn, coronavirus, corporate governance, corporate raider, Credit Default Swap, data science, deal flow, Donald Trump, family office, fear of failure, financial engineering, fixed income, Jeffrey Epstein, junk bonds, lockdown, low interest rates, Michael Milken, mortgage debt, NetJets, power law, ride hailing / ride sharing, Right to Buy, Robert Solow, Savings and loan crisis, shareholder value, super pumped, Travis Kalanick

Derivatives are securities whose value is tied to or derived from other underlying securities. Put options and call options on stocks, for example, allowed investors to wager on whether stock prices would rise or fall without actually owning the stock. Miller was going to use derivatives to juice his Caesars returns. His derivative choice was the credit default swap, or CDS. Buyers and sellers of CDS were betting whether companies could repay their debts in full. In this case, purchasing CDS would pay off if Caesars defaulted or went bankrupt. Banks created CDS to keep debt on their books while offloading risk. A young JPMorgan executive, Blythe Masters, had created CDS to help the firm hedge default risk related to a $5 billion loan to Exxon.

Ryan Mollett was confident a Chapter 11 filing was still far off, so GSO risked a portion of their fee by selling the CDS protection, taking the opposite side of Miller’s bet. BlackRock, the other key party in the B-7 loan, did the same thing. Miller started to slowly buy, and as 2014 progressed, market chatter grew that Elliott—and only Elliott—was buying what was called “front-end” or “short-dated” credit default swaps, accumulating as much as a half billion worth of CDS protection. Only Elliott seemed to be confident Caesars would default in less than a year. Apollo was aware of the adjacent skirmish between Miller and Mollett. It was not thrilled about the sideshow wreaking havoc with its company, but Sambur needed Miller—and Miller believed that his CDS bet was perfectly aligned with his underlying debt positions.

First, Caesars had agreed to file for bankruptcy in mid-January. On December 15, the company announced it was skipping a $225 million interest payment to junior bondholders, which foreshadowed the bankruptcy filing, but the press release now confirmed it. The bankruptcy filing would ensure that Elliott’s credit default swap bet would pay off. The second notable feature described a $300 million convertible preferred stock instrument in PropCo that was going to be made available to certain senior bondholders like Elliott for purchase, ostensibly to use the cash from selling the preferred to reduce the leverage on the reorganized OpCo.


pages: 195 words: 63,455

Damsel in Distressed: My Life in the Golden Age of Hedge Funds by Dominique Mielle

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", activist fund / activist shareholder / activist investor, airline deregulation, Alan Greenspan, banking crisis, Bear Stearns, Black Monday: stock market crash in 1987, blood diamond, Boris Johnson, British Empire, call centre, capital asset pricing model, Carl Icahn, centre right, collateralized debt obligation, Cornelius Vanderbilt, coronavirus, COVID-19, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, family office, fear of failure, financial innovation, fixed income, full employment, glass ceiling, high net worth, hockey-stick growth, index fund, intangible asset, interest rate swap, John Meriwether, junk bonds, Larry Ellison, lateral thinking, Long Term Capital Management, low interest rates, managed futures, mega-rich, merger arbitrage, Michael Milken, Myron Scholes, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, offshore financial centre, Paul Samuelson, profit maximization, Reminiscences of a Stock Operator, risk free rate, risk tolerance, risk-adjusted returns, satellite internet, Savings and loan crisis, Sharpe ratio, Sheryl Sandberg, SoftBank, survivorship bias, Tesla Model S, too big to fail, tulip mania, union organizing

Yet Greenspan opined: Credit default swaps have been an extraordinarily valuable tool in the sense a substantial proportion of loans that are made, are made by leveraged institutions. And in previous decades, they left those loans on their balance sheets. And when there was stress, they had a banking crisis. Or you had savings and loan crisis, or something of that nature. With the credit default swap, you have the originators of loans capable of selling off the credit risk to those with far less leverage, who are willing to accept the risk at a price. And since we’ve had credit default swaps, there has not been a major financial institution undermined.

The original elevator pitch was that hedge funds used their small size relative to the plethora of opportunities to swoop in and capitalize on market inefficiencies, quickly getting in and out of positions. As funds became larger, the pitch morphed into the opposite story. We had access to differentiated sources of inefficiencies because of our size. Direct lending and rescue financing, complex financial securities like mortgage securitizations and credit default swaps, large scale bankruptcy situations like Enron and WorldCom, and later Lehman Brothers and Puerto Rico, required large teams of investment analysts, extensive back office and compliance departments, external financial and restructuring advisors, not to mention corporate, bankruptcy, and litigation lawyers.

Housing prices weren’t the only ones reaching speculative extremes; around the globe risk premia (the extra profit you earn to hold risky investments) in general had compressed to radical lows, which pushed hungry investors to go after ever more illiquid, opaque, complex investments. Innovative but complex financial investments such as mortgage securitizations, credit default swaps (a financial contract akin to an insurance policy that pays out in the case of a corporate bond default), and carry trades (where one borrows money at a low interest rate to buy an asset that should provide a higher return) ballooned. Everyone, and I do mean everyone, was encouraged to use debt recklessly.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

active measures, Alan Greenspan, AOL-Time Warner, banking crisis, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, Easter island, endogenous growth, eurozone crisis, financial engineering, financial innovation, first-past-the-post, full employment, Glass-Steagall Act, Great Leap Forward, guns versus butter model, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market fundamentalism, Mexican peso crisis / tequila crisis, military-industrial complex, Money creation, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Nixon triggered the end of the Bretton Woods system, 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, Suez crisis 1956, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, WikiLeaks, Yom Kippur War

To address the Credit Crunch – i.e. the complete halt in inter-bank lending. 2008 – The main event January – The World Bank predicts a global recession, stock markets crash, the Fed drops interest rates to 3.5 per cent, and stock markets rebound in response. Before long, however, MBIA, an insurance company, announces that it has lost $2.3 billion from policies based on bonds containing sub-prime mortgages. These insurance policies suddenly become household names: they are known as credit default swaps, or CDSs. Box 6.1 Credit default swaps (CDS) If Mr Spock, of Star Trek fame, spotted a CDS and had to describe it to Captain Kirk, he would have said, in his usual expressionless way: ‘They are insurance policies, Captain, but not as we know them.’ CDSs pay out pre-specified amounts of money if someone else defaults.

., 149, 156, 157 Byrnes, James, 68 capital, and the human will, 18–19 capitalism: dynamic system, 139–40; free market, 68; generation of crises, 34; global, 58, 72, 114, 115, 133; Greenspan and, 11–12; Marxism, 17–18; static system, 139; supposed cure for poverty, 41–2; surplus recycling mechanisms, 64–5 capitalists, origin of, 31 car production, 70, 103, 116, 157–8 carry trade, 189–90 Carter, Jimmy, 99, 100 CDOs (collateralized debt obligations), 141–2, 147–8, 149, 150, 153; for crops, 163; eurozone, 205; explanation, 6–9; France, 203; function, 130–2; Greece, 206 see also EFSF; Geithner–Summers Plan CDSs (credit default swaps), 149, 150, 153, 154, 176, 177 CEOs (chief executive officers), 46, 48, 49 Chamber of Commerce, British, 152 cheapness, ideology of, 124 Chiang Kai-shek, 76 Chicago Commodities Exchange, 120 Chicago Futures Exchange, 163 China: aggregate demand, 245; Crash of 2008, 156, 162; currency, 194, 213, 214, 217, 218, 252; economic development, 106–7; effects of the Crash of 2008, 3; financial support for the US, 216; global capital, 116; Global Plan, 76; growth, 92; rise and impact, 212–18, 219–20 Chrysler, 117, 159 CIA (Central Intelligence Agency), 69 Citigroup, 149, 156, 158 City of London: Anglo-Celtic model, 12; Crash of 2008, 148, 152; debt in relation to GDP, 4–5; financialization, 118–19; under Thatcher, 138; wealth of merchants, 28 civilization, 27, 29–30, 128 Clinton, Hillary, 212, 215–16 Cold War, 71, 80, 81, 86 collateralized debt obligations see CDOs commodification: resistance to, 53–4; rise of, 30, 33, 54; of seeds, 175 commodities: global, 27–8; human nature not, 53; labour as, 45, 49, 54; money as, 45, 49; prices, 96, 98, 102, 125; trading, 31, 175 common market, European, 195 communism, collapse of, 22, 107–8 complexity, and economic models, 139–40 Condorcet, Nicholas de Caritat, marquis de, 29, 32 Congress (US): bail-outs, 77, 153–4, 155; import tariff bill, 45 Connally, John, 94–5 council houses, selling off, 137, 138 Crash of 1907, 40 Crash of 1929, 38–43, 44, 181 Crash of 2008, 146–68; aftermath, 158–60; chronicle, 2007, 147–9; chronicle, 2008, 149, 151–8; credit default swaps, 150; effects, 2–3; epilogue, 164–8; explanations, 4–19; in Italy, 237; review, 160–4; in Spain, 237; warnings, 144–5 credit crunch, 149, 151 credit default swaps (CDSs), 149, 150, 153, 154, 176, 177 credit facilities, 127–8 credit rating agencies, 6–7, 8, 9, 20, 130 crises: as laboratories of the future, 28; nature of, 141; pre-1929, 40; pre-2008, 2; proneness to, 30; redemptive, 33–5, 35 currency unions, 60–1, 61–2, 65, 251 Cyprus, Britain’s role in, 69, 79 Daimler-Benz, 117 DaimlerChrysler, 117 Darling, Alistair, 159 Darwinian process, 167 Das Kapital (Marx), 49 de Gaulle, Charles, 76, 93 Debenhams, takeover of, 119 debt: and GDP, 4–5; unsecured, 128; US government, 92; US households, 161–2 see also CDOs; leverage debt–deflation cycle, 63 deficits: in the EU, 196; US budget, 22–3, 25, 112, 136, 182–3, 215–16; US trade, 22–3, 25, 111, 182–3, 196, 227 Deng Xiao Ping, 92, 212 Depressions: US 1873–8, 40; US Great Depression, 55, 58, 59, 80 deregulations, 138, 143, 170 derivatives, 120, 131–2, 174, 178 Deutschmark, 74, 96, 195, 197 Dexia, 154 distribution, and production, 30, 31, 54, 64 dollar: devaluing, 188; flooding markets, 92–3; pegging, 190; reliance on, 57, 60, 102; value of, 96, 204; zone, 62, 78, 89, 164 dotcom bubble, 2, 5 Draghi, Mario, 239 East Asia, 79, 143, 144, 194 see also Asia; specific countries East Germany, 201, 202 see also Germany Eastern Europe, 108, 198, 203 ECB (European Central Bank): aftermath of Crash of 2008, 158; bank bail-outs, 203, 204; Crash of 2008, 148, 149, 155, 156, 157; European banking crisis, 208, 209–10; Greek crisis, 207; LTRO, 238; Maastricht Treaty, 199–200; toxic theory, 15 economic models, 139–42 Economic Recovery Advisory Board (ERAB), 180, 181 Economic Report of the President (1999), 116 ECSC (European Coal and Steel Community), 74, 75–6 Edison, Thomas, 38–9 Efficient Market Hypothesis (EMH), 15 EFSF (European Financial Stability Facility), 174, 175–7, 207, 208–9 EIB (European Investment Bank), 210 Eisenhower, Dwight D., 82 Elizabeth II, Queen, 4, 5 ERAB (Economic Recovery Advisory Board), 180, 181 ERM (European Exchange Rate Mechanism), 197 EU (European Union): economies within, 196; EFSF, 174; European Financial Stability Mechanism, 174; financial support for the US, 216; origins, 73, 74, 75; SPV, 174 euro see eurozone eurobonds, toxic, 175–7 Europa myth, 201 Europe: aftermath of Crash of 2008, 162; bank bail-outs, 203–5; Crash of 2008, 2–3, 12–13, 183; end of Bretton Woods system, 95; eurozone problems, 165; Geithner–Summers Plan, 174–7; oil price rises, 98; unemployment, 164 see also specific countries European Central Bank see ECB European Coal and Steel Community (ECSC), 74, 75–6 European Commission, 157, 203, 204 European Common Market, 195 European Exchange Rate Mechanism (ERM), 197 European Financial Stability Facility (EFSF), 174, 207, 208–9 European Financial Stability Mechanism, 174, 175–7 European Investment Bank (EIB), 210 European Recovery Progam see Marshall Plan European Union see EU eurozone, 61, 62, 156, 164; crisis, 165, 174, 204, 208–9, 209–11; European banks’ exposure to, 203; formation of, 198, 202; France and, 198; Germany and, 198–201; and Greek crisis, 207 exchange rate system, Bretton Woods, 60, 63, 67 falsifiability, empirical test of, 221 Fannie Mae, 152, 166 Fed, the (Federal Reserve): aftermath of Crash of 2008, 159; Crash of 2008, 148, 149, 151, 153, 155, 156, 157; creation, 40; current problems, 164; Geithner–Summers Plan, 171–2, 173, 230; Greenspan and, 3, 10; interest rate policy, 99; sub-prime crisis, 147, 149; and toxic theory, 15 feudalism, 30, 31, 64 Fiat, 159 finance: as a pillar of industry, 31; role of, 35–8 Financial Crisis Inquiry Commission, 166 financialization, 30, 190, 222 First World War, Gold Standard suspension, 44 food: markets, 215; prices, 163 Ford, Henry, 39 formalist economic model, 139–40 Forrestal, James, 68 Fortis, 153 franc, value against dollar, 96 France: aid for banks, 157; colonialism criticized, 79; EU membership, 196; and the euro, 198; gold request, 94; Plaza Accord, 188; reindustrialization of Germany, 74; support for Dexia, 154 Freddie Mac, 152, 166 free market fundamentalism, 181, 182 French Revolution, 29 G7 group, 151 G20 group, 159, 163–4 Galbraith, John Kenneth, 73 GATT (General Agreement on Tariffs and Trade), 78 GDP (Gross Domestic Product): Britain, 4–5, 88, 158; eurozone, 199, 204; France, 88; Germany, 88, 88; Japan, 88, 88; US, 4, 72, 73, 87, 88, 88, 161; world, 88 Geithner–Summers Plan, 159, 169–83; in Europe, 174–7; results, 178–81; in the US, 169–74, 170, 230 Geithner, Timothy, 170, 173, 230 General Motors (GM), 131–2, 157–8, 160 General Theory (Keynes), 37 geopolitical power, 106–8 Germany: aftermath of the Second World War, 68, 73–4; competition with US, 98, 103; current importance, 251; and Europe, 195–8; and the eurozone, 198–201, 211; global capital, 115–16; Global Plan, 69, 70; Greek crisis, 206; house prices, 129; Marshall Plan, 73; reunification, 201–3; support for Hypo Real Estate, 155; trade surplus, 251; trade surpluses, 158 Giscard d’Estaing, Valery, 93 Glass–Steagall Act (1933), 10, 180 global balance, 22 global imbalances, 251–2 Global Plan: appraisal, 85–9; architects, 68; end of, 100–1, 182; geopolitical ideology, 79–82; Germany, 75; Marshall Plan, 74; origins, 67–71; real GDP per capita, 87; unravelling of, 90–4; US domestic policies, 82–5 global surplus recycing mechanism see GSRM global warming, 163 globalization, 12, 28, 125 GM (General Motors), 131–2, 157–8, 160 gold: prices, 96; rushes, 40; US reserves, 92–3 Gold Exchange Standard, collapse, 43–5 Goodwin, Richard, 34 Great Depression, 55, 58, 59, 80 Greece: currency, 205; debt crisis, 206–8 greed, Crash of 2008, 9–12 Greek Civil War, 71, 72, 79 Greenspan, Alan, 3, 10–11 Greenwald, Robert, 125–6 Gross Domestic Product see GDP GSRM (global surplus recycling mechanism), 62, 66, 85, 90, 109–10, 222, 223, 224, 248, 252–6 HBOS, 153, 156 Heath, Edward, 94 hedge funds, 147, 204; LTCM, 2, 13; toxic theory, 15 hedging, 120–1 history: consent as driving force, 29; Marx on, 178; as undemocratic, 28 Ho Chi Minh, 92 Holland, 79, 120, 155, 196, 204 home ownership, 12, 127–8; reposessions, 161 Homeownership Preservation Foundation, 161 Hoover, Herbert, 42–3, 44–5, 230 House Committee on Un-American Activities, 73 house prices, 12, 128–9, 129, 138; falling, 151, 152 human nature, 10, 11–12 humanity, in the workforce, 50–2, 54 Hypo Real Estate, 155 Ibn Khaldun, 33 IBRD (International Bank for Reconstruction and Development) see World Bank Iceland, 154, 155, 156, 203 ICU (International Currency Union) proposal, 60–1, 66, 90, 251 IMF (International Monetary Fund): burst bubbles, 190; cost of the credit crunch, 151; Crash of 2008, 155–6, 156, 159; demise of social services, 163; on economic growth, 159; European banking crisis, 208; G20 support for, 163–4; Greek crisis, 207; origins, 59; South East Asia, 192, 193; Third World debt crisis, 108; as a transnational institution, 253, 254 income: distribution, 64; national, 42; US national, 43 India: Britain’s stance criticized, 79; Crash of 2008, 163; suicides of farmers, 163 Indochina, and colonization, 79 Indonesia, 79, 191 industrialization: Britain, 5; Germany, 74–5; Japan, 89, 185–6; roots of, 27–8; South East Asia, 86 infinite regress, 47 interest rates: CDOs, 7; post-Global Plan, 99; prophecy paradox, 48; rises in, 107 International Bank for Reconstruction and Development (IBRD) see World Bank International Currency Union (ICU) proposal, 60–1, 66, 90, 253 International Labour Organisation, 159 International Monetary Fund see IMF Iran, Shah of, 97 Ireland: bankruptcy, 154, 156; EFSF, 175; nationalization of Anglo Irish Bank, 158 Irwin, John, 97 Japan: aftermath of the Second World War, 68–9; competition with the US, 98, 103; in decline, 186–91; end of Bretton Woods system, 95; financial support for the US, 216; global capital, 115–16; Global Plan, 69, 70, 76–8, 85–6; house prices, 129; labour costs, 105; new Marshall Plan, 77; Plaza Accord, 188; post-war, 185–91; post-war growth, 185–6; relations with the US, 187–8, 189; South East Asia, 91, 191–2; trade surpluses, 158 joblessness see unemployment Johnson, Lyndon B.: Great Society programmes, 83, 84, 92; Vietnam War, 92 JPMorgan Chase, 151, 153 keiretsu system, Japan, 186, 187, 188, 189, 191 Kennan, George, 68, 71 Kennedy, John F., 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

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


pages: 261 words: 86,905

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

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, asset allocation, Basel III, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamond, Bretton Woods, BRICs, business cycle, 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, fear index, financial engineering, financial innovation, Flash crash, forward guidance, Garrett Hardin, Gini coefficient, Glass-Steagall Act, global reserve currency, high net worth, High speed trading, hindsight bias, hype cycle, income inequality, inflation targeting, interest rate swap, inverted yield curve, Isaac Newton, Jaron Lanier, John Perry Barlow, joint-stock company, joint-stock limited liability company, junk bonds, Kodak vs Instagram, Kondratiev cycle, Large Hadron Collider, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, low interest rates, 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, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Ponzi scheme, precautionary principle, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, trickle-down economics, two and twenty, Two Sigma, Tyler Cowen, Washington Consensus, wealth creators, working poor, yield curve

Third, and finally, one of the most brilliant things the financial services industry ever did was to take the word “debt,” which people were brought up to consider a bad thing that you want to avoid, and to rename it as “credit,” which sounds like a good thing that you want more of. This is a major example of reversification at work. credit default swap (CDS) A financial instrument arising from interest rate swaps. The simplest way of looking at a CDS is as a form of insurance. If you are receiving interest from someone to whom you’ve lent money, you may start to wonder what happens if she starts to have trouble paying you. If you get worried, you might want to insure the interest you’re getting, so that in the event of a default by your borrower, you still get your money. That’s a credit default swap: you pay someone a fee to take on the risk of default, and in return, in the event of a default, she pays you the money you are owed.

That’s a credit default swap: you pay someone a fee to take on the risk of default, and in return, in the event of a default, she pays you the money you are owed. This might sound straightforward, but the picture is complicated by the fact that you can take out a credit default swap against loans you haven’t actually made. That’s right: you can insure against the risk of a default not of your own loan, but of somebody else’s loan. That’s less like insurance and more like a form of gambling, since you’re basically betting on someone else’s debts. Credit default swaps of this sort played a big role in the credit crunch. currency wars Conflicts that happen when countries adopt “beggar thy neighbor” policies: they make their own currency cheap to bolster their own exports.

The British bank C. Hoare and Co. is unusual in being an unlimited liability bank, wholly owned by one family. London Whale The nickname of Bruno Iksil, the trader at J. P. Morgan’s London branch who was paid $7.32 million in 2010 and $6.76 million in 2011, and then in 2012 lost $6.2 billion betting on credit default swaps. The first response of Jamie Dimon, chairman and CEO of J. P. Morgan, was to describe the affair as “a tempest in a teacup,” until the scale of the losses became apparent. The thing that’s interesting about his nickname is that “whale” is a term from gambling: a whale is a punter who gets free hospitality from casinos because he (usually a he) bets such huge sums.


pages: 350 words: 109,220

In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Berlin Wall, Black Swan, break the buck, business cycle, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial engineering, financial innovation, financial intermediation, fixed income, full employment, George Akerlof, Glass-Steagall Act, Greenspan put, housing crisis, inflation targeting, information asymmetry, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, Michael Milken, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, Socratic dialogue, too big to fail

“In the case of Lehman Brothers,” he said, reading from prepared testimony, “the Federal Reserve and the Treasury declined to commit public funds to support the institution. The failure of Lehman posed risks. But the troubles at Lehman had been well known for some time, and investors clearly recognized — as evidenced, for example, by the high cost of insuring Lehman’s debt in the market for credit default swaps — that the failure of the firm was a significant possibility. Thus, we judged that investors and counterparties had had time to take precautionary measures.” Paulson and Bernanke’s statements were more than after-the-fact window dressing. Although Lehman was already dead, the cause of death wasn’t a secondary issue.

Geithner did muse, occasionally, that the evolution of financial markets might produce fewer crises, but bigger ones. (The “bigger” so far has proven dead-on. “Fewer” remains an open question.) And he did help clean up one mess: an alarming backlog of paperwork in a rapidly growing corner of the markets, the securities called credit default swaps, which allow banks and other lenders to buy insurance against borrowers going bust. The buyers and sellers used sophisticated twenty-first-century finance; but the back office was more circa the late nineteenth century. One firm confessed in June 2006 that it had 18,000 undocumented trades, several thousand of which had been languishing in the back office for more than ninety days.

With the help of his predecessor, Gerald Corrigan, then at Goldman Sachs, Geithner summoned representatives of fourteen big Wall Street firms — “the Fourteen Families,” they called themselves — and prodded them to automate the process before a crisis hit. It worked. On September 30, 2006, the firms counted 97,000 unconfirmed trades outstanding for more than thirty days. By October 2008, the backlog had been reduced by 75 percent. And in all the turmoil of the Great Panic, the failure to process credit default swaps was one problem that didn’t occur. Big players on Wall Street knew who their counterparties were — even if they didn’t completely trust them. No one at the Fed, however, rang the gong and warned investors, lenders, business executives, and consumers that years of easy credit even for risky borrowers, placid markets, and shared optimism were unsustainable.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

3Com Palm IPO, asset allocation, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Brownian motion, buy and hold, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, global macro, high net worth, implied volatility, index arbitrage, index fund, Jim Simons, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, subprime mortgage crisis, survivorship bias, tail risk, transaction costs, two-sided market, value at risk, yield curve

.), these securities were extraordinarily vulnerable to any downturn in the housing market. So surely at the first sign of trouble in the housing market subprime bond prices should have fallen sharply below par. Figure 2.9 shows the prices of the ABX-HE-AAA index, an index of credit default swaps tied to 20 subprime-loan bonds rated AAA. (Credit default swaps are derivatives that mirror the risk premiums of the reference bonds.) Note that prices remained near par until early July 2007 when they went over a cliff. Figure 2.9 ABX-HE-AAA 07-1 Index, January to August 2007 Source: Markit.com. Did the real estate market suddenly worsen in early summer 2007, as one might infer from this price chart?

*Some of the text in the first two paragraphs has been adapted from Jack D. Schwager, Managed Trading: Myths & Truths (New York: John Wiley & Sons, 1996). 1Commodity trading advisor (CTA) is the official designation of regulated managers who trade the futures markets. 2Although the most widely used model to price mortgage-backed securitizations used credit default swaps (CDSs) rather than default rates as a proxy for default risk, CDS prices would have been heavily influenced by historical default rates that were based on irrelevant mortgage default data. PART ONE MARKETS, RETURN, AND RISK Chapter 1 Expert Advice Comedy Central versus CNBC On March 4, 2009, Jon Stewart, the host of The Daily Show, a satirical news program, lambasted CNBC for a string of poor prognostications.

This section has been excerpted from Jack Schwager, Hedge Fund Market Wizards (Hoboken, NJ: John Wiley & Sons, 2012). 2CDOs were a general type of securitization that were also built from many other types of instruments besides mortgage bonds, but these other constructions are not germane to this discussion. 3Although correlations for individual mortgages could also be significant during severe economic downturns, the degree of correlation would still not be nearly as extreme as the correlations between different BBB tranches. 4To be precise, the Gaussian copula formula, which was widely used to price CDOs, used credit default swaps (CDSs) on mortgage-backed securitizations (MBSs) as a proxy for default risk. However, CDS prices would have been heavily influenced by historical default rates that were based on irrelevant data. Moreover, the historical period for which CDS data existed was characterized by steadily rising housing prices and low default rates, thereby implying misleadingly low correlation among defaults in different securitizations and grossly understating the risk in CDOs, which were constructed by combining MBSs. 5Source for this section: see chapter, “The Curious Case of Palm and 3Com,” in Mastering Investment by James Pickford (Upper Saddle River, NJ: Financial Times Prentice Hall, 2002). 6The data on historical S&P daily percentage declines comes from Stock Market Volatility: Ten Years after the Crash, a 1997 study by G.


pages: 733 words: 179,391

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

Alan Greenspan, Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, bitcoin, Bob Litterman, Bonfire of the Vanities, bonus culture, break the buck, Brexit referendum, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, carbon tax, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, confounding variable, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, democratizing finance, Diane Coyle, diversification, diversified portfolio, do well by doing good, double helix, easy for humans, difficult for computers, equity risk premium, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, information security, interest rate derivative, invention of the telegraph, Isaac Newton, it's over 9,000, James Watt: steam engine, Jeff Hawkins, Jim Simons, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, language acquisition, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, megaproject, merger arbitrage, meta-analysis, Milgram experiment, mirror neurons, money market fund, moral hazard, Myron Scholes, Neil Armstrong, Nick Leeson, old-boy network, One Laptop per Child (OLPC), out of africa, p-value, PalmPilot, paper trading, passive investing, Paul Lévy, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Solow, Sam Peltzman, Savings and loan crisis, seminal paper, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, subprime mortgage crisis, survivorship bias, systematic bias, Thales and the olive presses, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, uptick rule, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

Not only did they lose their value, they became very difficult to sell, and their illiquidity made it hard to value them. Securities that were once considered darlings of the fixed-income industry were now called “toxic assets.” The companies that insured these securities through credit default swaps now found themselves obliged to pay out. But because credit default swaps weren’t regulated like insurance contracts, insurers like Ambac, MBIA, and AIG weren’t required to maintain sufficient capital to cover potential claims. Those insurers began to fail. Without the protection of insurance, the large investment banks that had bought these securities at already high debt-to-assets ratios now saw their leverage ratios rising toward infinity.

There was an adaptive radiation of new mortgage types: adjustable-rate mortgages, “pick-a-payment” mortgages, and even the infamous NINJA loan (“No Income, No Job, no Assets”), evaluated and approved by automated loan-review programs. At the same time, investment banks issued collateralized debt obligations, which enabled large pools of mortgages to be packaged and chopped up into a variety of new securities, and sold with the blessings of the rating agencies. Ultimately, the credit default swap market emerged, in order to provide insurance on some of those new debt issues, which encouraged even more investors to participate in the markets. This process expanded the mortgage ecosystem’s size and reach. In 1996, $480 billion in mortgage-related securities were issued in the United States, including mortgage‐backed securities and collateralized mortgage obligations.

But that piece of knowledge is hardly worth keeping a secret, and the fact that you don’t have that knowledge isn’t going to get you too upset. But suppose I know how to cure diabetes and you don’t. Or I know how to prevent cancer by avoiding certain common foods and you don’t. Or I know how to price mortgage-backed securities and credit default swaps and you don’t. In these cases, the knowledge I possess confers a certain power and status to me. Complexity creates the need for better narratives and those who have those narratives will become the high priests of complex systems, the gatekeepers of critical, life-altering knowledge. And the difficulty in joining the priesthood—earning an MD/Ph.D. in molecular biology and having twenty years of work experience at biotech and pharmaceutical companies, in the case of curing diabetes—coupled with the societal value of the special knowledge will determine the divisiveness of this elitism.


pages: 1,088 words: 228,743

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

Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Black Swan, Bob Litterman, bond market vigilante , book value, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, carbon credits, Carmen Reinhart, central bank independence, classic study, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global macro, 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, inverted yield curve, invisible hand, John Bogle, junk bonds, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, low interest rates, managed futures, 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, pension time bomb, performance metric, Phillips curve, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, savings glut, search costs, selection bias, seminal paper, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stock buybacks, stocks for the long run, survivorship bias, systematic trading, tail risk, 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

Evolving perceptions of the credit risk of swaps and government bonds over time have also played a role. Recently some observers have emphasized swaps’ off-balance-sheet nature, a factor that could justify swaps’ richness against government bonds that require capital outlays. Credit default swaps (CDS) Compared with buying a corporate bond, a credit default swap offers a purer and more efficient way of gaining exposure to the default risk of the bond’s issuer. In a CDS, the seller provides default protection in exchange for receiving a fee—in default the seller must pay the difference between the bond’s par value and, typically, its market value after the default event.

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

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


pages: 267 words: 74,296

Unhappy Union: How the Euro Crisis - and Europe - Can Be Fixed by John Peet, Anton La Guardia, The Economist

"World Economic Forum" Davos, bank run, banking crisis, Berlin Wall, Bretton Woods, business cycle, capital controls, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, debt deflation, Doha Development Round, electricity market, eurozone crisis, Fall of the Berlin Wall, financial engineering, fixed income, Flash crash, illegal immigration, labour market flexibility, labour mobility, light touch regulation, low interest rates, market fundamentalism, Money creation, moral hazard, Northern Rock, oil shock, open economy, pension reform, price stability, quantitative easing, special drawing rights, supply-chain management, The Great Moderation, too big to fail, transaction costs, éminence grise

It was also allowed to lend money to governments to recapitalise banks and extend precautionary loans. The deal would prompt ratings agencies to declare a temporary “selective default” (the EFSF would have to offer the ECB alternative collateral), but its voluntary nature ensured it would not count as a “credit event” that triggered payments of credit-default swaps, a form of insurance against sovereign defaults. However, the deal proved to be the worst of both worlds: the haircut was too small to turn around Greece’s public finances, but big enough to spread fear that other bonds were at risk. Markets had other reasons to worry. The original banking crisis had never been satisfactorily resolved; it had only been masked by the Greek turmoil and, to a great extent, worsened by the sovereign-debt crisis.

They first chose a complete bail-out; then at Deauville suddenly flirted with the idea of across-the-board bail-in of creditors; and then backed away from the idea more or less entirely. By July, when they got around to cutting Greece’s debt, the haircut was too modest and came too late. Months were wasted seeking a “voluntary” contribution from private creditors that would not trigger credit-default swaps (CDS); in the end CDS contracts were paid out anyway. The same uncertainty affected their judgment about the pace of fiscal consolidation. To make the numbers fit within the money made available by the euro zone and the IMF, Greece was forced into excessively harsh deficit-cutting (and at first had to pay high rates of interest).

Bond yields for Italy and Spain dropped markedly, by about 250 and 90 basis points respectively between January and March. The long-drawn-out second Greek bailout, with its large haircut on privately held government bonds, was concluded in February and markets seemed unconcerned by the triggering of credit-default swaps that had once been so feared. Draghi quietly retired Trichet’s official bond-buying operation in February. Yet no sooner had he told Bild in March 2012 that “the worst is over” than the crisis entered another, more perilous phase. The LTRO drug was wearing off, and the euro zone had entered a double-dip recession at the end of 2011, caused in part by the previous year’s turmoil.


pages: 252 words: 72,473

Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy by Cathy O'Neil

Affordable Care Act / Obamacare, Alan Greenspan, algorithmic bias, Bernie Madoff, big data - Walmart - Pop Tarts, call centre, Cambridge Analytica, carried interest, cloud computing, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, data science, disinformation, electronic logging device, Emanuel Derman, financial engineering, Financial Modelers Manifesto, Glass-Steagall Act, housing crisis, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, Ida Tarbell, illegal immigration, Internet of things, late fees, low interest rates, machine readable, mass incarceration, medical bankruptcy, Moneyball by Michael Lewis explains big data, new economy, obamacare, Occupy movement, offshore financial centre, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price discrimination, quantitative hedge fund, Ralph Nader, RAND corporation, real-name policy, recommendation engine, Rubik’s Cube, Salesforce, Sharpe ratio, statistical model, tech worker, Tim Cook: Apple, too big to fail, Unsafe at Any Speed, Upton Sinclair, Watson beat the top human players on Jeopardy!, working poor

The damage was compounded by other vast markets that had grown up around the mortgage-backed securities: credit default swaps and synthetic collateralized debt obligations, or CDOs. Credit default swaps were small insurance policies that transferred the risk on a bond. The swaps gave banks and hedge funds alike a sense of security, since they could supposedly use them to balance risk. But if the entities holding these insurance policies go belly up, as many did, the chain reaction blows holes through the global economy. Synthetic CDOs went one step further: they were contracts whose value depended on the performance of credit default swaps and mortgage-backed securities.

Synthetic CDOs went one step further: they were contracts whose value depended on the performance of credit default swaps and mortgage-backed securities. They allowed financial engineers to leverage up their bets even more. The overheated (and then collapsing) market featured $3 trillion of subprime mortgages by 2007, and the market around it—including the credit default swaps and synthetic CDOs, which magnified the risks—was twenty times as big. No national economy could compare. Paradoxically, the supposedly powerful algorithms that created the market, the ones that analyzed the risk in tranches of debt and sorted them into securities, turned out to be useless when it came time to clean up the mess and calculate what all the paper was actually worth.

This ratio is crucial to a trader’s career, his annual bonus, his very sense of being. If you disembody those traders and consider them as a set of algorithms, those algorithms are relentlessly focused on optimizing the Sharpe ratio. Ideally, it will climb, or at least never fall too low. So if one of the risk reports on credit default swaps bumped up the risk calculation on one of a trader’s key holdings, his Sharpe ratio would tumble. This could cost him hundreds of thousands of dollars when it came time to calculate his year-end bonus. I soon realized that I was in the rubber-stamp business. In 2011 it was time to move again, and I saw a huge growth market for mathematicians like me.


pages: 258 words: 71,880

Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street by Kate Kelly

Alan Greenspan, bank run, Bear Stearns, book value, buy and hold, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, eat what you kill, fixed income, housing crisis, index arbitrage, Long Term Capital Management, margin call, moral hazard, proprietary trading, quantitative hedge fund, Renaissance Technologies, risk-adjusted returns, shareholder value, technology bubble, too big to fail, traveling salesman

Unsurprisingly, Bear’s credit analysts remained upbeat on the housing sector, even as doubts about the health of subprime loans crept in. That spring, Bear had an embarrassing tussle with one of its big clients. A prominent hedge fund manager, John Paulson, accused the firm of double-dealing in its handling of certain securities. Paulson was bearish on the subprime market and was buying credit-default swaps, or insurance policies, that would compensate him if subprime securities lost value. Bear sold the swaps, and had sold some to Paulson. But since the firm also packaged and serviced some of the very subprime securities that Paulson was betting would fall, he worried Bear might try to prop up those securities by renegotiating the home loans they contained to prevent them from going into default—a situation that would otherwise cause the securities to drop in value.

In their discussion with aides and with each other, he and Geithner began using a dramatic analogy: They couldn’t “spray enough foam on the runway” to prevent this jetliner from crashing. Bear’s collapse wouldn’t be limited to the financial services firms, either. A bankrupt firm would dump a plethora of troubled securities into the market. These included mortgage-backed securities, corporate loans, and a large swath of derivatives, like credit-default swaps. Amid the mortgage downturn and lending dry-up, bids for many such securities were already low, but adding thousands of bits of new inventory to a market with few sellers would only depress the prices further, harming other banks and funds that were already struggling to sell the same sorts of items.

Derivative is a general word that applies to everything from stock options to commodities, like gold and pork bellies; it consists simply of a bilateral, or two-party, contract. But the last several years had brought a slew of innovations to the market—perhaps most notably, the $46 trillion market for credit-default swaps, the insurance policies that paid the buyer money if the entity he or she was insuring failed to pay back its debt. Swaps covered a variety of default risks, from large companies like Bear and Morgan Stanley to obscure pieces of mortgage-backed securities tied to home loans generated by specific mortgage lenders.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

Alan Greenspan, asset-backed security, bank run, banking crisis, Bernie Madoff, bond market vigilante , bonus culture, Bretton Woods, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, deal flow, disintermediation, diversification, fiat currency, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, foreign exchange controls, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Greenspan put, Home mortgage interest deduction, inverted yield curve, Isaac Newton, joint-stock company, junk bonds, Kickstarter, liquidity trap, London Interbank Offered Rate, long peace, low interest rates, margin call, market clearing, mass immigration, Money creation, money market fund, moral hazard, mortgage tax deduction, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, Phillips curve, plutocrats, Ponzi scheme, profit maximization, proprietary trading, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, Suez canal 1869, systems thinking, tail risk, The Great Moderation, the long tail, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, We are all Keynesians now, Y2K, yield curve

Banks used derivatives to hedge their bets on many of these structured credit deals. At the extreme end of this complexity within complexity were so-called synthetic CDOs. These structures did not even own a pool of real assets like bonds or loans. Instead, they used something called a credit default swap or CDS to gain ‘‘credit exposure’’ to pools of assets. ‘‘Credit exposure’’ is finance-speak for getting paid to take risk. Without going into detail, a credit default swap is a derivative in which the seller of protection on a loan or bond gets paid a fee and ongoing premium by the owner of the instrument. If a pre-defined event of default happens, the swap is triggered. The seller takes the bond, and the buyer gets paid its full value.

This process, called ‘‘asset securitization,’’ made the reckless expansion of consumer debt not only possible but almost irresistible because of buy-side demand. The investment banking wiz kids even invented whole new classes of securities called ‘‘derivatives.’’ Derivatives have no value in themselves but allow investors to ‘‘bet’’ on the value of an asset or contract linked to them. For example, a credit default swap allows investors to make money if a company or country cannot pay its bond holders. The rapid fire invention and roll out of new, untested securities has been central both to the explosive growth of the global financial markets and the shocking meltdown we are now living through. Hedge Funds New providers—often called ‘‘alternative investment vehicles’’— have also sprung up to meet the ‘‘buy-side’’ demand for higher returns on invested money.

The man the press dubbed the ‘‘Sheriff of Wall Street’’ did nothing to head off the excesses behind the bubble in asset-backed securities that brought down Wall Street in 2008. In fact, by vindictively driving the one man from power who really understood AIG and who essentially managed its risk, its founder Hank Greenburg, Spitzer bears at least some responsibility for destabilizing a critical cog in the credit default swap market on the eve of the crisis. AIG’s default book may have proved fatal in any case but Spitzer weakened the company by arbitrarily using an arcane state law to undermine other key parts of its global business model such as finite risk contracts, a key product in the global reinsurance market.


pages: 447 words: 104,258

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

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

If the whole set of exchanged cash flows involves a common single currency, the swap is called an interest rate swap (IRS). If the exchange of cash flows involves two currencies, one talks of currency rate swap (CRS) or cross currency rate swap (CCRS).2 A swap is an unconditional product: the exchange of cash flows cannot depend from any kind of condition. A contrario, credit default swaps and similar derivatives on a default risk are not swaps, strictly speaking, because there are conditional. We will look at these in Chapter 13. The market trades swaps on maturities from 2 to 30 years, 3 the peak of traded volumes being between 5 and 10 years. If one excludes some attempts to trade swaps on a derivative exchange (but up to now, the traded volumes are too tiny), the swap market is an OTC or interbank market, at least one of the counterparts being a bank.

The deterministic approach leads to the valuation of products such as vanilla swaps and futures, for which the forward value is obtained independently from the further evolution of their underlying instrument. The non-deterministic approach allows for taking into account a random evolution of the underlying spot instrument, which is necessarily the case for valuing products conditioned by such an evolution, that is, for options or any products presenting a conditional feature (for example, credit default swaps). The evolution of the prices or returns of a financial instrument is to be represented by a mathematical model describing, at best, how prices or returns behave. It is important to distinguish between a forecasting model and an ex post – or explanatory – model. Here, we consider only ex post models.

This collateral secures that, in case of default, the protection seller can assume his role vis-à-vis the protection buyer (see product example). 13.1.5 Example of a credit derivative Before looking at credit derivative valuation properly said, let us present the most traded product, the credit default swap (CDS). The CDS is an OTC contract between two parties (at least one is a bank, active in credit derivatives), with a contractual maturity and notional amount, on a specific underlying risky bond (reference obligation): The “protection buyer” can be viewed as a hedger: he holds the bond and pays for being compensated in case of default on this bond; said payment is called “premium”; The “protection seller” receives a premium in exchange of supporting the default risk.


pages: 414 words: 101,285

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

air freight, air traffic controllers' union, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, behavioural economics, Berlin Wall, biodiversity loss, Bretton Woods, BRICs, business cycle, butterfly effect, carbon tax, clean water, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, connected car, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, digital divide, discovery of penicillin, diversification, diversified portfolio, Douglas Engelbart, Douglas Engelbart, Edward Lorenz: Chaos theory, energy security, eurozone crisis, Eyjafjallajökull, failed state, Fairchild Semiconductor, Fellow of the Royal Society, financial deregulation, financial innovation, financial intermediation, fixed income, Gini coefficient, Glass-Steagall Act, global pandemic, global supply chain, global value chain, global village, high-speed rail, income inequality, information asymmetry, Jean Tirole, John Snow's cholera map, Kenneth Rogoff, light touch regulation, Long Term Capital Management, market bubble, mass immigration, megacity, moral hazard, Occupy movement, offshore financial centre, open economy, precautionary principle, profit maximization, purchasing power parity, race to the bottom, RAND corporation, regulatory arbitrage, reshoring, risk free rate, Robert Solow, scientific management, Silicon Valley, six sigma, social contagion, social distancing, Stuxnet, supply-chain management, systems thinking, tail risk, TED Talk, The Great Moderation, too big to fail, Toyota Production System, trade liberalization, Tragedy of the Commons, transaction costs, uranium enrichment, vertical integration

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

Special-purpose vehicle (SPV): A specially created company designed to have limited liability and insulate the ultimate beneficial owners from risks associated with investments and/or to obscure ownership of financial assets and liabilities. Sometimes known as a “special-purpose entity” or a “financial vehicle corporation” instead. Collateralized debt obligation (CDO): An investment security composed of a wide range of assets that is passed on to different classes or tranches of owners who face varying degrees of risk. Credit default swap (CDS): A financial swap agreement that transfers the credit link of a financial product between parties. It usually involves the seller compensating the buyer in return for a payoff in the event of a default. Asset-backed security (ABS): A security collateralized or backed by combining pools of assets (such as car loans, credit card debt, or royalty payments).

See management education butterfly defect, xiii–xiv butterfly effect, xiii, 80, 81 California: energy imports of, 140; environmental regulation in, 142 Cameron, Geoffrey, 197 capital flows: cross-border, 12, 19, 21f, 41; liberalization of, 12, 20f carbon dioxide. See greenhouse gas emissions Cash, Richard A., 159, 163–64 CDOs. See collateralized debt obligations CDSs. See credit default swaps central banks: European, 56, 59–60, 63; Icelandic, 37, 38–39; research at, 63; systemic risk measurements by, 59–60 chaos theory, xiii chemical weapons, 194, 254n80 Chen, Lincoln C., 159, 163–64 Chicago, Burnham Plan, 105 China: air pollution in, 137; domestic air travel in, 15–16, 17f; economic reforms in, 74–75; exports of, 16, 73–74, 74f, 75, 234n12; income inequality in, 172, 175f, 250n19; Internet use in, 193; MBA programs in, 87; political liberalization of, 74; rare earth element production in, 71, 71f; relations with Western countries, 11; SARS outbreak in, 144, 154; WTO membership of, 12 cholera, 145, 160–61 Cisco Visual Networking Index, 14 cities.


pages: 304 words: 99,836

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

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

On Tuesday of that week, the stock of AIG, the world’s biggest insurance company, dropped 60 percent, after already having dropped more than 95 percent from its fifty-two-week high of $70.13. AIG was an insurance institution that affected millions of lives in almost every country in the world, and because of some reckless gambling in credit-default swaps,** it was on the brink of collapse. The Federal Reserve stepped in and gave AIG an initial $85 billion bailout. This would grow. After people saw what was going on with AIG, the reaction was: Holy shit! Wall Street likes predictability, and the way the government was flip-flopping between bailing out companies and letting them fail was not helping the markets.

But I remember thinking, Welcome to the changing world of Goldman Sachs leadership. Company culture and morale seemed to be bygone values. To paraphrase that great sage Puff Daddy, it was all about the Benjamins now. If you were in the right place at the right time, if you were the trader with the “hot pad” (credit-default swaps, for example), or if you were the salesperson with the clients who were running for the exits, and if you had the instincts to know how to capitalize on this, then—boom!—the firm promoted you and paid you well and you were now a leader of the firm. This was the new model of Goldman Sachs managing directorship from about 2008 onward.

I listened in; everybody at Goldman did. It was a masterful performance under extraordinarily difficult circumstances. As the experts peppered Viniar with questions, he succeeded in making a two-pronged, essentially self-contradictory argument: that Goldman Sachs, which was owed billions of dollars related to credit-default swaps with AIG, had hedged itself to such a degree that we would have been just fine if AIG had gone bankrupt—but also that Goldman had been completely justified in accepting $12.9 billion, a hundred cents on the dollar, in AIG’s bailout money. You see, AIG had insured Goldman’s mortgage securities, and when the mortgage market crashed, Goldman wanted to get its insurance money—even though we were shorting the market.


pages: 321

Finding Alphas: A Quantitative Approach to Building Trading Strategies by Igor Tulchinsky

algorithmic trading, asset allocation, automated trading system, backpropagation, backtesting, barriers to entry, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, constrained optimization, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, data science, deep learning, discounted cash flows, discrete time, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, financial intermediation, Flash crash, Geoffrey Hinton, implied volatility, index arbitrage, index fund, intangible asset, iterative process, Long Term Capital Management, loss aversion, low interest rates, machine readable, market design, market microstructure, merger arbitrage, natural language processing, passive investing, pattern recognition, performance metric, Performance of Mutual Funds in the Period, popular capitalism, prediction markets, price discovery process, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, selection bias, sentiment analysis, shareholder value, Sharpe ratio, short selling, Silicon Valley, speech recognition, statistical arbitrage, statistical model, stochastic process, survivorship bias, systematic bias, systematic trading, text mining, transaction costs, Vanguard fund, yield curve

A cigar Event-Driven Investing203 butt found on the street that has only one puff left in it may not offer much of a smoke, but the ‘bargain purchase’ will make that puff all profit.” — Warren Buffett, Berkshire Hathaway 1989 shareholder letter The distressed-asset universe is huge and spans all kinds of below-­ investment-­grade debt securities. These investments may include high-­ yield bonds, below-par distressed bank loans, debtor-in-possession loans, credit default swaps, preferred stock, common stock, warrants, and real estate assets. Distressed-asset investing tends to perform best during bull markets, when investors make money on the turnaround on investments made during the preceding economic downturn. A downturn provides a large number of opportunities for this form of investing.

CAPITAL STRUCTURE ARBITRAGE A company’s capital structure comprises the shares, debts, and other financial instruments it uses to finance its operations. In capital structure arbitrage, one security of a company is traded against another security of the same company – for example, buying the company’s bonds and shorting its stock, or trading its credit default swaps (CDSs) against its stock. Another play could be on the arbitrage between listings of the same security on different exchanges; such mispricings may happen because of liquidity or other factors. Another type of capital arbitrage is to trade on changes in the company’s capital structure, such as share buybacks, share issuances, debt issuances, or debt exchanges.

Another type of capital arbitrage is to trade on changes in the company’s capital structure, such as share buybacks, share issuances, debt issuances, or debt exchanges. These trades do not express a view on the overall quality of the company but on relative mispricings or shifts in value among different forms of capital. One of the most popular capital structure arbitrage plays is to profit from mispricings between a company’s equity and its bonds or credit default swaps. This strategy has gained a lot of popularity with the growth of the CDS market. Consider, for example, what happens when extremely bad news hits a company. This will cause both its bonds and its stocks to fall, though the stock prices will likely decline further, for several reasons. Stockholders will absorb a greater loss than bondholders Event-Driven Investing205 if the company is liquidated, because bondholders have a priority claim on the assets of the company; the dividend might be reduced or dropped altogether, whereas annual bond payments are fixed, and the stock market is usually more liquid and so reacts to news more dramatically.


pages: 358 words: 106,729

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

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

As the Wall Street Journal reported in 2009 in an article on my Jackson Hole presentation: Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money but being only lightly penalized for losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products, with potentially big payoffs, which could on occasion fail spectacularly. He pointed to “credit default swaps” which act as insurance against bond defaults. He said insurers and others were generating big returns selling these swaps with the appearance of taking on little risk, even though the pain could be immense if defaults actually occurred. Mr. Rajan also argued that because banks were holding a portion of the credit securities they created on their books, if those securities ran into trouble, the banking system itself would be at risk.

Much like a financial Venus flytrap, though, AAA mortgage-backed securities masked their risk with their ratings, and their attractive returns drew in many an investor innocent about finance and many more who should have known better. Among the firms that should have understood the risk better was the American International Group (AIG). Its now-infamous financial products unit (AIGFP) sold insurance through credit-default swaps on billions of dollars of asset-backed securities, including senior (AAA-rated) tranches of the mortgage-backed securities described above. It promised buyers of the swaps that if the insured securities defaulted, AIGFP would make good on them. The unit was thus betting that defaults would be far rarer even than the market anticipated.

It started attracting and recruiting the smartest students in class, people who thought they could price CDO squared and CDO cubed (particularly egregious forms of securitization involving collateralized debt obligations) and manage their risks. As Trillin writes: “When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that.”11 The suggestion that bosses, recruited in a staid and regulated era, were of lower caliber than the employees they had recruited from the top of the class in a deregulated and high-paying era is not completely without foundation.


pages: 297 words: 108,353

Boom and Bust: A Global History of Financial Bubbles by William Quinn, John D. Turner

accounting loophole / creative accounting, Alan Greenspan, algorithmic trading, AOL-Time Warner, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Big bang: deregulation of the City of London, bitcoin, blockchain, book value, Bretton Woods, business cycle, buy and hold, capital controls, Celtic Tiger, collapse of Lehman Brothers, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, debt deflation, deglobalization, Deng Xiaoping, different worldview, discounted cash flows, Donald Trump, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, fake news, financial deregulation, financial intermediation, Flash crash, Francis Fukuyama: the end of history, George Akerlof, government statistician, Greenspan put, high-speed rail, information asymmetry, initial coin offering, intangible asset, Irish property bubble, Isaac Newton, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, junk bonds, land bank, light touch regulation, low interest rates, margin call, market bubble, market fundamentalism, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Network effects, new economy, Northern Rock, oil shock, Ponzi scheme, quantitative easing, quantitative trading / quantitative finance, railway mania, Right to Buy, Robert Shiller, Shenzhen special economic zone , short selling, short squeeze, Silicon Valley, smart contracts, South Sea Bubble, special economic zone, subprime mortgage crisis, technology bubble, the built environment, total factor productivity, transaction costs, tulip mania, urban planning

Its chief activity in this sphere was the issuance of credit default swaps guaranteeing the MBSs and CDOs held by banks and investors. In return for a stream of payments, it agreed to reimburse investors in the event of default.31 This business had grown from a notional amount insured of $20 billion in 2002 to $533 billion in 2007.32 The default of many MBSs and CDOs meant that AIG was having to pay out substantial sums on its credit default swaps – sums that it had made little provision for. The failure of AIG would have had major consequences for the solvency of many financial institutions that had bought credit default swaps from it. Following the collapse of Lehman Brothers and AIG, the US Treasury and Federal Reserve came up with a plan to stave off the implosion of the banking system: the Troubled Assets Relief Plan (TARP).

Unlike the assets at the centre of other bubbles, housing markets are very difficult if not impossible to short sell. This means that the speculation pushing house prices up could not be countered by speculators 185 BOOM AND BUST betting on a fall in house prices. A small number of investors documented in Michael Lewis’s The Big Short shorted the housing market by buying credit default swaps on MBSs, which paid out when the MBSs defaulted. In order to make these trades, however, these investors had to navigate complex regulations, were ostracised by colleagues and in some cases risked their jobs as fund managers by going against the herd – perhaps explaining why there were so few of them.75 What was the spark that converted ordinary people into property speculators?

See Guardian, 29 August 2015. 28. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, pp. 213–14. 29. US Treasury Department Office of Public Affairs, Treasury Senior Preferred Stock Purchase Agreement, 7 September 2008. 30. Ball, The Fed and Lehman Brothers, p. 222. 31. Although credit default swaps are sometimes viewed as credit insurance, they are unlike real insurance in that the issuer is under no requirement to hold reserves and the purchaser need have no insurable interest in the asset. 32. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 140. 33. US Department of the Treasury Press Room, Treasury Announces TARP Capital Purchase Program, 14 October 2008. 34.


pages: 741 words: 179,454

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

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, 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, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, 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, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, 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 Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Synthetic Stuff In the 1990s, securitization underwent a makeover, being rebranded CDOs (collateralized debt obligations), a term subsuming various types of underlying loans and securitization formats. In 1997 JP Morgan introduced synthetic securitization, overcoming the unwieldy need to transfer the underlying loans to the SPV and also lowering the cost of transferring the risk. Instead of selling the loans, the lender now purchased credit insurance against the risk of loss using a credit default swap (CDS). The structure is shown in Figure 11.3. The bank purchased separate credit insurance policies from the SPV on each loan it wanted to transfer. As in a traditional ABS structure, the SPV issued securities. Instead of issuing securities equal to the face value of the loans insured, they issued a smaller amount—$80 million against an underlying portfolio of $1,000 million.

Assuming demand for $30 billion of mezzanine debt, this translated into up to $128 billion of underlying mortgages, compared to total subprime loans of around $450 billion in 2006, 28 percent of the total market.5 As other hedge funds and banks started doing the same thing, volumes exceeded the underlying stock of mortgage loans. The normal CDS was designed for companies where payment was triggered by bankruptcy or failure to make interest and principal repayments on loans. In June 2005, ABS PAYG CDS (asset-backed securities pay-as-you-go credit default swaps) were introduced. Under this form of credit insurance, buyers of insurance received payments where there was simply a permanent write down in the underlying loans, a downgrade to CCC credit rating or extension of maturity. Traders benefited from any deterioration in the quality of the underlying loans, making it easier to short the housing market.

Free Money Around 1997, banks began using synthetic securitization to get risk off their books to reduce capital needs. The structure created the low-risk super senior tranche that banks wanted to sell off. After JP Morgan introduced the idea, FP began selling credit insurance, in the form of credit default swaps (CDS). Under the contract, AIG received a fee from the bank. In return, FP agreed to insure the bank against the small risk of loss on the super senior tranche. By 2008, FP had insured around $450 billion of this risk. AIG’s AAA rating and ability to take these risks more cheaply than a regulated bank made FP the go-to house now for super senior risk.


pages: 293 words: 88,490

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

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

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

If the market is becoming efficient, if information is immediately accessible to everyone at the same time, then either create new private information or else speed up your access to the public information. Derivatives play a role in the first approach, with investment banks such as Goldman Sachs creating information asymmetries by constructing financial instruments such as credit default swaps that they understand better than the buyers. For the second approach, consider the news feeds that are pushed to high-frequency traders with millisecond response times. Another tactic is to deny the market information by destroying it. One such maneuver has been called algorithmic shredding, where an algorithm breaks down trades into confetti-like pieces that obscure information that might otherwise be broadcast to the market.10 At the same time, those doing the shredding employ more sophisticated methods to track the pattern of trading as it moves from one venue to the next in order to reconstruct vital details about the preshredded trade.

Subprime mortgages—a sliver of the mortgage market—started it all off. Then as things gathered steam, anything that smelled of subprime became garbage: CDOs on subprime and then on anything with mortgage exposure; asset-backed commercial paper backed by mortgage securities; structured investment vehicles (SIVs) that might have mortgage exposure; and credit default swaps (CDSs) meant to insure against firms with these various sorts of exposure—CDSs held as investments, as inventory, and as collateral. The Ball Gets Rolling THE PREDATORS’ BALL Hedge funds have looked for a free pass on the 2008 crisis, because it centered on the banks.5 But the first shot fired came from two hedge funds at Bear Stearns Asset Management (BSAM), and things fell apart quickly from there.


pages: 559 words: 155,372

Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley by Antonio Garcia Martinez

Airbnb, airport security, always be closing, Amazon Web Services, Big Tech, Burning Man, business logic, Celtic Tiger, centralized clearinghouse, cognitive dissonance, collective bargaining, content marketing, corporate governance, Credit Default Swap, crowdsourcing, data science, deal flow, death of newspapers, disruptive innovation, Dr. Strangelove, drone strike, drop ship, El Camino Real, Elon Musk, Emanuel Derman, Fairchild Semiconductor, fake it until you make it, financial engineering, financial independence, Gary Kildall, global supply chain, Goldman Sachs: Vampire Squid, Hacker News, hive mind, How many piano tuners are there in Chicago?, income inequality, industrial research laboratory, information asymmetry, information security, interest rate swap, intermodal, Jeff Bezos, Kickstarter, Malcom McLean invented shipping containers, Marc Andreessen, Mark Zuckerberg, Maui Hawaii, means of production, Menlo Park, messenger bag, minimum viable product, MITM: man-in-the-middle, move fast and break things, Neal Stephenson, Network effects, orbital mechanics / astrodynamics, Paul Graham, performance metric, Peter Thiel, Ponzi scheme, pre–internet, public intellectual, Ralph Waldo Emerson, random walk, Reminiscences of a Stock Operator, Ruby on Rails, Salesforce, Sam Altman, Sand Hill Road, Scientific racism, second-price auction, self-driving car, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, Skype, Snapchat, social graph, Social Justice Warrior, social web, Socratic dialogue, source of truth, Steve Jobs, tech worker, telemarketer, the long tail, undersea cable, urban renewal, Y Combinator, zero-sum game, éminence grise

While the underlying value of my writing skill will fluctuate within a relatively narrow band even if I’m successful, in the improbable event of literary immortality, that derivative can be worth very much indeed (or nothing at all). What’s a credit-default swap (CDS) then? A CDS is like car insurance, except it protects a pile of money someone has lent, rather than a pile of glass and steel called an automobile. Some asshole keys your car and destroys $500 of value; the insurance contract pays you that amount. The thing gets stolen? The policy pays out the total value of the car. Credit-default swaps work superficially the same way. You lend someone money in the form of a bond. They don’t pay you back, or pay you back only partially?

They are on the wrong side of technological history; the real-time interaction of human desire with online capitalism is here to stay. Heck, even Wall Street has seen the light. Remember how we described a postcrisis Goldman considering but rejecting the notion of trading credit default swaps on exchanges, the inevitable evolution of that derivatives market? In 2013, Goldman finally partnered with the InterContinental Exchange (ICE), a pioneering electronic exchange trading everything from jet fuel to orange juice, to clear trades on European credit default swaps via ICE for Goldman’s clients. Perhaps Facebook will one day show itself to be as much of a leader and innovator as Goldman Sachs. What of Facebook’s great enemy, Google, and its encroaching social network copy Google Plus; Carthage must be destroyed!

To continue the car analogy, when an insurance company insures your jalopy, it doesn’t take into account the infinite combinations of features, car colors, wheel rims, postpurchase modifications, and dangling air fresheners. It knows the make, model, year, and location of the vehicle, and the value insured. That’s it. There are really only a few hundred types of car insurance when you break it down; likewise with credit-default swaps. So why not trade CDSs on exchanges, as we do shares of Google? The question was raised in 2008 as the financial world burned. The internal chatter on the desk was that the government would exploit the crisis to regulate our Wild West market. Goldman (briefly) considered taking the initiative and self-regulating into exchange-traded markets instead.


Systematic Trading: A Unique New Method for Designing Trading and Investing Systems by Robert Carver

asset allocation, automated trading system, backtesting, barriers to entry, Black Swan, buy and hold, cognitive bias, commodity trading advisor, Credit Default Swap, diversification, diversified portfolio, easy for humans, difficult for computers, Edward Thorp, Elliott wave, fear index, fixed income, global macro, implied volatility, index fund, interest rate swap, Long Term Capital Management, low interest rates, margin call, Market Wizards by Jack D. Schwager, merger arbitrage, Nick Leeson, paper trading, performance metric, proprietary trading, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, survivorship bias, systematic trading, technology bubble, transaction costs, Two Sigma, Y Combinator, yield curve

A range of other risk factors such as book-tomarket ratios and firm size are used in equity value strategies. In other assets there are different premia. For example longer maturity bonds earn a premium over those which mature earlier since investors like to be compensated for lending over longer periods. Timing varying risk premium Buying cheap credit default swap insurance on risky mortgages in 2006 subsequently made hedge fund manager John Paulson billions of dollars when the market melted down a year later.25 Conversely when there is blood on the streets you can buy risky assets for peanuts, as in early 2009 when I bought my insufficiently aggressive stake in Barclays.

Systematic Trading Rules Positive skew Negative skew Examples: Examples: • Trend following strategies. • FX carry • Bets done by buying options, e.g. if you think the stock market will weaken then buying put options. • Fixed income relative value as practised by Long Term Capital Management (LTCM), a large hedge fund that blew up in 1998.** • John Paulson in 2006 buying cheap credit default swap insurance on securities backed by mortgages.* • Market making. • Tail protect hedge funds that try and provide cheap insurance against large market moves, as practised by Nassim Taleb amongst others. • Short option strategies, e.g. selling equity option ‘straddles’ (pairs of call and put options).

This is more of a problem for large institutional investors and those trading fast. Liquidity is not constant and can reduce quickly in 75. I’ll explain why the spread bet is more expensive in chapter twelve, ‘Speed and Size’. 104 Chapter Six. Instruments times of severe market stress, particularly for non exchange traded ‘over the counter’ instruments, as in the Credit Default Swap derivatives markets in 2008. Again chapter twelve, ‘Speed and Size’, will explain how those with larger account sizes will need to understand costs and liquidity better than small investors. Skew Should you avoid negative skew in your portfolio from instruments like holding short VIX (US equity volatility index) futures?


China's Superbank by Henry Sanderson, Michael Forsythe

"World Economic Forum" Davos, addicted to oil, Asian financial crisis, Bretton Woods, BRICs, Carmen Reinhart, Credit Default Swap, deindustrialization, Deng Xiaoping, Dutch auction, failed state, financial innovation, financial repression, fixed income, Great Leap Forward, high-speed rail, if you build it, they will come, income inequality, invisible hand, joint-stock company, junk bonds, Kenneth Rogoff, land bank, London Interbank Offered Rate, low interest rates, megacity, new economy, New Urbanism, price mechanism, race to the bottom, reserve currency, Ronald Reagan, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Solyndra, South Sea Bubble, sovereign wealth fund, special drawing rights, special economic zone, too big to fail, urban renewal, urban sprawl, work culture

It’s also risky for banks: The LGFV loans essentially become illiquid loans, constantly rolled over into the future, the opposite of deposits, which are highly liquid and can be withdrawn at a moment’s notice. It is also a failure of the market that CDB had created in order to value risk and capital correctly, much like the credit-default swap products the United States had invented to insure against losses in subprime debt. The risk had been passed from the local governments to the banks, and then back onto the central government. That gave the central government little choice but to force banks to resolve the debts, pushing them out into the future rather than letting the market function.

The cost of a CDB bond rises and falls with lending and deposit rates, not with whether the bond is more risky or not. For this reason, CDB does not need a rating to sell its bonds. When CDB bonds sell overseas, Moody’s, Standard & Poor’s, and Fitch rate them at the same level as the sovereign bonds, assuming that the state will always bail CDB bonds out. CDB credit-default swaps, which investors use to insure against a default risk and speculate on creditworthiness, still trade below many other global banks, despite the risk of some 2 trillion yuan in local government loans. The global market seems to be saying that the risk involved in any government bailout or recapitalization is very low.

See also state-owned enterprises (SOEs) Africa, outstanding loans of $13.7 billion in African loans and China’s eventual involvement in African domestic politics to protect its assets, including oil and energy supplies Asian financial crisis, provided stimulus (25 trillion yuan) to 18 provinces with proposed projects Asian financial crisis and centralization of banking system Asian financial crisis and lending (5 trillion yuan) to Chinese companies through 10,000 LGFVs assets and total loans (2011) assets of over 6 trillion yuan (2011) bad assets (15 billion yuan) were purchased from Industrial & Commercial Bank of China bad debt (100 billion yuan) removed (2004) bad loans (2 billion yuan) were bought from Tianjin FAW Xiali Automotive Co. and replaced with new market capitalization ($2 billion) Beijing Olympic Games stadiums and sports facilities, loan (43.4 billion yuan) provided for bond issuer, country’s biggest bond market plunged and National Development and Reform Commission stopped approving bonds (Aug. 2011) bonds (vs. deposits) are bought by China’s commercial banks bonds are sold into the global market at a fraction of the cost of other global banks bonds are sold with a sovereign credit rating to raise funds with a zero-risk weighting bonds have maturity of 20 years CDB backed a secret raid by Aluminum Corp. of China to acquire stock in Rio Tinto CDB has independence from government for investment decisions and its functions as a commercially driven institution “CDB would be out of business in a matter of days if banks stopped buying the bonds” central government liabilities are hidden by CDB selling bonds to commercial banks which use people’s savings to buy the bonds which earn a higher yield for absolutely zero risk Chinese companies benefit from nearly all loans for foreign development Chinese companies depend on low-interest CDB financing for their operations in both China and across the globe Chinese government stands behind CDB’s debts and lending Citigroup, CDB’s attempt to buy stake in commercial bank (2008), state-owned companies such as Huawei, ZTE, Chery Auto, and Sinohydro receive billions of dollars in loans from CDB for their overseas expansion companies such as Huawei in telecom, carmaker Chery Auto, state-owned oil Sinopec, and dam makers Sinohydro Group have markets created for them by CDB “credit-default swaps” trade below other global banks credit reforms, CDB went through three (3) debt based bank creating liabilities (trillions of yuan) for the state debt-for-equity shares (48 billion yuan), UBS Warburg disposed of debt payments: 33 percent of LGFVs generated insufficient cash flow to make debt payments; and 68 percent reported returns on capital less than the benchmark lending rate debt (trillions of yuan) was given to the Ministry of Finance to backstop (2004) dim sum bonds in Hong Kong European Union trade action against CDB financing financed infrastructure growth in coastal regions of the country financial crisis (2008) and ($2 trillion) stimulus by CDB and state banks to keep the Chinese economy going by building roads, bridges, subways and stadiums, x funding for Congo’s road and rail networks, and mining, energy, agriculture, and manufacturing industries funding for long-term infrastructure projects Ghana’s loan of $3 billion global energy loans by date and amount Good Housekeeping Seal of Approval, CDB loans have the government’s Huawei and ZTE, lines of credit worth $45 billion to investment will stimulate growth land prices fell (2011) and LGFVs are unable to pay principal of bank loans land prices fell (2011) and Yunnan Highway Construction was unable to pay the principal of the outstanding bank loan (90 billion yuan) only interest land/property bubbles, LGFVs have created one of the world’s biggest land value in the future is leveraged into large up-front loans lending for power, road construction, railways, petrochemicals and telecommunications LGFV model, invented LGFV model of financing Light Manufacturing in Africa report (2011) line of credit (5.6 billion yuan) to Hebei Bohai Investment Co.


pages: 457 words: 143,967

The Bank That Lived a Little: Barclays in the Age of the Very Free Market by Philip Augar

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Bonfire of the Vanities, bonus culture, book value, break the buck, business logic, call centre, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, family office, financial deregulation, financial innovation, fixed income, foreign exchange controls, Glass-Steagall Act, high net worth, hiring and firing, index card, index fund, interest rate derivative, light touch regulation, loadsamoney, Long Term Capital Management, long term incentive plan, low interest rates, Martin Wolf, money market fund, moral hazard, Nick Leeson, Northern Rock, offshore financial centre, old-boy network, out of africa, prediction markets, proprietary trading, quantitative easing, risk free rate, Ronald Reagan, shareholder value, short selling, Sloane Ranger, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, too big to fail, vertical integration, wikimedia commons, yield curve

The company now had two determined executive directors pursuing a growth strategy and a board of the same persuasion. Strong and informed challenge was required but the board had neither the inclination nor the knowledge to make it. The non-executives scarcely knew an equity swap from a mortgage-backed security or the difference between a CDO (collateralized debt obligation) and a CDS (credit default swap), all of which were products Barclays Capital traded.fn2 The investment bankers on the board – Agius, Broadbent and, until October 2006, Steel – were advisers not traders, The rest were capable members of the corporate club who had excelled in their own fields but who were not qualified to govern a bank.

The idea was that by bringing mortgage origination in-house, Barclays would have more control over the quality of the loans it was buying and packaging.9 It proved to be a top of the market acquisition. During 2006 a few astute observers detected signs of sub-prime distress. Borrowers’ late payments and default rates on interest repayments were climbing, lenders were repossessing properties and house prices were in decline. The price of credit default swaps – a form of insurance against bond failures – on mortgage backed entities increased dramatically towards the end of 2006. Eager to keep the party going for as long as possible, vested interests in the credit ratings agencies and investment banks kept this quiet but a handful of banks including J.

Diamond said: ‘I want you to remember that if Lehman becomes available at a distressed price it is going to mean that there is a nasty world out there. Bear that in mind if we come back with a decision to take.’ Over the next few weeks the Lehman share price continued to slide, credit agencies downgraded its rating, the cost of insuring against its failure through credit default swaps rose sharply,9 and Lehman’s management frantically tried to sell bits of its business to raise cash. In August Diamond wanted to register interest, reporting to Varley: ‘We do not want to be on the outside as there may be pieces here that would be of interest.’ Varley fired back: ‘You’re right though to be choosy about what we might want.’10 9–10 SEPTEMBER – NEW YORK AND LONDON Diamond was in New York on Tuesday 9 September presenting at a conference for investors.


pages: 515 words: 132,295

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

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, Alan Greenspan, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, Bear Stearns, behavioural economics, Big Tech, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, data science, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, electricity market, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial intermediation, Ford Model T, Frederick Winslow Taylor, George Akerlof, gig economy, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Greenspan put, guns versus butter model, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Bogle, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, low interest rates, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, proprietary trading, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Ronald Reagan, Satyajit Das, Savings and loan crisis, scientific management, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stock buybacks, subprime mortgage crisis, technology bubble, TED Talk, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, Tragedy of the Commons, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, vertical integration, zero-sum game

But here’s a telling statistic on the credit default swaps, those risky securities that blew up the housing market: Back in 2008, their notional value was $67 trillion, while the market value of all the outstanding bonds issued by US companies underlying that market was only $15 trillion. When the value of what’s being traded is more than four times the underlying asset that actually exists in the real world, it’s safe to say that a good chunk of what’s happening in the market is purely speculative.44 While some portions of the derivatives markets, including credit default swaps, have contracted sharply since the 2008 crisis, the overall market remains enormous.

But by the 1990s, and much more so after 2000, derivatives began to explode and expand in a way that made it clear that at least some of what was being traded had nothing to do with protecting people or companies in the real economy, but was more about speculation—one could call it gambling—with an increasingly complex array of financial instruments, on things like interest rate swaps, credit default swaps, and even bets on what the weather would be like from day to day. Derivatives are best known to most people as the “financial weapons of mass destruction” that Warren Buffett has warned us about, the complex securities that blew up our financial system in 2008. These financial instruments—be they interest rate swaps, foreign exchange bets, or grain futures—have very real, very tangible impacts.

Amazingly, nobody thought too much about the fact that those academics had been funded to do their research by AIG Financial Products, which was looking to expand the portion of its business that allowed investors to buy index-linked bundles of commodities.26 Of course, by 2008, AIG, which helped bring down the US and global economy with its enormous credit default swap bets, was in the news for bigger and more alarming reasons. Academics pushing paid-for research that made a potentially risky market segment look safe were a minor thing by comparison. In any case, the financialization of commodities had already begun to take off. Institutional investors poured into the market for natural resources; between 2004 and 2007, the number of commodities futures contracts outstanding in the world nearly doubled.


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, Asian financial crisis, asset-backed security, Bear Stearns, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business logic, business process, buy and hold, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, commoditize, complexity theory, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, currency risk, disinformation, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial engineering, financial innovation, fixed income, Glass-Steagall Act, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Bogle, John Meriwether, junk bonds, locking in a profit, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, mega-rich, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mutually assured destruction, Myron Scholes, new economy, New Journalism, Nick Leeson, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk free rate, risk-adjusted returns, risk/return, Salesforce, Satyajit Das, shareholder value, short selling, short squeeze, South Sea Bubble, statistical model, technology bubble, the medium is the message, the new new thing, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

Strippers Pearls of wisdom Own goals Taxing times Fund times 9 Credit where credit is due – fun with CDS and CDO Credit wars Credit epiphanies 242 245 246 248 249 250 253 254 257 260 262 265 266 267 DAS_A01.QXD 5/3/07 8:01 PM Page xii Contents xii First-to-credit derivatives Remote credit Mistaken identity Heard it on the grapevine Guaranteed delivery Re-re-re-re-restructuring – CDS stutters Beyond the push and pull Imitation and flattery Tranche warfare It’s super A capital idea The arbitrage age Hangovers UFOs Geeks with Greeks Never believe your own lies Russian dolls Black holes 269 271 274 276 277 279 281 282 285 287 289 290 291 292 293 295 297 298 Epilogue 301 The Asian century redux Vexatious litigation The more things change Hot tubbing Rogue trader Bangs and whimpers The China Club BOAT (Best of all time) Knowns and unknowns 302 305 308 310 313 316 317 318 319 Notes 321 Index 325 DAS_A01.QXD 5/3/07 8:01 PM Page xiii List of figures and tables Figure 1.1 Figure 1.2 Figure 1.3 Figure 1.4 Figure 1.5 Figure 6.1 Figure 7.1 Figure 7.2 Figure 9.1 Figure 9.2 Figure 9.3 Figure 9.4 Figure 9.5 Parallel loans 1981 World Bank – IBM currency swap Interest rate swap Inverse floater Leveraged inverse floater Share price and option values Asset swap Repackaging vehicle Credit default swap (CDS) Collateralized loan obligation (CLO) Synthetic securitization Fully funded CDO capital structure Synthetic CDO capital structure 35 36 37 46 50 196 231 232 272 283 285 286 288 Table 3.1 Table 3.2 Table 5.1 Table 6.1 Table 6.2 Table E.1 Investment styles Unique selling propositions Critical events 1987–2005 Expected share price in one year Option expected value Job description – rogue trader 111 118 165 191 192 313 DAS_A01.QXD 5/3/07 8:01 PM Page xiv Preface In March 1977, I began working in banking.

In 1997, the Asian century was still- DAS_C02.QXP 8/7/06 4:22 PM Page 45 1 N Financial WMDs – derivatives demagoguery 45 born. In 1998, Russia defaulted. In 2001, Argentina completed its transition from first world to third world economy under the weight of debts that the country would never be able to service, let alone repay. Credit derivative products emerged. Credit default swaps and collateralized debt obligations (CDOs) allowed investors to take on credit risk. On schedule, in 2001, the CDO market collapsed, leaving the investors to nurse sizeable losses. In between, there were dalliances with gold, weather and catastrophe bonds that kept the markets busy. Forbidden fruit Back at the training programme, I generally finished my class for trainees by taking them through a structured product – an inverse floater, which I used to illustrate structured products.

Remote credit Credit derivatives did not enjoy immediate success and many of the original innovators were disappointed at the lack of growth, a lot left to do other things. It was only in the late 1990s that they took off. Suddenly, people talked of credit derivatives being larger than interest rate derivatives, the biggest part of the derivatives markets. The pioneers had been ahead of their time. The breakthrough was the credit default swap (CDS). The basic idea of a CDS is simple. Assume that a bank has made a loan to a client. The bank now wants to sell the risk on the loan; it has too much exposure to the client, industry or country. This is ‘concentration risk’, the opposite of diversification. Alternatively, the bank is worried – it knows something that makes it worry about whether it will get its money back.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-border payments, currency peg, currency risk, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Glass-Steagall Act, Herman Kahn, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Japanese asset price bubble, joint-stock company, junk bonds, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Mary Meeker, Michael Milken, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, Suez canal 1869, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

One day after the failure of Lehman, the US government intervened to prevent the collapse of AIG, then the world’s largest insurance company. AIG had sold several hundred billion dollars worth of credit default swaps (CDSs), essentially an insurance policy to the buyers of bonds that they would not incur losses if the firms that had issued bonds defaulted. Many of these CDSs were purchased by the firms that owned the bonds. Some were purchased by third parities, who had no direct insurable interest; from their point of view, the premium required to buy a credit default swap was low relative to the payoff if the borrower defaulted. Financial history would have been different if Lehman Bros had not failed.

Two groups of stakeholders would have benefited if Lehman had not failed – one was employees, perhaps some of those with bonuses, and the other was the counterparties and the owners of Lehman bonds. AIG – one of the world’s largest insurance companies – also was experiencing a run as efforts were made to avoid the bankruptcy of Lehman. AIG had written tens of billions of credit default swaps. In effect AIG acquired the credit risk attached to these bonds in exchange for the premium income; the buyers of the credit default swaps believed that premiums that they paid were modest relative to the credit risk. The run on AIG was like the run on Lehman once removed, since AIG would have to reimburse those who had bought these swaps to protect themselves against losses on their holdings of Lehman bonds when the firms went bankrupt.

AIG (the acronym for the American International Group), then the world’s largest insurance company, is the ‘poster child’ of the 2008 collapse because of the massive amount of financial assistance that it received from the US government to avoid bankruptcy. Most of its problems stemmed from the sale of credit default swaps (CDSs), which are a form of insurance purchased by the owners of bonds to protect themselves against loss if the firms that have issued the bonds go bankrupt. (These swaps are similar in concept to private mortgage insurance; the mortgage lenders require that the borrowers with less than 20 percent of the cash needed for the traditional down-payment buy insurance to protect themselves from loss if the borrowers default.)


pages: 372 words: 107,587

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

3D printing, agricultural Revolution, Alan Greenspan, Anthropocene, Apollo 11, back-to-the-land, banking crisis, banks create money, Bear Stearns, biodiversity loss, Bretton Woods, business cycle, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, degrowth, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, Glass-Steagall Act, global village, green transition, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, intentional community, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jevons paradox, Kenneth Rogoff, late fees, liberal capitalism, low interest rates, mega-rich, military-industrial complex, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, rolling blackouts, Ronald Reagan, short selling, special drawing rights, systems thinking, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, WikiLeaks, working poor, world market for maybe five computers, zero-sum game

Nevertheless, if a contract is settled, somebody has to pay — unless they can’t. Credit default swaps (CDSs, discussed in the last chapter) are usually traded “over the counter” — meaning without the knowledge of anyone other than the two counterparties; they are a sort of default insurance: a contract holder acts as “insurer” against default, bankruptcy, or other “credit event,” and collects regular “insurance” payments as premiums; this comes as “free money” to the “insurer.” But if default occurs, then a huge payment becomes due. Perversely, it is perfectly acceptable to take out a credit default swap on someone else’s debt. Here’s one example: In 2005, auto parts maker Delphi defaulted on $5.2 billion in outstanding bonds and loans — but over $20 billion in credit default derivative contracts had been written on those bonds and loans.

Paper currencies not backed by metal had sprung up from time to time, starting as early as the 13th century ce in China; by the late 20th century, they were the near-universal norm. Along with more abstract forms of currency, the past century has also seen the appearance and growth of ever more sophisticated investment instruments. Stocks, bonds, options, futures, long- and short-selling, credit default swaps, and more now enable investors to make (or lose) money on the movement of prices of real or imaginary properties and commodities, and to insure their bets — even their bets on other investors’ bets. Probably the most infamous investment scheme of all time was created by Charles Ponzi, an Italian immigrant to the US who, in 1919, began promising investors he could double their money within 90 days.

Prior to the crash of 2008, investor Warren Buffett famously called derivatives “financial weapons of mass destruction,” and asserted that they constitute an enormous bubble. Indeed, during the 2008 crash, a subsidiary of the giant insurance company AIG lost more than $18 billion on a type of swap known as a credit default swap, or CDS (essentially an insurance arrangement in which the buyer pays a premium at periodic intervals in exchange for a contingent payment in the event that a third party defaults). Société Générale lost $7.2 billion in January of the same year on futures contracts. Often, mundane financial jargon conceals truly remarkable practices.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, airline deregulation, Alan Greenspan, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Big bang: deregulation of the City of London, bilateral investment treaty, book value, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, Carmen Reinhart, central bank independence, classic study, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, democratizing finance, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, foreign exchange controls, full employment, Gini coefficient, Glass-Steagall Act, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, military-industrial complex, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, proprietary trading, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, scientific management, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, stock buybacks, structural adjustment programs, subprime mortgage crisis, Tax Reform Act of 1986, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, vertical integration, very high income, Washington Consensus, We are all Keynesians now, Works Progress Administration, zero-coupon bond, zero-sum game

But another catastrophe—at Lehman Brothers, whose banking business had begun with commodities-trading and brokerage operations in the 1850s—was not.45 When Geithner once again convened Wall Street CEOs, now in the depths of the greatest crisis they had ever seen, and urged them to arrange a private-sector bailout of Lehman, their fear of ending up with each other’s bad debts ruled out the kind of collective action they had agreed to a decade earlier with LTCM.46 As Lehman went bankrupt, and investors immediately questioned both the government’s commitment and organizational capacity to support the private institutional pillars of the financial system, Fed Chairman Bernanke came to the conclusion that twelve of the thirteen most important institutions in the United States “were at risk of failure within a period of a week or two.”47 What had to be faced most immediately was the imminent collapse of AIG, the world’s largest insurance company, which had provided so much credit-default-swap protection for the investment banks.48 The Federal Reserve had already gone well beyond the normal boundaries of its regulatory remit by extending help to investment banks, but it now ventured into even newer territory as it took responsibility for the survival of an insurance company whose commitments constituted a key pillar of the markets for securitized products and complex derivatives. By virtue of this bailout of AIG, which involved paying 100 percent of face value to AIG’s credit default swap counterparties, Goldman Sachs notoriously received almost $20 billion; but upwards of two-thirds of the payments to AIG counterparties actually went to foreign financial institutions, including some $17 billion to Société Générale, $15 billion to Deutsche Bank, $8.5 billion to Barclay’s, and $5.5 billion to UBS. 49 The Fed now fast-tracked applications by both Goldman Sachs and Morgan Stanley to be regulated as bank holding companies, thereby giving them permanent access to the Fed’s discount window.

The large US multinational commercial banks were also now fully engaged in what Gillian Tett has described as the “years of bold innovation that made high-risk trading and aggressive deal-making the gold standard of the Street [where] a ‘kill or be killed’ ethic prevailed.”61 She notes that, shortly after Salomon Brothers engineered the first major derivative bond swap between IBM and the World Bank in the early 1980s, J.P. Morgan used its City of London operations to circumvent the Glass-Steagall Act and allow its clients to take advantage of the explosion of derivatives markets. By the early 1990s, after also pioneering the development of credit default swaps, half of Morgan’s trading revenues came from derivatives contracts. But Morgan was only one of eight US banks that by then accounted for over 50 percent of interest-rate and currency swaps worldwide, as well as 90 percent of US bank derivatives activity; and there was a similar concentration of derivatives activity in the US investment banking sector.62 This concentration was closely related to the highly complex information and risk-management systems that were required to allow the risk on bonds with different interest-rate and currency structures to be traded without any bonds actually changing hands.

Following the recession of the early 1980s, these custom-made derivative products supplemented Wall Street’s fresh knack for tapping pension funds and rendering them into the loans that leveraged the corporate takeovers, mergers, and restructurings that Reagan’s tax allowances encouraged. The practice developed in the 1970s by the Bank of America, among others, of “slicing and dicing” mortgage loans and selling them to institutional investors, was applied to corporate bonds and loans in the 1980s, and to credit default swaps in the 1990s.64 What had initially led Wall Street’s investment banks to sell mortgage-backed instruments that “looked and tasted” like safe bonds was the desire to gain access to the large investor base represented by institutional investors such as pension funds and insurance companies: “If there was a master plan, it was to meet the needs of our institutional investor clients,” noted Laurence Fink, at the time Wall Street’s leading player in this arena.65 The 1970s had seen the introduction and tightening of minimum funding requirements for pension funds, while new tax breaks for individual contributions to retirement savings plans had launched a massive explosion of mutual funds.


pages: 316 words: 87,486

Listen, Liberal: Or, What Ever Happened to the Party of the People? by Thomas Frank

Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, Amazon Mechanical Turk, American ideology, antiwork, barriers to entry, Berlin Wall, Bernie Sanders, Black Lives Matter, blue-collar work, Burning Man, centre right, circulation of elites, Clayton Christensen, collective bargaining, Credit Default Swap, David Brooks, deindustrialization, disruptive innovation, Donald Trump, driverless car, Edward Snowden, Evgeny Morozov, Fall of the Berlin Wall, financial engineering, financial innovation, Frank Gehry, fulfillment center, full employment, George Gilder, gig economy, Gini coefficient, Glass-Steagall Act, high-speed rail, income inequality, independent contractor, Jaron Lanier, Jeff Bezos, knowledge economy, knowledge worker, Lean Startup, mandatory minimum, Marc Andreessen, Mark Zuckerberg, market bubble, mass immigration, mass incarceration, McMansion, microcredit, mobile money, moral panic, mortgage debt, Nelson Mandela, new economy, obamacare, payday loans, Peter Thiel, plutocrats, Ponzi scheme, post-industrial society, postindustrial economy, pre–internet, profit maximization, profit motive, race to the bottom, Republic of Letters, Richard Florida, ride hailing / ride sharing, Ronald Reagan, Savings and loan crisis, sharing economy, Silicon Valley, Steve Jobs, Steven Levy, TaskRabbit, tech worker, TED Talk, Thorstein Veblen, too big to fail, Travis Kalanick, Uber for X, union organizing, urban decay, WeWork, women in the workforce, Works Progress Administration, young professional

Born’s suggestion turned out to be the opposite of a no-brainer: the three members of the Committee to Save the World came together not only to crush her proposal but to do the reverse—to ensure the elimination of the weak regulation that did exist. The ultimate result of their efforts, the Commodity Futures Modernization Act, signed into law by Clinton a month before he returned to private life, was a deregulatory debacle to which we can chalk up both the activities of Enron as well as the credit-default swaps that brought the entire world economy to the brink of collapse in 2008.38 Things ended badly for Brooksley Born, but Robert Rubin left the Treasury Department in glory just a few days after the measure repealing Glass-Steagall had passed the Senate. Four months later, he took up work at Citigroup, which by coincidence was the largest beneficiary of the repeal (it allowed the giant bank to merge with a giant insurance company).

And yet recent history is littered with exactly such stuff: Innovations that allow companies to spy on us. Innovations that allow terrorist groups to recruit online. Innovations that allowed Enron to do all the fine things it used to do. Come to think of it, the whole economic debacle of the last ten years owes its existence to the financial innovations of the Nineties and the Aughts—the credit default swaps, or the algorithms companies used to hand out mortgage loans—innovations that were celebrated in their day in the same mindlessly positive way we celebrate tech today. Somehow that stuff never comes up, however. We know what innovation is about, and it’s righteousness and triumph. Success is all you’ll find when you riffle through the inno-thoughts produced by the various foundations, institutes, websites, mentors, accelerators, incubators, and entrepreneurship competitions.

Airbnb allows consumers and providers to get around various safety and zoning rules with which conventional hotels must comply.15 Amazon allows customers in many places to avoid paying sales taxes. The circumvention strategy isn’t restricted to software innovations, either. One of the great attractions of credit default swaps—a big financial innovation of the last decade—is that they were completely unregulated. Monopoly is the telos of innovation, the holy grail fervently sought after by every young coder sweating away in the incubator. The reason is plain enough: monopoly is the most direct road to profit, and the online world offers countless opportunities to achieve it.


pages: 365 words: 88,125

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

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

One of them apparently shocked Alistair Darling, then British Chancellor of the Exchequer, by telling him in the summer of 2008 that ‘from now on we will only lend when we understand the risks involved’.1 For another, even more astonishing, example, only six months before the collapse of AIG, the American insurance company bailed out by the US government in the autumn of 2008, its chief financial officer, Joe Cassano, is reported to have said that ‘[i]t is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of the [credit default swap, or CDS] transactions’. Most of you – especially if you are an American taxpayer cleaning up Mr Cassano’s mess – might find that supposed lack of flippancy less than amusing, given that AIG went bust because of its failure in its $441 billion portfolio of CDS, rather than its core insurance business.

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

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


pages: 304 words: 80,965

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

activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, buy and hold, Carl Icahn, centralized clearinghouse, clean water, compensation consultant, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Glass-Steagall Act, income inequality, index fund, information asymmetry, invisible hand, John Bogle, Kenneth Arrow, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, Paul Volcker talking about ATMs, payment for order flow, performance metric, Ponzi scheme, post-work, principal–agent problem, rent-seeking, Ronald Coase, seminal paper, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

If someone has to report every time they do something questionable, they will be far more hesitant to do it in the first place. How could regulators use information to improve the system? An overarching principle would be to ensure that there is maximum transparency in situations where the system might be abused. Here is one example. At present we have a huge market in securities known as credit default swaps (CDSs). These are effectively life insurance contracts on a company, which pay out if a company defaults on its debt. Like human life insurance, they can be useful for anyone—say, someone who had lent the company money—who would be in trouble should the company fail. But unlike life insurance, CDSs do not need the permission of the party whose life is being insured.

Hu and Bernard Black, “Equity and Debt Decoupling and Empty Voting II: Importance and Extensions,” University of Pennsylvania Law Review 156 (2008): 625–739. 50. The authors of this book have served on a number of creditor committees. On at least one occasion, we have thought that other “creditors” have hedged their positions using credit default swaps, a type of derivative. Our opinion is that their participation in the reorganization process was not helpful, as their economic interests were not in reorganizing the company. This sounds technical and like a matter only of interest to “vulture investors” (banks and hedge funds), but the company involved was Adelphia Communications, which was the fifth largest cable television company in the United States, employing thousands of people.

., 254n2 BrightScope, 122 Brokers, fiduciary duty and, 256n23 Brooks, David, 167 Buffett, Warren, 45, 63, 64, 80, 150, 221 Business judgment rule, 78–79 Business school curriculum, 190–92 Buy and Hold Is Dead (Again) (Solow), 65 Buy and Hold Is Dead (Kee), 65 Buycott, 118 Cadbury, Adrian, 227 Call option, 93 CalPERS, 91, 110, 111–12, 208, 221, 241n37 CalSTRS, 208 Canada, pension funds in, 59, 111, 209 Capital Aberto (magazine), 117 Capital gains, taxation of, 92 Capital Institute, 59, 87 Capital losses, 92 Capitalism: agency, 33, 74–80 defined, 243n2 Eastern European countries’ transition to, 167 financial system and, 9 injecting ownership back into, 83–93 private ownership and, 62 reforming, 11–12 Carbon Disclosure Project, 89 Career paths, new economic thinking and, 189–90 CDC. See Collective pension plans CDFIs. See Community Development Financial Institutions (CDFIs) CDSs. See Credit default swaps (CDSs) CEM Benchmarking, 54 Central banks, 20, 213 Centre for Policy Studies, 105 CEOs: performance metrics, 68, 86–87 short-term mindset among, 67–68. See also Executive compensation Ceres, 120 CFA Institute, 121 Chabris, Christopher, 174 Charles Schwab, 29, 31 Cheating, regulations and, 144–45 Chinese Academy of Social Sciences, 167 Citadel, 29 Citicorp, 76 Citizen investors/savers, 19 charter for, 227–31 communication between funds and, 110–11 dependence on others to manage money, 5–6, 19, 20 goals of, 48, 49 government regulation to safeguard, 107–9 lack of accountability to, 5–7, 96, 99–106 technology and, 90–92 trading platforms that protect, 88–89 City Bank of Glasgow, 257n34 Civil society organizations (CSOs), 153 corporate accountability and, 119–23 scrutiny of funds by, 224 “Civil Stewardship Leagues,” 122 Clark, Gordon L., 101, 106 Classical economics, 159–61 Clegg, Nick, 9 Clinton, Bill, 68–69 Clinton, Hillary Rodham, 119 Coase, Ronald, 169–70, 243n2, 261n31 Cohen, Lauren, 102 Coles Myer, 82 Collective Defined Contribution (CDC), 266n28 Collective pension plans, 263n1, 266n28 duration of liabilities, 264n3 in Netherlands, 197, 199, 209, 264n6.


pages: 492 words: 118,882

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

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

Source: www.​federalreserve.​gov/​Boarddocs/​speeches/​2005/​20051012 18This includes derivatives and other contract-based assets that derive their value from an underlying asset, index, or interest rate. They include, but are not restricted to, debt-based products such as collateralized debt obligations (CDO’s), credit default swaps (CDS’s) and other variants or by-products of these products. 19Securitization is the practice of combining various types of debt such as mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables), and selling their related cash flows to third party investors in the form of a financial instrument called a security.

As the power of banks decreased due to the issuance of debt by non-financial institutions, the banks installed a new risk management practise via their activities in exchanging securities and specifically through CDOs (Collateralised Debt Obligations ), Collateralized Loan Obligations (CLOs) and CDSs (Credit Default Swaps ). Previously, banks controlled the amount of risk in the economy by providing or withholding credit. This was referred to the as the “originate-to-hold” model (Santos, 2012) of risk management. However, with the birth of CDOs, CLOs and CDSs , new possibilities were discovered. Under the originate-to-hold model, banks limited the distribution of risk to mortgages, credit card credits, and auto and student loans.

While large banks might offer greater efficiencies, their size also comes with more process, more red-tape, increased amounts of opaqueness, and larger mistakes. Consider the case of the J.P. Morgan’s “London Whale” episode in 2012. As the traders executed their hedging strategy by entering into a series of derivative transactions involving credit default swaps (CDS) , one of the JP Morgan traders, Bruno Iksil, accumulated outsized CDS positions in the market and began distorting the market with massive bets. As other traders in the CDS market began to notice this activity, they moved in the opposite direction and began to take positions that were contrary to the J.P.


pages: 584 words: 187,436

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

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, book value, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, deal flow, do well by doing good, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, Jim Simons, John Bogle, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, low interest rates, machine translation, margin call, market bubble, market clearing, market fundamentalism, Market Wizards by Jack D. Schwager, Mary Meeker, merger arbitrage, Michael Milken, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, operational security, pattern recognition, Paul Samuelson, pre–internet, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Savings and loan crisis, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, tail risk, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule

All of Wall Street knew that their reliance on short-term funding, coupled with extremely high leverage, made them vulnerable to a bank run; and the Morgan and Goldman stock prices began to show up permanently at the top of the CNBC screen, in what traders called the “death watch.”25 The trouble at the giant insurer AIG only made things worse. By writing credit default swaps, AIG had sold protection against the danger that all manner of bonds might go into default—it was the kind of crazy risk taking you got when you located an ambitious trading operation inside the bosom of a well-capitalized firm, imbuing the traders with a heady sense of invulnerability. Inevitably, AIG’s credit default swaps lost billions when the likelihood of default spiked up amid the crisis following Lehman. On Tuesday, September 16, the government was forced to rescue the firm, lending it an astonishing $85 billion.

In contrast to auto-company bonds, there was no franchise value to worry about, either. A bankrupt company might be worth something to someone. A pile of loans with zero payout is worth, simply, zero. In April 2005, Paulson placed his first bet against these mortgage securities. He bought a credit default swap—an insurance policy on a bond’s default—on $100 million worth of BBB-rated subprime debt. There was a huge asymmetry in the risk and the reward: He paid $1.4 million for a year’s worth of insurance, but if the securities were wiped out, he stood to pocket the full $100 million. The question was whether the odds of default were good: You can get a juicy payout by betting on a single number in roulette, but that’s because your chances of winning are abysmal.

In the summer of 2006, he set up a new hedge fund to do exactly what his table said, seeding it partly with his own money and enlisting Pellegrini as the comanager. The challenge was how to do the trades in the size that he now wanted. Paulson could bet against mortgage bonds by borrowing them and selling them short, a cumbersome operation. Or he could buy an insurance policy—a credit default swap from a bank—but that depended upon finding a bank that was interested in selling. To Paulson’s great good fortune, in July 2006 Wall Street’s top investment banks created an easier option: Hoping to earn themselves a stream of trading commissions, they launched a subprime mortgage index, known as the ABX.


pages: 348 words: 99,383

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

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

A substantial portion of the losses early in the financial crisis occurred in these bonds, not in direct real estate loans. Also, as discussed, this capital destruction was magnified by the leverage ratios of financial intermediaries, resulting in significant liquidity problems in the capital markets. Another important and obscure financial instrument is a credit default swap (CDS). A CDS is basically an insurance policy that is purchased to reduce the credit risk in a debt instrument. For example, Goldman Sachs has a $100 million B-rated bond backed by home mortgages. Goldman wants to hold the bond in its portfolio temporarily. However, based on the SEC capital guidelines, Goldman will need significantly less capital if the bond is A-rated.

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

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


pages: 312 words: 93,836

Barometer of Fear: An Insider's Account of Rogue Trading and the Greatest Banking Scandal in History by Alexis Stenfors

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, bonus culture, capital controls, collapse of Lehman Brothers, credit crunch, Credit Default Swap, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, fixed income, foreign exchange controls, game design, Gordon Gekko, inflation targeting, information asymmetry, interest rate derivative, interest rate swap, London Interbank Offered Rate, loss aversion, mental accounting, millennium bug, Nick Leeson, Northern Rock, oil shock, Post-Keynesian economics, price stability, profit maximization, proprietary trading, regulatory arbitrage, reserve currency, Rubik’s Cube, Snapchat, Suez crisis 1956, the market place, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, work culture , Y2K

I am also grateful to many of you on the trading floors across the world, whether still physically there or in memory alone. ABBREVIATIONS ACI Association Cambiste Internationale BBA British Bankers’ Association BBAIRS BBA Interest Rate Settlement BIS Bank for International Settlements CDO collateralised debt obligation CDOR Canadian Dollar Offered Rate CDS credit default swap CEO chief executive officer CIA Central Intelligence Agency CIBOR Copenhagen Interbank Offered Rate CME Chicago Mercantile Exchange CPI Consumer Price Index CRS cross-currency basis swap ECB European Central Bank ERM Exchange Rate Mechanism EU European Union EURIBOR Euro Interbank Offered Rate FBI Federal Bureau of Investigation FCA Financial Conduct Authority FIBOR Frankfurt Interbank Offered Rate FRA forward rate agreement FSA Financial Services Authority FX foreign exchange GDP gross domestic product HELIBOR Helsinki Interbank Offered Rate ICMA International Capital Market Association IMM International Monetary Market IRS interest rate swap ISDA International Swaps and Derivatives Association KLIBOR Kuala Lumpur Interbank Offered Rate LIBOR London Interbank Offered Rate LIFFE London International Financial Futures and Options Exchange NIBOR Norwegian Interbank Offered Rate OIS overnight index swap OPEC Organization of the Petroleum Exporting Countries OTC over the counter PIBOR Paris Interbank Offered Rate PRA Prudential Regulation Authority SEC Securities and Exchange Commission SFO Serious Fraud Office SIMEX Singapore International Monetary Exchange STIBOR Stockholm Interbank Offered Rate STIRT Short-term Interest Rate Trading TAF Term Auction Facility TIBOR Tokyo Interbank Offered Rate TIFFE Tokyo International Financial Futures Exchange INTRODUCTION ‘It’s a misunderstanding’ ‘How can the FSA be sure you will not do this again?’

A few weeks later, an email was sent out stating that Barclays should ‘try to get our JPY [Japanese yen] libors a little more in line with the rest of the contributors, or else the rumours will start flying about Barclays needing money because its libors are so high’.16 This issue was raised in the Wall Street Journal in May 2008.17 The journalists Carrick Mollenkamp and Mark Whitehouse argued that some LIBOR panel banks had deliberately quoted rates that were too low to be justified by their credit standing as reflected in the credit default swap (CDS) market. Although the article did not claim outright manipulation, it argued that banks ‘may have been low-balling their borrowing rates to avoid looking desperate for cash’. The contents of the article supported anecdotal evidence from some active market participants (myself included) who had become suspicious of LIBOR manipulation.

Collateralised debt obligation (CDO): A derivative whose income payments and principal repayments are dependent on a pool of different financial instruments which themselves are loans and are due to pay interest and ultimately be repaid.1 Covered interest parity: The covered interest parity states that the interest rate differential between two currencies in the money markets should equal the differential between the FX forward and FX spot rates. If this is not the case, arbitrage would be possible. Credit default swap (CDS): A derivative designed to provide protection against the risk of a credit event (e.g. bankruptcy) relating to a particular company or country. Cross-currency basis swap (CRS): A derivative where two counterparties effectively borrow from each other in two different currencies. The counterparties exchange principals at both the start and the maturity of the swap, as well as regular floating interest rate payments, which generally are indexed to LIBOR or equivalent benchmarks.


pages: 482 words: 121,672

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition) by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, book value, butter production in bangladesh, buttonwood tree, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Detroit bankruptcy, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, equity risk premium, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Salesforce, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, Teledyne, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

Second-order derivatives were sold on the derivative mortgage-backed bonds. Credit-default swaps were issued as insurance policies on the mortgage-backed bonds. Briefly, the swap market allowed two parties—called counterparties—to bet for or against the performance of the mortgage bonds, or the bonds of any other issuer. For example, suppose I hold bonds issued by General Electric and I begin to worry about GE’s creditworthiness. I could buy and hold an insurance policy from a company like AIG (the biggest issuer of credit default swaps) that would pay me if GE defaulted. The problems with this market lay in the fact that the issuers of the insurance such as AIG had inadequate reserves to pay the claims if trouble occurred.

The problems with this market lay in the fact that the issuers of the insurance such as AIG had inadequate reserves to pay the claims if trouble occurred. And anyone from any country could buy the insurance, even without owning the underlying bonds. Eventually, the credit-default swaps trading in the market grew to as much as ten times the value of the underlying bonds, pushed by demand from institutions around the world. This change, where the derivative markets grew to a large multiple of the underlying markets, was a crucial feature of the new finance system. It made the world’s financial system very much riskier and much more interconnected.

You can use your device’s search function to locate particular terms in the text academics, 26 technical analysis and, 135–36, 154–57, 189 academic theories of securities valuation, see new investment technology accounting: “creative,” 93, 164, 165–68 fraudulent, 25, 93–95 aggressive investments, see beta, high AIG, credit default swaps by, 100 Ali, Muhammad, 71 alphas, 219, 280 Amazon.com, 83 American Century, 370 American Child Health Association, 163–64 American Music Guild, 58 American Telephone & Telegraph (AT&T), 48, 52, 53, 322, 384 AMOMX, 268 Androbot, 70 annuities, 372–75 and retirement, 372, 373 variable, 373 antitrust laws, 60 Apollo Group, 169 AQR, 268, 281 arbitrage, 231 limits of, 248–51 Arbitrage Management Company, 197 arbitrage pricing theory (APT), 223–25 Arnott, Robert, 278 Arthur Andersen, 95 art objects, as investments, 310, 324 Asch, Solomon, 240 Asperger, James, 75 asset allocation, 350 asset pricing theory, see capital-asset pricing model assets and needs, 363 AT&T, see American Telephone & Telegraph auto insurance, 295 Automatic Sprinkler Corporation (A-T-O, Inc.), 63 average return, see expected rate of return Avon Products, 68 Babson, Roger, 51–52 Babson Break, 51–52 banking, new system of, 98–100 Bank of America, 264, 272, 280 Bank of Japan, 77 bankrate.com, 299 bankruptcy, 40, 102 banks, 26 savings accounts in, 308 six-month certificates of, 308 see also Internet banks Barber, Brad, 172, 234, 246, 256 Barclays Aggregate Bond Market Index, 386 Barclays Capital broad bond index, 207 Barron’s, 88, 168, 393 Bartiromo, Maria, 92 Barton, Bruce, 48 Baruch, Bernard, 55, 258 base-rate probabilities, 238 Batten, Barton, Durstine and Osborn, 48 Bawl Street Journal, The, 341–42 Bayes’ law, 238 Beardstown Ladies, 153 Beardstown Ladies Common-Sense Investment Guide, The, 153 bear traps, defined, 114 Beating the Dow (O’Higgins), 150 Beat the Dealer (Thorp), 156n behavioral finance, 35, 229–59, 267 biased judgments in, 231, 235–38 herd mentality in, 231, 239–43, 248, 253–54 lessons for investors from, 252–59 limits to arbitrage in, 248–51 loss aversion in, 231, 243–45, 256 overconfidence in, 231, 232–35, 256 pride and regret in, 245–46 and savings, 246–48 Benartzi, Shlomo, 247–48 bequests, 374 Berkshire Hathaway, 399 Berns, Gregory, 241 Best, A.


pages: 471 words: 124,585

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

Admiral Zheng, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, classic study, 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, equity risk premium, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, Future Shock, German hyperinflation, Greenspan put, Herman Kahn, 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, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, Nelson Mandela, Nick Bostrom, 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, risk free rate, Robert Shiller, rolling blackouts, Ronald Reagan, Savings and loan crisis, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, subprime mortgage crisis, tail risk, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, transaction costs, two and twenty, undersea cable, value at risk, W. E. B. Du Bois, Washington Consensus, Yom Kippur War

An explosion of ‘securitization’, whereby individual debts like mortgages are ‘tranched’ then bundled together and repackaged for sale, pushed the total annual issuance of mortgage backed securities, asset-backed securities and collateralized debt obligations above $3 trillion. The volume of derivatives - contracts derived from securities, such as interest rate swaps or credit default swaps (CDS) - has grown even faster, so that by the end of 2007 the notional value of all ‘over-the-counter’ derivatives (excluding those traded on public exchanges) was just under $600 trillion. Before the 1980s, such things were virtually unknown. New institutions, too, have proliferated. The first hedge fund was set up in the 1940s and, as recently as 1990, there were just 610 of them, with $38 billion under management.

A third kind of derivative is the swap, which is effectively a bet between two parties on, for example, the future path of interest rates. A pure interest rate swap allows two parties already receiving interest payments literally to swap them, allowing someone receiving a variable rate of interest to exchange it for a fixed rate, in case interest rates decline. A credit default swap, meanwhile, offers protection against a company’s defaulting on its bonds. Perhaps the most intriguing kind of derivative, however, are the weather derivatives like natural catastrophe bonds, which allow insurance companies and others to offset the effects of extreme temperatures or natural disasters by selling the so-called tail risk to hedge funds like Fermat Capital.

Part of the reason is simply that the initial Chinese forays into US financial stocks have produced less than stellar results.bj There are justifiable fears in Beijing that the worst may be yet to come for Western banks, especially given the unknowable impact of a US recession on outstanding credit default swaps with a notional value of $62 trillion. But there is also a serious political tension now detectable at the very heart of Chimerica. For some time, concern has been mounting in the US Congress about what is seen as unfair competition and currency manipulation by China, and the worse the recession gets in the United States, the louder the complaints are likely to grow.


pages: 586 words: 160,321

The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

"there is no alternative" (TINA), Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, Brexit referendum, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, cross-border payments, currency peg, currency risk, debt deflation, Deng Xiaoping, different worldview, diversification, Donald Trump, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, financial deregulation, financial repression, fixed income, Flash crash, floating exchange rates, full employment, Future Shock, German hyperinflation, global reserve currency, income inequality, inflation targeting, information asymmetry, Irish property bubble, Jean Tirole, Kenneth Rogoff, Les Trente Glorieuses, low interest rates, Martin Wolf, mittelstand, Money creation, money market fund, Mont Pelerin Society, moral hazard, negative equity, Neil Kinnock, new economy, Northern Rock, obamacare, offshore financial centre, open economy, paradox of thrift, pension reform, Phillips curve, Post-Keynesian economics, price stability, principal–agent problem, quantitative easing, race to the bottom, random walk, regulatory arbitrage, rent-seeking, reserve currency, risk free rate, road to serfdom, secular stagnation, short selling, Silicon Valley, South China Sea, special drawing rights, tail risk, the payments system, too big to fail, Tyler Cowen, union organizing, unorthodox policies, Washington Consensus, WikiLeaks, yield curve

Difference in Interest Rates between 10-Year Sovereign Bond Yields Issued by Ireland/Portugal/Spain and the 10-Year German Government Bond Yield (Source: Datastream) Soon after PSI was decided in principle, and even before it became official policy, interest rates on peripheral countries’ debt (as well as sovereign CDS) increased markedly. (See figure 2.1.) The market thought that a default of the peripheral sovereign bonds became more likely. Hence, the spreads for credit default swaps (CDS), the periodic fee a buyer of “protection” against the default has to pay, increased. The crisis also spread to Italy and Spain. Before Deauville, those two countries could have still been considered immune from the crisis, although a small deviation in interest rates had already appeared earlier.

In the spring of 2012, many financial institutions started to take on hedges against risk that some countries were to leave the euro area. These hedges became increasingly expensive, as buying protection makes the underlying break-up event even more likely. Indeed Draghi had been disturbed by questions from market participants asking how they should rewrite credit default swaps for the case of a collapse of the euro. He also knew that once the momentum began to reverse, institutions that had bought this protection would make losses and reverse their action. As president of the ECB, Draghi was powerful enough to at least temporarily stabilize the situation and by doing so cause large temporary losses on these hedging positions.

It was also intended to facilitate the financing of the Greek program, which was becoming more and more difficult every day. Trichet's gloomy predictions proved correct. Soon after PSI was decided in principle, and even before it became official policy, spreads started to increase for peripheral countries’ debt (as well as sovereign credit default swaps) and the gap between long-term interest rates inside the euro area widened. This was especially spectacular for Ireland, Spain, and Italy. Before Deauville, those countries could still be considered immune from the crisis (although a small divergence in interest rates had appeared). After Deauville, the spreads started to diverge from Germany, France, and other core countries.


pages: 553 words: 168,111

The Asylum: The Renegades Who Hijacked the World's Oil Market by Leah McGrath Goodman

Alan Greenspan, anti-communist, Asian financial crisis, automated trading system, banking crisis, barriers to entry, Bear Stearns, Bernie Madoff, Carl Icahn, computerized trading, corporate governance, corporate raider, credit crunch, Credit Default Swap, East Village, energy security, Etonian, family office, Flash crash, global reserve currency, greed is good, High speed trading, light touch regulation, market fundamentalism, Oscar Wyatt, peak oil, Peter Thiel, pre–internet, price mechanism, profit motive, proprietary trading, regulatory arbitrage, reserve currency, rolodex, Ronald Reagan, side project, Silicon Valley, upwardly mobile, zero-sum game

Gramm brought up the “mother” story again in 2008, when the Enron loophole was blamed for the credit crisis that rivaled the Great Depression. The loophole, which applied to complex financial instruments as well as the over-the-counter energy market, had allowed trillions of dollars of credit-default swaps to go completely unregulated, causing global banks to fall in on themselves like dying stars. (The credit-default swap, as it happened, was perfected by a group of J.P. Morgan bankers in 1994 on the exact site where the Nymex traders met every year for their wine-soaked futures conferences—the Boca Raton Resort & Club.) Gramm had initially wanted looser regulation, which would have opened up additional loopholes, causing Alan Greenspan and even Enron itself to object.

This was true when Born famously took on Federal Reserve chairman Alan Greenspan in the 1990s, warning of the stark dangers of unregulated financial derivatives in the dark market, which had started long ago with commodities and had since branched out into complex debt instruments. Of course, she’d been right. Less than two decades later, in 2008, she was branded a market Cassandra during the 360-degree disemboweling that shredded banking citadels Bear Stearns, Lehman Brothers, and Merrill Lynch, as unregulated credit-default swaps—bets on the creditworthiness of a company or product, such as mortgages—hurled the global financial system into its death spiral. Having specialized in obscure financial instruments at Arnold & Porter, Born easily grasped the inner workings of the market in ways that went right over Congress’s head.

They urged Gramm to settle for something less radical, lest the “modernization” act not pass at all. The result had been the Enron loophole, the Pandora’s box that unleashed the 2008 credit crisis and recession that shook the world. “Which idiot in Congress decided not to regulate credit-default swaps?” a blogger wailed on one of the many Web sites chronicling the mushrooming events. Gramm indicated that he didn’t think he should be blamed for it. He had no regrets, he told the New York Times, explaining again that the home loan received by his mother had been similar to the devastating subprime loans tied to the credit crunch.


pages: 580 words: 168,476

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

affirmative action, Affordable Care Act / Obamacare, airline deregulation, Alan Greenspan, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, behavioural economics, Berlin Wall, business cycle, 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, electricity market, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, Glass-Steagall Act, Great Leap Forward, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Bogle, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low interest rates, 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, Paul Volcker talking about ATMs, payday loans, Phillips curve, price stability, profit maximization, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, search costs, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, stock buybacks, subprime mortgage crisis, 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, Tragedy of the Commons, 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

They said whatever agreement was reached couldn’t be allowed to set off a “credit event,” meaning an event that would trigger a payment on credit default swaps, the risky securities that would pay off if Greece defaulted. In saying that, the ECB seemed to be placing the interests of the banks well above that of the Greek people. Greece needed a deep restructuring (another way of saying a large reduction in its debt burden), well beyond that which might emerge from a voluntary restructuring, but only a voluntary write-down would not be considered a credit event. There was something even more curious about the ECB position. Credit default swaps are supposed to provide insurance. If you have an insurance policy, you want the insurance company to be generous and declare that an “insurable event” has occurred: it is the only way that you can collect on your policy.

Congressional Oversight Panel, 193 consumerism, 104–6, 341 consumer protection, 136, 175, 192, 193, 197 contracts, 197, 271 Cordray, Richard, 370 corporate governance laws, 31, 38, 39, 41, 57, 66–67, 87, 111, 270, 271 corporations, xviii, 91, 100–101, 147, 348 deregulation in, 89, 102, 177–78 dishonest accounting in, 87, 110, 111, 271 dividend payments by, 88, 212 economic influence of, xxii–xxiii executive compensation in, 3, 21, 31, 40, 42, 65, 66, 67, 79, 87, 104, 109, 110, 111, 153–54, 271, 296, 309, 316, 328, 333 government munificence toward, 40, 48, 49–51, 97, 99, 136, 179–80, 189, 191, 210, 214, 215, 216, 222, 224, 228, 272–73 idea-shaping by, 147, 150–51, 160, 179 legal advantages of, 66, 132, 189–90, 191, 202, 272, 327, 374 patent control by, 43, 202–3 risk-taking by, xviii, 99, 189, 339 shareholder influence in, 31, 66, 67, 135, 271, 285, 328 taxation of, 62, 73–74, 95, 115, 142, 179, 214, 215, 221–22, 224, 225, 270, 272, 273–74, 278, 283, 296, 331 as tax shelters, 73, 270, 296 see also business Council of Economic Advisers, 99, 110, 174, 179, 185, 330, 387 credit default swaps (CDSes), 46, 248, 255, 256 creditworthiness, 58, 108 Crick, Francis, 41 crime, 15, 69, 303, 304 Daly, Lew, 78 debit cards, 324 debt: international, 138 U.S., 207, 217, 219 see also bankruptcy; credit default swaps (CDSes); deficit reduction; foreclosures; predatory lending; student loans debt ceiling, 207, 376 Declaration of Independence, 158 Defense Department, U.S., 209 defense industry, government procurement in, 40, 101, 176, 210, 224, 272 deficit, U.S., 114, 115, 179, 208–11, 251, 279, 330, 340, 383 deficit reduction, 207–32, 237, 256, 279, 377 expenditure implications of, 93, 115, 217 Right’s insistence on, 216, 217, 229 strategies for, 211–16, 224, 228, 235, 236 democracy, U.S., 118–45 corruption in, 132, 143, 162, 200 diminishing confidence in, xii, 120–21, 127–28, 129, 131, 132, 133, 134, 143, 144, 250–54, 288 disenfranchisement in, 129–35, 345 globalization and, 138–45 ideological battle over, 155, 162 media’s role in, 128–29, 135, 136, 163, 252, 286 trust and, 125–26 weakening of, 136–38, 142 see also politics, U.S.

When competition is so limited, prices are likely to be far in excess of competitive levels.41 That’s why the sector enjoys profits estimated to be more than $115 billion a year, much of which is passed along to its top officials and other bankers—helping create one of the major sources of inequality at the top.42 In some products, such as over-the-counter credit default swaps (CDSes), four or five very large banks totally dominate, and such market concentration always gives rise to the worry that they collude, albeit tacitly. (But sometimes the collusion is not even tacit—it is explicit. The banks set a critical rate, called the London Interbank Offered Rate, or Libor.


pages: 513 words: 141,153

The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History by David Enrich

Bear Stearns, Bernie Sanders, Black Monday: stock market crash in 1987, call centre, centralized clearinghouse, computerized trading, Credit Default Swap, Downton Abbey, eat what you kill, electricity market, Flash crash, Glass-Steagall Act, Goldman Sachs: Vampire Squid, information asymmetry, interest rate derivative, interest rate swap, London Interbank Offered Rate, London Whale, Long Term Capital Management, Michael Milken, Navinder Sarao, Nick Leeson, Northern Rock, Occupy movement, performance metric, profit maximization, proprietary trading, Savings and loan crisis, tulip mania, work culture , zero-sum game

See also specific bankers and traders CFTC investigation, 203, 205–7, 243–46 Code of Conduct, 302 compensation, 230–31 compliance, 295–96 culture of, 275–76, 281, 405–6 FSA investigation, 338–39 government bailout, 164, 230, 243 Hayes firing, 301–7, 313–14 Hayes job offer, 229–32, 239–40 internal Libor investigation, 297–301, 333–34 Japanese getaway, 1–3 Libor investigation, 271 Libor submissions, 245–46, 276–77, 279–82, 294–97, 405–6 Peng at, 186–87 City of London deregulatory revolution, 29–30, 41 as financial center, 27 Cleary Gottlieb, 297–98, 299 Clinton, Bill, 75, 247–48, 268 Cole, Margaret, xiii, 205, 257, 263, 399–400 commissions, 50–51 Commodity Futures Trading Commission (CFTC), xii, 198–203 Barclays financial settlement, 357–60 Gensler at, 248–49, 253–54 initial interest in Libor, 201, 202–3 Libor and Chicago Merc, 74–75 Libor investigation, 203, 205–7, 243–46, 257, 270–72, 312–13, 350–56, 399–400 Barclays recordings, 262–63, 264, 266 Goodman interview, 355–56 Read interview, 350–52, 354 Wilkinson interview, 352–54 original mandate of, 199–200 reputation of, 200–201 Compton, Steve, 260 Conservative Party, 50, 182, 358, 395 Conti, Anthony, 456 Conway, Christopher, 427–28 Cooke, Jeremy, xiii, 406–7, 411, 427–29, 435, 437, 438, 443–44, 452 Cotchett, Joseph, 254–56, 255–56, 431–32 Crédit Agricole, 86, 120 credit default swap indexes, 349–50 credit default swaps, 196–98 Credit Suisse, 212 Cryan, Noel, xii, 123, 171 background of, 43 Hayes bachelor party, 299–300 Hayes introduction to, 43–44 Libor investigation, 361, 398–99 Libor trial, 452–53, 455–56, 458 SFO criminal charges, 404–5 switch trades, 173–75, 226–28 Curious Incident of the Dog in the Night-Time, The (Haddon), 31 Danziger, Neil, ix, 198, 379 background of, 170–71 partying of, 171–72 suspension of, 334–35 switch trades, 170–74, 176–77, 214, 227–28, 379, 399, 408 Darin, Roger, x background of, 100–101 Hayes and Libor submissions, 101–3, 115, 160, 232–33 Justice criminal charges, 362, 371, 417 Magumbos incident, 218 update on, 445 Davies, Brent, ix acting work, 391, 411–12 Hayes and Libor submissions, 108 hiring of lawyer, 347 at ICAP, 223, 283, 343 at RBS, 30–31, 41–42, 108, 167, 223 SFO investigation, 391 Deadline (band), 3 Del Missier, Jerry, 359 Delmar, Nigel, xii, 87, 123, 154, 265, 285, 299 entertaining, 134–35, 140–41 derivatives, 31–33 Libor and, 74–75 swaps, 33–35 Deutsche Bank, x, 287 Adolph at, 220–21 Hayes job offers, 212 Hayes job search, 21, 305, 321 Libor rate, 79 Libor submissions, 220–21, 222 Deutsche Börse, 445–46 Dimon, Jamie, 349 Diamond, Bob, 359 DKB Financial Products Inc., 75 “Does the Libor reflect banks’ borrowing costs?”

The regulators pointed out to Ewan and his colleagues that Libor’s “accuracy is poor.” But the agency wasn’t interested in getting involved. Despite the onset of the financial crisis, it was clinging to its light-touch strategy. * * * For their next project, Mollenkamp and Whitehouse set out to prove that Libor was broken. They decided to look at an instrument called credit default swaps. These were basically insurance contracts between a bank and another party that paid out if a company defaulted on its debts. Investors used the instruments to protect themselves when they were buying corporate bonds. This way, if the bonds defaulted, the swaps would make up for their losses.

Cecere, too, was trying to cast all the blame on Hayes, even though this web was in fact shared by many spiders—Cecere among them. * * * For a few weeks that spring, the financial world’s attention was consumed by another scandal in London. A trader in J.P. Morgan’s London office, Bruno Iksil, had amassed huge positions in an exotic class of derivatives called credit default swap indexes. Before long, his bets grew so big that he was controlling a substantial slice of the market and had acquired a nickname: the London Whale. As Hayes had learned, size is a mixed blessing, and when markets turned against Iksil, competitors smelled blood and attacked. Things quickly careened out of control—soon Iksil’s team was sitting on losses of more than $2 billion.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

Albert Einstein, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bear Stearns, Bernie Madoff, Black Swan, bond market vigilante , book value, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, commodity super cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, equity risk premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, global macro, Greenspan put, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, inverted yield curve, invisible hand, junk bonds, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, market microstructure, Minsky moment, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, proprietary trading, purchasing power parity, quantitative easing, random walk, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, SoftBank, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, tail risk, The Great Moderation, Thomas Bayes, time value of money, too big to fail, Tragedy of the Commons, transaction costs, two and twenty, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

Although global GDP contracted 6 percent, something like 20 percent was being thrown at the problem, much of which had not yet been deployed at the time. I also looked at the swap rate and credit default swap levels. The swap rate is the inter-bank interest rate—the rate that banks use to lend to other banks. In November 2008, it reached a high of 5 percent amidst a total breakdown in confidence in the financial system. By March 2009, it came back to 2 percent and it is now at a quarter of a percent, which is the long-term trend. Credit default swaps, which are indications of credit deterioration, were also improving. Meanwhile, every corporate bond that I bought in November ‘08 was up 10 to 15 points.

By investing in positions that would profit from spread widening, you risked about 10 basis points of further tightening, while the eventual widening in 2008 took the spread out to almost 300 basis points. This was in a market that was entirely liquid and allowed even a large manager to establish positions of sufficient size to be meaningful. Looking further back not too many years ago, the credit default swap (CDS) contracts on European sovereign credits with 10-year maturities were trading at 5 basis points. The loss from paying on a CDS is limited to the interest rate charged, which in this case was 5 basis points a year for 10 years. Yet many of these moved to levels over 80 basis points during 2008.

It was definitely mispriced in 1998, then more so in 1999. Sometimes these things take time. For our credit bubble trades, we received the first installment of our payoff two years after we first entered the positions. One of the reasons we had staying power is that we structured the trade through option-like structures. Even though credit default swaps are not technically options, they behave like options. You can lose the bulk of what you paid for CDS, but when spreads become really tight you don’t need to sell them because your downside becomes very limited and you still have all the upside. This is especially true for tranches. Figure 4.1 CDX Generic Credit Spreads, 2005-2008 SOURCE: Bloomberg.


pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, Bear Stearns, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, Glass-Steagall Act, index fund, invisible hand, junk bonds, light touch regulation, margin call, Michael Milken, moral hazard, Nick Leeson, Northern Rock, proprietary trading, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail, two and twenty, zero-sum game

Arranging finance would consist of preparing presentations to potential funders and securing financing (normally debt, but this can also include additional sources of equity finance) Bait and switch: investment banking practice of marketing a (senior) team of bankers to a client and then replacing them with more junior bankers once a mandate has been awarded Big cap: a quoted company with a large market capitalisation or share value Business ethics: an ethical understanding of business, applying moral philosophical principles to commerce Capital markets: collective term for debt and equity markets; reference to the businesses within an investment bank that manage activity in the capital markets Casino capitalism: term used to describe high-risk investment banking activities with an asymmetric risk profile Categorical imperative: the concept, developed by Immanuel Kant, of absolute moral rules CDS: credit default swap, a form of financial insurance against the risk of default of a named corporation CEO: chief executive officer, the most senior executive officer in a corporation viii Glossary ix Church Investors’ Group (CIG): a group of the investment arms of a number of church denominations, mainly from the UK and Ireland Code of Ethics: an investment bank’s statement of its requirements for ethical behaviour on the part of its employees Compensation: investment bankers’ remuneration or pay Compliance: structures within an investment bank to ensure adherence to applicable regulation and legislation Conflict of interest: situation where an investment bank has conflicting duties or incentives Corporate debt: loan made to a company Credit rating: an assessment of the creditworthiness of a corporation or legal entity given by a credit rating agency CSR: Corporate Social Responsibility DCF: discounted cash flow Debtor in Possession finance (DIP finance): secured loan facility made to a company protected from its creditors under chapter 11 of the US bankruptcy code Derivative: a security created out of an underlying security (such as an equity or a bond), which can then be traded separately Dharma: personal religious duty, in Hinduism and Buddhism Discounted cash flow valuation: the sum of: • the net present value (NPV) of the cash flows of a company over a defined timescale (normally 10 years); • the NPV of the terminal value of the company (which may be the price at which it could be sold after 10 years); and • the existing net debt of the company Distribution: the marketing of securities Dodd–Frank Act: the Dodd–Frank Wall Street Reform and Consumer Protection Act Downgrade: a reduction in the recommended action to take with regard to an equity; or a reduction in the credit rating of a corporation Duty-based ethics: ethical values based on deontological concepts EBITDA: Earnings Before Interest Tax Depreciation and Amortisation EIAG: the Ethical Investment Advisory Group of the Church of England Encyclical: official letter from the Pope to bishops, priests, lay people and people of goodwill x Glossary Enterprise value (EV): value of an enterprise derived from the sum of its financing, including equity, debt and any other invested capital, which should equate to its DCF value ERM: the European Exchange Rate Mechanism, an EU currency system predating the introduction of the euro ETR: effective tax rate EV:EBITDA: ratio used to value a company Exit: sale of an investment Free-ride: economic term for gaining a benefit from another’s actions Financial adviser: see Adviser Glass–Steagall: the 1933 Act that required a separation of investment and retail banking in the US Golden Rule: do to others as you would have them do to you Hedge fund: an investment fund with a specific investment mandate and an incentivised fee structure (see 2 and 20) High yield bond: debt sold to institutional investors that is not secured (on the company’s assets or cash-flows) HMRC: Her Majesty’s Revenue and Customs, the UK’s authority for collecting taxes Hold-out value: value derived from the contractual right to be able to agree or veto changes Ijara: Shariah finance structure for project finance Implicit Government guarantee: belief that a company or sector benefits from the likelihood of Government intervention in the event of crisis, despite the fact that no formal arrangements are in place Initial Public Offering (IPO): the initial sale of equity securities of a company to public market investors Insider dealing: trading in shares in order to profit from possessing confidential information Insider trading: see Insider dealing Integrated bank: a bank offering both commercial and investment banking services Integrated investment bank: an investment bank that is both active in capital markets and provides advisory services Internal rate of return (IRR): the annualised return on equity invested.

In normal market trading, it is common market practice to deal on the basis of well-understood assumptions, which do not need to be specified for each transaction – for example, when selling a share in a company, it is accepted that the share is equivalent to other shares normally traded, and that settlement terms are those under normal market rules. In this context, any difference from the norm needs to be disclosed in advance of a deal being agreed. Applying ethical standards to off-market trading The ethics of both on and off-market trading need to be considered as separate but related issues. For example, CDOs and CDSs (credit default swaps) have (to date) not been traded on recognised exchanges. Their position is therefore very different to that of equities traded on the NYSE or the London Stock Exchange. The ethical duty of an investment bank when trading off-market also depends on how it treats its market-related activities.

., 73 conflicts of interest in, 112–14 cardinal virtues, 37 Caritas in Veritate (Benedict), 6, 52 cash compensation, 132, 134 casino capitalism emergence of, 43 in investment banking, 3 speculative, 16, 93 categorical imperative, 34, 59, 69 Caterpillar, 48 Central Finance Board of the Methodist Church (CFB), 54, 59 chief executive officer (CEO), 116 Christianity, 52–4 Anglican Communion, 53 Methodist Church, 53 Roman Catholic Church, 53 Christian Old Testament, 34 Church Investors’ Group (CIG), 135 Church of England, 9, 53, 58 Citigroup, 19, 112 claiming credit, 134 clients confidential information, 120 conflicts of interest, 105–10 171 duty of care, 105 engagement letters, 122–3 fees, 115–18 financial restructuring, 119–20 hold-out value, 120–1 honesty, 101–5 margin-calls, 121 practical issues, 110–15 promises, 100–1 restructuring fees, 121–2 syndication, 118–22 truth, 101–5 Code of Ethics, 47–50, 147–51 for Goldman Sachs business principles, 46 in investment banking, 47–9 Revised, 47 collatoralised debt obligations (CDOs), 30, 42, 75 command economies, 13 commercial banking, 19–21, 25 communication within markets, 88 Companies Act 2006, 27 compensation cash, 132, 134 defined, 132 for employees, 135 internal issues on, 8 for junior bankers, 136 levels of, 132–3, 138 objectivity of, 144 political issues with, 6, 137 restrictions on, 10 competitors, 113 compliance corporate, 20 danger of, 20 frameworks for, 68, 146 regulatory, 18 requirements of, 6 confidential information, 120 conflicts of interest, 105–10, 158 with capital markets, 109–10 with corporate finance, 107–8 personal, 47 with pre-IPO financing, 110 with private equity, 110 172 Index conflicts of interest – continued reconciling, 68–70 of trusted advisers, 108–9 consequentialist ethics, 36–7, 42 corporate compliance, 20 Corporate/Compliance Social Responsibility (CSR), 7 corporate debt, 17 corporate entertainment, 128–9, 159 corporate finance, 107–8 Corporate Sustainability Committee, 152 Costa, Ken, 9 Cox, Christopher, 96–7 creative accounting, 12 credit crunch, 17 credit default swap (CDS), 71 credit downgrade, 17, 76 Credit Lyonnais, 12 creditors, restricted, 121 credit rating, 75–7 calculating, 76 inaccurate, 5 manipulating, 75, 156, 158 unreliability of, 17 credit rating agencies, 76 Crisis and Recovery (Williams), 53 culture, 46, 136, 151 customers, 69 Daily Telegraph, 84 Debtor in Possession finance (DIP finance), 80 debts bank, 82–3, 120 corporate, 17 junior, 118 rated, 77 senior, 118 sovereign, 17 deferred equity, 5 deferred shares, 133 Del Monte Foods Co., 107 deontological ethics, 34–6 stockholders, 41–2 trust, 40–1 derivative, 27, 30 dharma, 63–4 Dharma Indexes, 57 discounted cash flow (DCF), 27 discount rate, 27 discriminatory behaviour, 129–31 distribution, 15, 35, 66 Dodd–Frank Wall Street Reform and Consumer Protection Act, 25 dotcom crisis, 94 dotcom stocks, 17 Dow Jones, 55–6 downgrade credit, 17, 76 defined, 76 multi-notch, 17, 76 duties, see rights vs. duties duty-based ethics, 66–8 duty of care, 105 Dynegy, 8 Earnings Before Interest Tax Depreciation and Amortisation (EBITDA), 27 economic free-ride, 5, 21 economic reality, 137 effective tax rate (ETR), 140 emissions trading, 14 employees, compensation for, 135 Encyclical, 52 engagement letters, 122–3, 159 Enron, 8, 12, 17, 20, 76 enterprise value (EV), 27 entertainment adult, 56 corporate, 128–9, 159 sexist, 159 equity deferred, 5 private, 2–3, 12, 110 equity research, 88–9, 113–15 insider dealing and, 83–4 ethical behaviour, 38–9 Ethical Investment Advisory Group (EIAG), 53, 58 ethical investment banking, 145–7 ethical standards, 47 Index ethics consequentialist, 36–7, 42 deontological, 34–6 duty-based, 66–8 exceptions and, effects of, 89–90 financial crisis and, 4–8 in investment banking, 1 in moral philosophy, 1 performance and, 8–10 rights-based, 66–8 virtue, 37–8, 43–4 see also business ethics; Code of Ethics Ethics Helpline, 48 Ethics of Executive Remuneration: a Guide for Christian Investors, The, 135 European Commission, 89 European Exchange Rate Mechanism (ERM), 17 exceptions, 89 external regulations, 19, 31 fair dealing, 45 Fannie Mae, 43 Federal Home Loan Mortgage Corporation, 43 Federal National Mortgage Association, 43 fees, 115–18 advisory, 107, 116 restructuring of, 121–2 2 and 20, 13 fiduciary duties, 27–8 financial advisers, 109 Financial Conduct Authority (FCA), 26 financial crisis, business ethics during CDOs during, 90 CDSs during, 90 ethics during, 4–8, 12–34 investment banking and, necessity of, 14–15 market capitalism, 12–14 necessity of, 14–15 non-failure of, 21 positive impact of, 18 problems with, 15–17 reality of, 16 speculation in, 91 173 Financial Crisis Inquiry Commission, 76 Financial Policy Committee (FPC), 25 financial restructuring, 119–20 Financial Services Modernization Act, 19 Financial Stability Oversight Council, 25 firm price, 67 Four Noble Truths, 57 Freddie Mac, 43 free-ride defined, 26 economic, 5, 21 in investment banking, 24 FTSE, 55 Fuhs, William, 8 General Board of Pension and Health Benefits, 54, 59 German FlowTex, 12 Gift Aid, 141 Glass–Steagall Act, 19 Global Settlement, 113 golden parachute arrangements, 133 Golden Rule, 35, 150 Goldman Sachs, 7, 16, 45, 63 Business Principles, 45–6 charges against, 78 Code of Business Conduct and Ethics, 45, 68 Code of Ethics for, 47–8 Goldsmith, Lord, 27 government, 59 business ethics within, 60 guarantees of, 24 intervention by, 22–3 government bonds, 23 greed, 4–5 Green, Stephen, 8–9 gross revenues, 59 Hedge fund behaviour of, 12 failure of, 21 funds for, raising, 2 investment fund, as type of, 3 rules for, 133 174 Index Hennessy, Peter, 42 Her Majesty’s Revenue and Customs (HMRC), 140–1 high returns, 28, 110 Hinduism, 56–7 Hobbes, Thomas, 36 hold-out value, 120–1 honesty, see trust hospitality, 128–9 hot IPOs, 94 hot-stock IPOs, 94 HSBC, 9, 28, 152 Ijara, 55 implicit government guarantee, 22–3 Independent Commission on Banking, 25 inequitable rewards, 6 informal authorisation, 81, 98 Initial Public Offering (IPO), 7 of dotcom stocks, 17 hot, allocation of, 94 hot-stock, 94 insider dealings, 83–4, 155 equity research and, 83–4 ethics of, 66, 70 laws on, 84 legal prohibition on, 82 legal restrictions on, 10 legal status of, 82 legislation on, 74 restrictions on, 83 rules of, 82, 90 securities, 70 insider trading, 12 insolvency, 24–5 institutional greed, 4 integrated bank, 28 integrated investment banking, 2, 30, 67, 106, 108 interest payments, 59–60 interest rate, 60 internal ethical issues, 126–43 abuse of resources, 127–8 corporate entertainment, 128–9 discriminatory behaviour, 129–31 hospitality, 128–9 management behaviour, 131–2 remuneration, 132–9 tax, 139–41 internal review process, managing, 134 investment banking, 94 casino capitalism in, 3 Code of Ethics in, 47–9 commercial and, convergence of, 20–1 defined, 2 ethics in, 1 free-ride in, 24 integrated, 2, 30, 67, 108, 112 in market position, role of, 65–6 moral reasoning and, 38 necessity of, 14–15 non-failure of, 19–20 positive impact of, 18 recommendations in, 94–7 sector exclusions for, 58–9 investment banking adviser, 121 investment banking behaviours, 3 investment banking ethics committee, 151–3 investment bubbles, 95 investment fund, 3 investment grade bonds, 118 investment grade securities, 76 investment recommendations, 94 investments personal account, 128, 156 principal, 15, 28 proprietary, 29 IRS, 140 Islam, 54–5 Islamic banking, 6, 54–5 Jewish Scriptures, 34 Joint Advisory Committee on the Ethics of Investment (JACEI), 54 JP Morgan, 16 Judaism, 56 junior bankers, 139 junior debt, 118 junk bond, 118 “just war” approach, 38 Index Kant, Immanuel, 35, 69 karma, 57 Kerviel, Jérôme, 44, 80 Krishna, 57 Law Society, 19 Lazard International, 9 leading adviser, 41 Leeson, Nick, 12, 44, 81 legislative change, 25–6 Lehman Brothers, 5–6, 15, 21, 23, 31, 43, 76 lenders, 26, 131 lending, 59–60 leverage levels of, 25 over, 75, 80, 119 Levin, Carl, 17, 63–4, 68 light-touch regulations, 4 liquidity market, 95 orderly, 25 withdrawal of, 24 loan-to-own, 80 Locke, John, 34 London Inter-Bank Offered Rate (LIBOR), 23 London School of Economics, 43 London Stock Exchange, 65, 71, 84 long-term values, 147 Lords Grand Committee, 27 LTCM, 23 lying, 101 MacIntyre, Alasdair, 38 management behaviour, 131–2 margin-calls, 121 market abuse, 14, 70, 75, 86–8, 155 market announcements, 88 market behaviours, 74 market capitalism, 12–14 market communications, 88 market liquidity, 95 market maker defined, 65–7 investment bank as, 66 primary activities of, 65 175 market manipulation, 75 market position, role of, 104 market rate, 117 markets advisory, 73 capital, 73, 117–18, 158 communication within, 88 duties to support, 71–2 primary, 103 qualifying, 70, 82 secondary, 103 market trading, 41 Maxwell, Robert, 12 Meir, Asher, 56 mergers and acquisitions (M&As), 41, 79 Merkel, Angela, 93 Merrill Lynch, 8, 16 Methodism, 53 Methodist Central Finance Board, 59 Methodist Church, 54 Midrash, 56 Milken, Michael, 12 Mill, John Stuart, 36 Mirror Newspaper Group, 12 misleading behaviours, 86, 105 mis-selling of goods and services, 77–9, 155 modern capitalism, 54 moral-free zones, 31 moral hazard, 22, 70 moral philosophy, 1 moral reasoning, 38 moral relativism, 38–9, 49, 68 Morgan Stanley, 47 multi-notch downgrade, 17, 79 natural law, 34, 37 natural virtues, 37 necessity of investment banking, 14–15 New York Stock Exchange (NYSE), 65, 71 New York Times, 8 Noble Eightfold Path, 57 Nomura Group Code of Ethics, 47 normal market trading, 71 Northern Rock, 43 176 Index offer price, 64 off-market trading, 71–3, 90, 155 Olis, Jamie, 8 on-market trading, 70–1 oppressive regimes, 61 option value, 121 Orderly Liquidation Authority, 25 orderly liquidity, 25 out-of-pocket expenses, 127–8 over-leverage, 75, 80, 119, 158 overvalued securities, 155 patronage culture, 131, 142 Paulson, Henry M., 86 Paulson & Co., 78 “people-based” activity, 67 P:E ratio, 27 performance, 8–10 personal abuse, 159 personal account investments, 128, 156 personal account trading, 128 personal conflicts of interest, 45 pitching, 102, 159 Plato, 37 practical issues, 110–15 competitors, relationships with, 113 equity research, 113–15 pitching, 111 sell-side advisers, 111–13 pre-IPO financing, 110 prescriptive regulations, 31, 145 price tension, 79, 113 primary market, 103 prime-brokerage, 2 principal investment, 15, 28 private equity, 2–3, 12, 110 private trading, 94 Project Merlin, 133, 141 promises, 100–1 proprietary investment, 29 proprietary trading, 15, 25, 66, 150, 155 Prudential Regulation Authority (PRA), 26 public ownership, bonus pools in, 136–9 “pump and dump” strategy, 86 qualifying instruments, 70, 87 qualifying markets, 70, 82 quality-adjusted life year (QALY), 36 Quantitative Easing (QE), 23 Queen Elizabeth II, 42 Qu’ran, 54 rated debt, 77 rates attrition, 132 discount, 27 interest, 60 market, 117 tax, 140 rating agencies, 76 Rawls, John, 35, 136 recognised exchanges, 71 Regal Petroleum, 84 regulations banking, 16 compliance with, 28 external, 19, 31 light-touch, 4 prescriptive, 31, 145 regulatory changes and, 18–20 securities, 114 self, and impact on legislation, 19 regulatory compliance, 18 religion, business ethics in, 51–62 Buddhism, 56 Christianity, 52–4 Governments, 59 Hinduism, 56–7 interest payments, 59–60 Islam, 54–5 Judaism, 56 lending, 59–60 thresholds, 60 usury, 59–60 remuneration, 132–9 bonus pools in public ownership and, 136–9 claiming credit, 134 ethical issues with, 142–3 internal review process, managing, 134 1 Timothy 6:10, 135–6 Index research, 156 resources, abuse of, 127–8 restricted creditors, 120 restructuring of fees, 121–2 financial, 119–20 syndication and, 118–22 retail banks, 16 returns, 28, 156 Revised Code of Ethics, 47 right livelihood, 57 rights-based ethics, 66–8 rights vs. duties advisory vs. trading/capital markets, 73 conflict between, reconciling, 68–70 duty-based ethics, 66–8 off-market trading, ethical standards to, 71–2 on-market trading, ethical standards in, 70–1 opposing views of, 63–74 reconciling conflict between, 68–70 rights-based ethics, 66–8 Roman Catholic Church, 52 Royal Dutch Shell, 85 Sarbanes–Oxley Act, 20 Schwarzman, Stephen, 20 scope of ethical issues, 7–8 secondary market, 103 sector exclusions for investment banking, 58–9 securities investment grade, 76 issuing, 103–5 overvalued, 155 Securities and Exchange Commission (SEC), 7, 16 Goldman Sachs, charges against, 78 rating agencies, review by, 77 short-selling, review of, 96–7 securities insider dealing, 70 securities mis-selling, 77–9 securities regulations, 114 self-regulation, 19 sell recommendation, 115 177 sell-side advisers, 107, 111–13 Senate Permanent Subcommittee on Investigations, 46 senior debt, 118 sexist entertainment, 159 shareholders, 27–9 shares, deferred, 133 Shariah finance, 55 short-selling, 94–7, 154–5 Smith, Adam, 14, 35–6 social cohesion, 53 socially responsible investment (SRI), 56 Société Générale, 44, 80 solidarity, 53 Soros, George, 17 South Sea Bubble, 90 sovereign debt, 17 speculation, 91–4, 155 in financial crisis, 93 traditional views of, 91–3 speculative casino capitalism, 16, 91 spread, 21 stabilisation, 89 stock allocation, 94–7 stockholders, 41–2 stocks, dotcom, 17 Strange, Susan, 43 strategic issues with business ethics, 30–1 syndication, 119 and restructuring, 118–22 systemic risk, 24–5 Takeover Panel, 109 Talmud, 56 taxes, 139–41 tax optimisation, 158 tax rates, 140 tax structuring, 140 Terra Firma Capital Partners, 79, 112 Theory of Moral Sentiments, The (Smith), 14 3iG FCI Practitioners’ Report, 51 thresholds, 60 1 Timothy 6:10, 135–6 178 Index too big to fail concept, 21–7 ethical duties, and implicit Government guarantee, 22–3 ethical implications of, 26–7 in government, 22–3 insolvency, systemic risk and, 24–5 legislative change, 25–6 Lehman, failure of, 23 systemic risk, 24–5 toxic financial products, 5 trading abusive, 93 emissions, 14 insider, 12 market, 41 normal market, 71 off-market, 71–83, 90, 155 on-market, 70–1 personal account, 128 private, 94 proprietary, 15, 25, 66, 150, 155 unauthorised, 7 “trash and cash” strategy, 86 Travellers, 19 Treasury Select Committee, 26 Trinity Church, 53 Trouble with Markets, The (Bootle), 4 trust, 40, 53 trusted adviser, 108–9, 125 truth, 101–5 bait and switch, 102–3 misleading vs. lying, 101 securities, issuing, 103–5 2 and 20 fee, 13 UBS Investment Bank, 9 unauthorised trading, 7, 80–1, 155 unethical behaviour, 68 UK Alternative Investment Market, 89 UK Business Growth Fund, 133 UK Code of Practice, 141 UK Independent Banking Commission, 4, 22 United Methodist Church, 54, 59 United Methodist Investment Strategy Statement, 59 US Federal Reserve, 24, 25 US Financial Crisis Inquiry Commission, 4 US Open, 126 US Senate Permanent Subcommittee on Investigations, 64, 73 US Treasury Department, 132 universal banks, 2, 21, 28, 67 untoward movement, 85 usury, 59–60 utilitarian, 84 utilitarian ethics, 49, 84, 139 values, 9, 46, 119–21, 148 Vedanta, 57 victimless crime, 82 virtue ethics, 37–8, 43–4 virtues, 9, 34 virtuous behaviours, 37 Vishnu, 57 Volcker, Paul, 25 Volcker Rule, 2, 25 voting shareholders, 29 Wall Street, 12, 19, 53 Wall Street Journal, 20 Wealth of Nations, The (Smith), 14 Wesley, John, 53 Wharf, Canary, 18 Williams, Rowan, 53 Wimbledon, 127 WorldCom, 12, 17, 20, 76 write-off, 80 zakat, 55 zero-sum games, 118–22


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

airline deregulation, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, bond market vigilante , Bretton Woods, business cycle, 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, Glass-Steagall Act, Gordon Gekko, high-speed rail, Hyman Minsky, income inequality, inflation targeting, invisible hand, it is difficult to get a man to understand something, when his salary depends on his not understanding it, It's morning again in America, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Joseph Schumpeter, junk bonds, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, low skilled workers, Mark Zuckerberg, Minsky moment, Money creation, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Savings and loan crisis, Upton Sinclair, We are all Keynesians now, We are the 99%, working poor, Works Progress Administration

Before taking on the full outlines of a recovery strategy, I want to spend the next few chapters delving more deeply into how we got into this depression in the first place. CHAPTER FOUR BANKERS GONE WILD [R]ecent regulatory reform, coupled with innovative technologies, has stimulated the development of financial products, such as asset-backed securities, collateral loan obligations, and credit default swaps, that facilitate the dispersion of risk. . . . These increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago. —Alan Greenspan, October 12, 2005 IN 2005 ALAN GREENSPAN was still regarded as the Maestro, a source of oracular economic wisdom.

We now know that the sale of “asset-backed securities”—basically, the ability of banks to sell bunches of mortgages and other loans to poorly informed investors, instead of keeping them on their own books—encouraged reckless lending. Collateralized loan obligations—created by slicing, dicing, and pureeing bad debt—initially received AAA ratings, again sucking in gullible investors, but as soon as things went bad, these assets came to be known, routinely, as “toxic waste.” And credit default swaps helped banks pretend that their investments were safe because someone else had insured them against losses; when things went wrong, it became obvious that the insurers, AIG in particular, didn’t have anything like enough money to make good on their promises. The thing is, Greenspan wasn’t alone in his delusions.

., 200 conservatives: anti-government ideology of, 66 anti-Keynesianism of, 93–96, 106–8, 110–11 Big Lie of 2008 financial crisis espoused by, 64–66, 100 free market ideology of, 66 Consumer Financial Protection Bureau, 84 Consumer Price Index (CPI), 156–57, 159, 160 consumer spending, 24, 26, 30, 32, 33, 39, 41, 113, 136 effect of government spending on, 39 household debt and, 45, 47, 126, 146 income inequality and, 83 in 2008 financial crisis, 117 conventional wisdom, lessons of Great Depression ignored in, xi corporations, 30 see also business investment, slump in; executive compensation correlation, causation vs., 83, 198, 232–33, 237 Cowen, Brian, 88 credit booms, 65 credit crunches: of 2008, 41, 110, 113, 117 Great Depression and, 110 credit default swaps, 54, 55 credit expansion, 154 currency, manipulation of, 221 currency, national: devaluation of, 169 disadvantages of, 168–69, 170–71 flexibility of, 169–73, 179 optimum currency area and, 171–72 see also euro Dakotas, high employment in, 37 debt, 4, 34, 131 deregulation and, 50 high levels of, 34, 45, 46, 49–50, 51 self-reinforcing downward spiral in, 46, 48, 49–50 usefulness of, 43 see also deficits; government debt; household debt; private debt “Debt-Deflation Theory of Great Depressions, The” (Fisher), 45 debt relief, 147 defense industry, 236 defense spending, 35, 38–39, 148, 234–35, 235, 236 deficits, 130–49, 151, 202, 238 Alesina/Ardagna study of, 196–99 depressions and, 135–36, 137 exaggerated fear of, 131–32, 212 job creation vs., 131, 143, 149, 206–7, 238 monetary policy and, 135 see also debt deflation, 152, 188 debt and, 45, 49, 163 De Grauwe, Paul, 182–83 deleveraging, 41, 147 paradox of, 45–46, 52 demand, 24–34 in babysitting co-op example, 29–30 inadequate levels of, 25, 29–30, 34, 38, 47, 93, 101–2, 118, 136, 148 spending and, 24–26, 29, 47, 118 unemployment and, 33, 47 see also supply and demand Democracy Corps, 8 Democrats, Democratic Party, 2012 election and, 226, 227–28 Denmark, 184 EEC joined by, 167 depression of 2008–, ix–xii, 209–11 business investment and, 16, 33 debt levels and, 4, 34, 47 democratic values at risk in, 19 economists’ role in, 100–101, 108 education and, 16 in Europe, see Europe, debt crisis in housing sector and, 33, 47 income inequality and, 85, 89–90 inflation rate in, 151–52, 156–57, 159–61, 189, 227 infrastructure investment and, 16–17 lack of demand in, 47 liquidity trap in, 32–34, 38, 51, 136, 155, 163 long-term effects of, 15–17 manufacturing capacity loss in, 16 as morality play, 23, 207, 219 private sector spending and, 33, 47, 211–12 unemployment in, x, 5–12, 24, 110, 117, 119, 210, 212 see also financial crisis of 2008–09; recovery, from depression of 2008– depressions, 27 disproportion between cause and effect in, 22–23, 30–31 government spending and, 135–36, 137, 231 Keynes’s definition of, x Schumpeter on, 204–5 see also Great Depression; recessions deregulation, financial, 54, 56, 67, 85, 114 under Carter, 61 under Clinton, 62 income inequality and, 72–75, 74, 81, 82, 89 under Reagan, 50, 60–61, 62, 67–68 rightward political shift and, 83 supposed benefits of, 69–70, 72–73, 86 derivatives, 98 see also specific financial instruments devaluation, 169, 180–81 disinflation, 159 dot-com bubble, 14, 198 Draghi, Mario, 186 earned-income tax credit, 120 econometrics, 233 economic output, see gross domestic product Economics (Samuelson), 93 economics, economists: academic sociology and, 92, 96, 103 Austrian school of, 151 complacency of, 55 disproportion between cause and effect in, 22–23, 30–31 ignorance of, 106–8 influence of financial elite on, 96 Keynesian, see Keynesian economics laissez-faire, 94, 101 lessons of Great Depression ignored by, xi, 92, 108 liquidationist school of, 204–5 monetarist, 101 as morality play, 23, 207, 219 renewed appreciation of past thinking in, 42 research in, see research, economic Ricardian, 205–6 see also macroeconomics “Economics of Happiness, The” (Bernanke), 5 economy, U.S.: effect of austerity programs on, 51, 213 election outcomes and, 225–26 postwar boom in, 50, 70, 149 size of, 121, 122 supposed structural defects in, 35–36 see also global economy education: austerity policies and, 143, 213–14 depression of 2008– and, 16 income inequality and, 75–76, 89 inequality in, 84 teachers’ salaries in, 72, 76, 148 efficient-markets hypothesis, 97–99, 100, 101, 103–4 Eggertsson, Gauti, 52 Eichengreen, Barry, 236 elections, U.S.: economic growth and, 225–26 of 2012, 226 emergency aid, 119–20, 120, 144, 216 environmental regulation, 221 Essays in Positive Economics (Friedman), 170 euro, 166 benefits of, 168–69, 170–71 creation of, 174 economic flexibility constrained by, 18, 169–73, 179, 184 fixing problems of, 184–87 investor confidence and, 174 liquidity and, 182–84, 185 trade imbalances and, 175, 175 as vulnerable to panics, 182–84, 186 wages and, 174–75 Europe: capital flow in, 169, 174, 180 common currency of, see euro creditor nations of, 46 debtor nations of, 4, 45, 46, 139 democracy and unity in, 184–85 fiscal integration lacking in, 171, 172–73, 176, 179 GDP in, 17 health care in, 18 inflation and, 185, 186 labor mobility lacking in, 171–72, 173, 179 1930s arms race in, 236 social safety nets in, 18 unemployment in, 4, 17, 18, 176, 229, 236 Europe, debt crisis in, x, 4, 40, 45, 46, 138, 140–41, 166–87 austerity programs in, 46, 144, 185, 186, 188, 190 budget deficits and, 177 fiscal irresponsibility as supposed cause of (Big Delusion), 177–79, 187 housing bubbles and, 65, 169, 172, 174, 176 interest rates in, 174, 176, 182–84, 190 liquidity fears and, 182–84 recovery from, 184–87 unequal impact of, 17–18 wages in, 164–65, 169–70, 174–75 European Central Bank, 46, 183 Big Delusion and, 179 inflation and, 161, 180 interest rates and, 190, 202–3 monetary policy of, 180, 185, 186 European Coal and Steel Community, 167 European Economic Community (EEC), 167–68 European Union, 172 exchange rates, fixed vs. flexible, 169–73 executive compensation, 78–79 “outrage constraint” on, 81–82, 83 expansionary austerity, 144, 196–99 expenditure cascades, 84 Fama, Eugene, 69–70, 73, 97, 100, 106 Fannie Mae, 64, 65–66, 100, 172, 220–21 Farrell, Henry, 100, 192 Federal Deposit Insurance Corporation (FDIC), 59, 172 Federal Housing Finance Agency, 221 Federal Reserve, 42, 103 aggressive action needed from, 216–19 creation of, 59 foreign exchange intervention and, 217 inflation and, 161, 217, 219, 227 interest rates and, 33–34, 93, 105, 117, 134, 135, 143, 151, 189–90, 193, 215, 216–17 as lender of last resort, 59 LTCM crisis and, 69 money supply controlled by, 31, 32, 33, 105, 151, 153, 155, 157, 183 recessions and, 105 recovery and, 216–19 in 2008 financial crisis, 104, 106, 116 unconventional asset purchases by, 217 Federal Reserve Bank of Boston, 47–48 Feinberg, Larry, 72 Ferguson, Niall, 135–36, 139, 160 Fianna Fáil, 88 filibusters, 123 financial crisis of 2008–09, ix, x, 40, 41, 69, 72, 99, 104, 111–16 Bernanke on, 3–4 Big Lie of, 64–66, 100, 177 capital ratios and, 59 credit crunch in, 41, 110, 113, 117 deleveraging in, 147 Federal Reserve and, 104, 106 income inequality and, 82, 83 leverage in, 44–46, 63 panics in, 4, 63, 111, 155 real GDP in, 13 see also depression of 2008–; Europe, debt crisis in financial elite: political influence of, 63, 77–78, 85–90 Republican ideology and, 88–89 top 0.01 percent in, 75, 76 top 0.1 percent in, 75, 76, 77, 96 top 1 percent in, 74–75, 74, 76–77, 96 see also income inequality financial industry, see banks, banking industry financial instability hypothesis, 43–44 Financial Times, 95, 100, 203–4 Finland, 184 fiscal integration, 171, 172–73, 176 Fisher, Irving, 22, 42, 44–46, 48, 49, 52, 163 flexibility: currency and, 18, 169–73 paradox of, 52–53 Flip This House (TV show), 112 Florida, 111 food stamps, 120, 144 Ford, John, 56 foreclosures, 45, 127–28 foreign exchange markets, 217 foreign trade, 221 Fox News, 134 Frank, Robert, 84 Freddie Mac, 64, 65–66, 100, 172, 220–21 free trade, 167 Friedman, Milton, 96, 101, 181, 205 on causes of Great Depression, 105–6 Gabriel, Peter, 20 Gagnon, Joseph, 219, 221 Gardiner, Chance (char.), 3 Garn–St.


pages: 224 words: 13,238

Electronic and Algorithmic Trading Technology: The Complete Guide by Kendall Kim

algorithmic trading, automated trading system, backtesting, Bear Stearns, business logic, commoditize, computerized trading, corporate governance, Credit Default Swap, diversification, en.wikipedia.org, family office, financial engineering, financial innovation, fixed income, index arbitrage, index fund, interest rate swap, linked data, market fragmentation, money market fund, natural language processing, proprietary trading, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, short selling, statistical arbitrage, Steven Levy, transaction costs, yield curve

Electronic access to stocks has been more prevalent than for futures and options, but these asset classes are catching up particularly in foreign exchange. A growing number of trading platforms now support trading in over-the-counter (OTC) derivatives. According to the Bond Market Association in 2004, 25 platforms now allow users to execute transactions in 111 112 Electronic and Algorithmic Trading Technology interest rate swaps, credit default swaps, options, futures, and other derivative products. This is nearly double the number of platforms that supported derivatives trading in 2003. The equities markets will execute trades using some sort of algorithmic model, but the same will most likely be true for other products such as futures, options, and foreign exchange.

By 2006, the total notional outstanding credit derivatives market is expected to reach US $8.5–9.0 trillion. One of the most interesting developments in E-bond trading over the past 18 months has occurred in credit markets. MarketAxess, the unquestioned market leader in high-grade corporate debt, recently rolled out the first multi-dealer-to-client trading platform for credit default swaps. MarketAxess is now facing increased competition from Thomson TradeWeb. U.S. corporate debt outstanding currently stands at US $5.0 trillion, accounting for 20% of all U.S. fixed-income securities outstanding by notional amount. Corporates, however, remain one of the most illiquid segments of the U.S. bond market with trading volume as of Q2 2005 at just US $20.9 billion average trading volume per day representing over 2% of all fixed-income activity.

Smaller firms gained market share and broker-dealers have lost revenue, as all traders were able to share the same prices. The transparency created by TRACE has squeezed soft dollar revenue for the sell side, causing broker-dealers to cut back on bond-research departments. At the same time, income is booming from securities that are derived from corporate bonds. The market for credit default swaps has more than doubled in size in the past year to cover $26 trillion of securities, according to the International Swaps and Derivatives Association (ISDA). Swaps allow traders to bet on creditworthiness of companies without actually owning the underlying bonds. In March 2006, the NYSE began seeking approval to start electronic trading of 4,000 corporate bonds. 11.6 Foreign Exchange Markets Electronic trading has had an important presence in interdealer spot foreign exchange market for over a decade.


pages: 202 words: 66,742

The Payoff by Jeff Connaughton

Alan Greenspan, algorithmic trading, bank run, banking crisis, Bear Stearns, Bernie Madoff, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, desegregation, Flash crash, Glass-Steagall Act, locking in a profit, London Interbank Offered Rate, London Whale, Long Term Capital Management, naked short selling, Neil Kinnock, plutocrats, Ponzi scheme, proprietary trading, risk tolerance, Robert Bork, Savings and loan crisis, short selling, Silicon Valley, TED Talk, too big to fail, two-sided market, uptick rule, young professional

We knew that policymakers had pushed banks and quasi-agencies like Fannie Mae and Freddie Mac to make housing affordable; that subprime mortgages were pooled and securitized; that the rating agencies blew it and gave these pools AAA ratings; and that banks were leveraging thirty- and fifty-to-one and buying up these soon-to-be-toxic assets. Credit default swaps were being written and traded to hedge these risks without any understanding of who was writing how much and without any regulation or oversight. As Ted liked to say, Washington’s decades-long infatuation with deregulation had pulled all the referees off the football field. Then, the executives trusted to act in the best interests of shareholders had convinced themselves, against all reason and instinct, that they could engineer risk out of the system.

On March 2, AIG had reported it had recorded a $61 billion loss in the fourth quarter of 2008. The next day, Treasury had announced an additional $30 billion in assistance to AIG, on top of the $150 billion it had already extended. Ted and others were wondering, “How could AIG lose $61 billion?” Bernanke and Geithner simply didn’t know who held the credit-default swaps. There were similar problems in England, in Iceland, and at the Bank of Scotland. Ted said: “It was like a friend of mine who has this oak tree out in front of his house, a gigantic tree, and the tree is surrounded by a driveway. The roots were coming up and knocking out the driveway. But when they tried to put a new driveway in, they didn’t know where the roots went.

They also began to host meetings of progressive Democratic senators who thought Dodd’s bill was too weak. Dick Durbin (D-IL) tried to coordinate the input of senators who were dissatisfied with the Dodd bill. Al Franken (D-MN) had developed an amendment on credit rating agencies and conflicts of interest. Dorgan began pushing for a ban on naked credit default swaps (when speculators take a short position on a bond without owning the bond itself). Blanche Lincoln (D-AR), the chair of the Agriculture Committee, which has jurisdiction over derivatives (futures markets originally existed to hedge commodities, especially agricultural commodities), had first worked out a compromise with the committee’s ranking Republican, Senator Saxby Chambliss (R-GA).


pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

Alan Greenspan, asset allocation, buy and hold, collateralized debt obligation, commoditize, compensation consultant, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Glass-Steagall Act, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, John Bogle, junk bonds, low interest rates, market bubble, market clearing, military-industrial complex, money market fund, mortgage debt, new economy, Occupy movement, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, Ponzi scheme, post-work, principal–agent problem, profit motive, proprietary trading, prudent man rule, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, seminal paper, shareholder value, short selling, South Sea Bubble, statistical arbitrage, stock buybacks, survivorship bias, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, Vanguard fund, William of Occam, zero-sum game

We also have credit default swaps, which are essentially bets on whether a corporation can meet the interest payments on its bonds. These credit default swaps alone had a notional value of $33 trillion. Add to this total a slew of other derivatives, whose notional value as 2012 began totaled a cool $708 trillion. By contrast, for what it’s worth, the aggregate capitalization of the world’s stock and bond markets is about $150 trillion, less than one-fourth as much. Is this a great financial system . . . or what! Much of the trading in derivatives—including stock index futures, credit default swaps, and commodities—reflects risk aversion and hedging.

However high the levels of mutual fund trading in stocks have soared relative to traditional norms, they pale by comparison to the trading volumes of hedge funds, to say nothing of the levels of trading in exotic securities such as interest rate swaps, collateralized debt obligations, derivatives such as futures on commodities, stock indexes, stocks, and even bets on whether a given company will go into bankruptcy (credit default swaps). The aggregate nominal value of these instruments, as I noted in Chapter 1, now exceeds $700 trillion. Yes, what we have come to describe as speculation has clearly come to play the starring role in our nation’s huge financial market colossus, with investment taking only a supporting role, if not a cameo role.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

"World Economic Forum" Davos, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, availability heuristic, bank run, behavioural economics, Black Swan, business cycle, Cass Sunstein, classic study, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, iterative process, Kenneth Arrow, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, money market fund, moral hazard, mortgage debt, Oklahoma City bombing, Pareto efficiency, Paul Samuelson, placebo effect, precautionary principle, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, social discount rate, source of truth, statistical model, stochastic process, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning, Vilfredo Pareto

In addition, the chartering laws have imposed relatively high capital requirements on the firms. Quite irrationally, in recent years, insurance regulators have also allowed municipal bond insurers to provide coverage against default risks on subprime mortgage securitizations and related collateralized debt obligations (CDOs) and credit default swaps (CDSs). It is unclear why the insurance regulators allowed the insurers to mix the relatively limited credit risks on municipal bonds with the high risks on subprime mortgages and their derivatives, since this clearly violated the monoline principle on which the insurers were chartered. Worse yet, losses on the subprime mortgage derivatives now threaten the solvency of the municipal bond insurers.9 The failure of these firms would have significant negative externalities in two regards.

However, the shortage of capital in banks also resulted in very high shadow rates (usually not reported to the general public) for use of intermediary capital. This outcome is represented in Figure 20.6 by the black line, which delineates the bond-CDS basis—that is, the difference between the spreads on corporate bonds and the derivative contracts that insure them (i.e., credit default swaps, or CDS).3 Why the bond-CDS spread, and what does it tell us? CDS contracts are relatively liquidly traded contracts that measure the credit risk on bonds. In theory, this basis, the difference between bond and CDS yields, should be near zero, since the cost of insurance against a bond’s default should be about the same as the additional yield demanded by bondholders to compensate them against this same default.

Chapter 20 Froot: Toward Financial Stability 1 I modify markets with dealer-centric to indicate the many dealer-intermediated markets that exist, and to contrast them from exchange-centric markets. 2 The London Interbank Offered Rate (LIBOR) is a daily reference rate based on the interest rates at which banks borrow funds from other banks in the London wholesale money market (or interbank market). Overnight index swaps (OIS) are instruments that allow financial institutions to swap the interest rates they are paying without having to refinance or change the terms of the loans they have taken from other financial institutions. 3 A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults. CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the specified events occur.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"there is no alternative" (TINA), accounting loophole / creative accounting, Alan Greenspan, balance sheet recession, bank run, banking crisis, Bear Stearns, Black Swan, book value, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Greenspan put, Growth in a Time of Debt, high-speed rail, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, low interest rates, market bubble, market clearing, Martin Wolf, Minsky moment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, Phillips curve, Post-Keynesian economics, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Solow, savings glut, short selling, structural adjustment programs, tail risk, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, Two Sigma, unorthodox policies, value at risk, Washington Consensus, zero-sum game

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

Note here that this has nothing to do either with the state, which now gets the blame for the debt stemming from this crisis—a wonderful confusion of cause and effect—or with the individual moral failings of the bankers.10 You can blame regulators for being lax or negligent and politicians for caving to banking interests all you like, but this was a quintessentially private-sector crisis, and it was precisely how you get a multi-billion-dollar financial panic out of a bunch of defaulting mortgages. But it was not yet sufficient to cause a global crisis. To get there, you have to understand how the structure of these mortgage securities combined with unbacked insurance policies called “credit default swaps” (CDSs) to produce a “correlation bomb” that spread the repo market crisis into the global banking system. Again, this had nothing to do with states and their supposedly profligate spending habits and everything to do with weaknesses internal to the private sector. The Amplifier: Derivatives It’s hard to describe derivatives in the abstract.

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


pages: 367 words: 110,161

The Bond King: How One Man Made a Market, Built an Empire, and Lost It All by Mary Childs

Alan Greenspan, asset allocation, asset-backed security, bank run, Bear Stearns, beat the dealer, break the buck, buy and hold, Carl Icahn, collateralized debt obligation, commodity trading advisor, coronavirus, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, diversification, diversified portfolio, Edward Thorp, financial innovation, fixed income, global macro, high net worth, hiring and firing, housing crisis, Hyman Minsky, index card, index fund, interest rate swap, junk bonds, Kevin Roose, low interest rates, Marc Andreessen, Minsky moment, money market fund, mortgage debt, Myron Scholes, NetJets, Northern Rock, off-the-grid, pneumatic tube, Ponzi scheme, price mechanism, quantitative easing, Robert Shiller, Savings and loan crisis, skunkworks, sovereign wealth fund, stem cell, Steve Jobs, stocks for the long run, The Great Moderation, too big to fail, Vanguard fund, yield curve

Introduction In November 2013, I made a big, dumb mistake. I’d worked for weeks on this one story about one of the biggest money managers on the planet, Pacific Investment Management Company (aka Pimco), amassing a huge bet in the market I covered. I’d cajoled sources into telling me about the trade in the opaque credit-default swap market, I’d tabulated data, I’d compulsively fact-checked. I had run it by the Pimco communications guy so many times he seemed extremely tired of hearing from me. The night before it ran, I finished my last paranoid fact-check, and my editor queued up the story to be published overnight. In the morning, I got a weird email from my colleague Cordell, full of exclamation marks yet seeming to apologize for something?

Many hedge funders and financial personalities made similar arguments, warning about inflation, insisting that the Fed was creating more money and that, invariably, the greater the supply of money, the less that money would be worth. This was the way it had always been. A more immediate threat was brewing: blame for the financial crisis was still searching for a home. Homeowners blamed Wall Street; Wall Street blamed the government; the government blamed credit-default swaps. But almost everyone agreed that the credit rating firms had missed it. Blind to the risks, they had gamely competed when Wall Street banks went rating shopping for the highest-possible grade and had slapped perfect ratings on rotten CDOs. They started downgrading only when the money was already gone.

Verizon ended up with about $100 billion in interest for $49 billion in debt. After the chaos cleared, Pimco had taken home about $8 billion of the deal, and BlackRock about $5 billion. The bonds surged immediately, handing those two firms profits on a massive scale. With the Fed still on hold, Gross had more time to take it at its word. He built a huge bet in credit default swaps, wagers on the future health of company credit, by selling the CDS index (CDX), a basket of contracts on corporate issuers. Gross got paid a premium in exchange for taking on the risk that one or some of the 125 companies in the index might fail to meet its debt obligations. If that didn’t happen—if nobody defaulted—his bet would make money.


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

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

The bottom tranche yielded the * Defaults in one area were presumed to be uncorrelated with defaults in another, which ceases to be the case in the event of a national housing market crash. 323 M ac roe c onom ic s i n t h e C r a s h a n d A f t e r , 2 0 0 7 – highest return, but it would only be paid what was left over from paying the other tranches. Credit Default Swaps (CDSs) The development of credit default swaps (CDSs) massively increased the scope and destructive power of securitization. CDSs are similar to insurance policies in that one party (the buyer) pays a regular fee to another (the seller) who will pay out in the case of the loan defaulting. As such, CDS contracts were an additional way of removing risky assets from banks’ balance sheets and freeing up capital to be used elsewhere.

Greek Prime Minister Papandreou compared purchases of naked CDSs to buying fire insurance on a stranger’s house and hoping that it will go up flames; their purchase incentivized financial arson. The reason is that because naked credit default swaps are ‘synthetic’ – meaning that there is no underlying asset on the institution’s books – there is no limit to how many can be sold. In addition, these too can be securitized; e.g. the ‘Abacus’ CDO consisted of a portfolio of credit default swaps. As a result, in 2007, the gross value of CDSs far exceeded the ‘real’ value of the bonds that backed them: ‘At the peak of the CDS market in mid-2007, there was at least $60 trillion of CDS outstanding . . .

This is what happened to the insurer AIG: it had to be bailed out for $182 billion by the Federal Reserve in 2008 due to not having enough capital to survive the wave of claims being made against it. The fact that the insurers could themselves default meant that the banks had not effectively offloaded their risk via the use of credit default swaps. Special Purpose Vehicles (SPVs) Banks set up legal entities called Special Purpose Vehicles (SPVs) to hold risky assets off their balance sheets. Legally, the SPV, not the bank, was the issuer of the securities. The idea was that, once a bank transferred its risky assets to its SPV, it could effectively count them as off its balance sheet and take more risk – e.g. issue more loans – without breaching leverage rules.


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

air freight, Alan Greenspan, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, 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, currency risk, 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, foreign exchange controls, forward guidance, Fractional reserve banking, full employment, Glass-Steagall Act, 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, Les Trente Glorieuses, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, Minsky moment, Modern Monetary Theory, Money creation, 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, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, subprime mortgage crisis, tail risk, 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, Tyler Cowen: Great Stagnation, vertical integration, very high income, winner-take-all economy, zero-sum game

Taylor, ‘The Financial Crisis and the Policy Response: An Empirical Analysis of What Went Wrong’, National Bureau of Economic Research Working Paper 14631, January 2009, www.nber.org. 33. Ferguson and Johnson note that ‘prices of credit default swaps on the four largest American banks, controlling some 40 per cent of all deposits, for example, all rose like rockets before falling back when Paulson, Bernanke and Geithner reversed course two days later and once again embraced single payer by bailing out AIG. The same holds for credit default swaps of Goldman Sachs and Morgan Stanley, the two most important remaining investment banks … Another excellent general indicator of stress, the “option adjusted” spread on broad investment grade debt – what banks had to pay to raise new capital – also shows a sharp rise as Lehman gave up the ghost.’

This proved what investors (and critics) had long believed, namely, that the US government stood behind the vast borrowings of these allegedly private companies ($5,400bn in outstanding liabilities at the time of the rescue).14 Yet it then, controversially, allowed (or felt obliged to allow) Lehman Brothers to go bankrupt on 15 September.15 Merrill Lynch was sold to Bank of America for $50bn, or $29 a share, on the same day – a big premium above its share price of $17, but a reduction of 61 per cent on its share price of $75 a year before and 70 per cent from its pre-crisis peak.16 Then, promptly after refusing to rescue Lehman, the US government saved the insurance giant, AIG, taking a 79.9 per cent equity stake and lending it $85bn on 16 September.17 In his book, Mr Paulson argues that the decisions were not inconsistent, because, ‘Unlike with Lehman, the Fed felt it could make a loan to help AIG because we were dealing with a liquidity, not a capital, problem.’18 If the Fed really believed that, it was soon proved wrong. A more likely reason is that Mr Paulson believed (wrongly, as it turned out) that the markets would take Lehman’s failure in their stride, but was sure the same would not be true for AIG, given its role as a seller of ‘credit default swaps’ – insurance contracts on bonds, including the securitized assets that had become increasingly toxic. Then, on 17 September, one of the money-market funds managed by Reserve Management Corporation (a manager of mutual funds) ‘broke the buck’ – that is, could no longer promise to redeem money invested in the fund at par (or dollar for dollar) – because of its exposure to loss-making loans to Lehman.

It converted conventional loans into tradeable asset-backed securities and CDOs (versions of asset-backed securities in which the repayments were ‘tranched’ or divided, with the highly rated paper receiving the first payments and the lower-rated paper receiving the later payments, if any). It created instruments that insured such assets, known as credit-default swaps, often deemed an adequate substitute for the capital required by regulators, even though they did not in any way increase the capital in the system. It led to the dissolution of the boundary between retail banking and wholesale markets. It created intense and non-transparent networks of financial relationships among institutions, both vertically and horizontally, in place of the vertically integrated silos characteristic of more traditional banking.


pages: 270 words: 73,485

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

3D printing, Alan Greenspan, bank run, banking crisis, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Glass-Steagall Act, 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, low interest rates, market bubble, market clearing, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, Phillips curve, Post-Keynesian economics, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, subprime mortgage crisis, 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

They were also able to borrow on the commercial market and interest rates on sovereign debt converged to the low favorable rate Germany was paying. But once the crisis broke and liquidity became short, many eurozone countries found that the markets treated their debt as no better than that of any corporation. The yield on bonds of Greece, Italy, Spain, Ireland and Portugal went up sharply, as did credit default swaps, which were bets on likely default. Sovereign debt was no longer immune from market attack. Debt was not just an intrageneration game between citizens and rentiers, but between a country and global credit markets. Five years on, the problems facing the eurozone countries remain. If the problem does not arise from oversaving and has no Keynesian solution, what solution can it have?

The market economy was globalized in other ways as well. The WTO was established, capital flows to developing economies accelerated and many governments began to borrow on global financial markets. Activities on the financial front exploded as many new stock markets opened up and many new instruments were innovated: credit default swaps (CDS) and collateralized debt obligations (CDO) being lately the most notorious. Much of this was the consequence of the pioneering work of Black and Scholes on options. Hedge funds and many other institutions of what became known as the shadow banking structure also proliferated. Transactions on the forex markets reached a level of trillions of dollars.

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


pages: 113 words: 37,885

Why Wall Street Matters by William D. Cohan

Alan Greenspan, Apple II, asset-backed security, bank run, Bear Stearns, Bernie Sanders, Blythe Masters, bonus culture, break the buck, buttonwood tree, Carl Icahn, corporate governance, corporate raider, creative destruction, Credit Default Swap, Donald Trump, Exxon Valdez, financial innovation, financial repression, Fractional reserve banking, Glass-Steagall Act, Gordon Gekko, greed is good, income inequality, Joseph Schumpeter, junk bonds, London Interbank Offered Rate, margin call, Michael Milken, money market fund, moral hazard, Potemkin village, quantitative easing, secular stagnation, Snapchat, South Sea Bubble, Steve Jobs, Steve Wozniak, tontine, too big to fail, WikiLeaks

Take, for instance, the word “securities,” which is nothing more than Wall Street argot for an ownership position in a stock—the equity value of a corporation—or a bond, which is a creditor’s right to receive fixed payments (plus the return of the principal) from a corporation, or a government entity, over time in exchange for lending money to it. If you’re like most people, though, once you hear the term “leveraged buyout” or “credit default swap,” your eyes glaze over and you mentally check out. Or maybe you are just utterly confused by the fact that after attacking Wall Street mercilessly during his campaign, Donald Trump has surrounded himself with Wall Street veterans. But here’s the thing: If you like your iPhone (which you clearly do, because more than one billion iPhones have been sold worldwide since its inception in June 2007), or your wide-screen TV, or your car, or your morning bacon, or your pension, or your 401(k), then you are a fan of Wall Street, whether you know it or not.

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. But unlike a typical home insurance policy, which can be bought only by the owner of the home, or a life insurance policy, which can be bought only, generally speaking, by the person whose life is being insured, anyone could buy insurance against the risk that a loan, a bond, or some other kind of credit instrument might default.


pages: 397 words: 112,034

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

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

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

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

., 36 buy America provisions, 24–25 Calderón, Felipe, 37–39 Canada, aging population of, 25–26; banking system in, 15–16; consumer debt in, 18–19; corporate sector in, 20; economic recovery in, xvii–xviii, 14–15; economy of, 12–28; employment in, 17–18; environmental policies, 27–28; fiscal deficit of, 257; fiscal situation in, 21–22; foreign investment in, 26–27; household sector in, 17–20; long-term issues and challenges for, 25–28; monetary policy, 22–23; productivity in, 26; real estate market in, 16–17, 19–20; risks facing, 23–25; tax policy, 20, 26; US and, 13–14, 24 Canada Mortgage and Housing Corporation (CMHC), 17 Canadian dollar, 23 cap-and-trade system, xxvi, 5 capital flows, 7–8 capital requirements, 233–235, 237–238, 241–244, 246–248 capital spending, 259 carbon emissions, xxvi–xxvii, 5, 219, 227. See also climate change career risk, 289 Carr, Nicholas, xxix, 292–293 CDOs. See collateralized debt obligations (CDOs) CDSs. See credit default swaps (CDSs) Central Africa, 126 central banks, Asia, 82–83; asset buying by, 81; demand for gold by, 169–170, 174–175; money supply and, 246–248; selling public debt to, 259 Chile, 8, 33, 48, 49, 51 China, xv, xx; Australian exports to, 145–146; climate change and, xxvi, 225; consumption in, 89–90; currency intervention by, 10; economic growth in, 10, 52; economy of, xxiii, 24; equity markets, 83–84, 85; excess of thrift in, 88–89; as financial capital, 245–246; financial sector in, xxvii; fiscal deficit, 257; gold market in, 170–171; gold reserves, xxv, 168–169, 170, 174; household incomes in, 89; influence of, in Africa, 122–123; labor costs in, 86–87, 89–90; monetary policy, 10; savings rate in, 245–246; structural shift in, 84–85 Citigroup, 272 Clean Development Mechanism (CDM), 225 climate change, adaptation to, 227–229; Canada and, xviii, 27–28; future outcomes for, 224–225; international agreements on, 220–223; oil industry and, xxv, 189–191; public policy and, xxvi–xxvii, 219–230; South Africa and, xxii coal, 125 Coates, John, 290 cognitive abilities, 293–294 cognitive biases, 287, 288–289 collateralized debt obligations (CDOs), 275 Colombia, 33, 48, 49 commodity prices, xv, xxii, 50, 52–54, 117, 195 Common Market for Eastern and Southern Africa (COMESA), 122 compensation plans, 277 composite currencies, 161–163 Conference of the Parties to the Convention (COP), 222 confirmatory evidence, 288 conflicts, in Sub-Saharan Africa, 123–124 Congdon, Tim, xxvii Constitutionalist Revolution (1906), 206 consumer debt, 18–19 Consumer Protection Financial Bureau, 267, 269 consumer spending, 8, 18 consumption-based taxes, 261–263 Copenhagen Accord, 222, 225 Cordero, Ernesto, 45 corporate compliance, xxviii–xxix, 271–282 corporate governance, 267, 268 corporate profits, 8 corporate sector: Canada, 20; US, xvi, 4, 8 corporate taxes, 260 cortisol, 290 Costa Rica, 48 Côte D’Ivoire, 127 credit default swaps (CDSs), 275 creditor status, 156 Creel, Santiago, 37, 45 crime, in Mexico, 43 culture of ethics, 276–280 currencies: African, 122; composite, 161–163; domestic, 155; international, 155–156; synthetic, 161–163.


pages: 1,202 words: 424,886

Stigum's Money Market, 4E by Marcia Stigum, Anthony Crescenzi

accounting loophole / creative accounting, Alan Greenspan, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Black-Scholes formula, book value, Brownian motion, business climate, buy and hold, capital controls, central bank independence, centralized clearinghouse, corporate governance, credit crunch, Credit Default Swap, cross-border payments, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, disintermediation, distributed generation, diversification, diversified portfolio, Dutch auction, financial innovation, financial intermediation, fixed income, flag carrier, foreign exchange controls, full employment, Glass-Steagall Act, Goodhart's law, Greenspan put, guns versus butter model, high net worth, implied volatility, income per capita, intangible asset, interest rate derivative, interest rate swap, inverted yield curve, junk bonds, land bank, large denomination, locking in a profit, London Interbank Offered Rate, low interest rates, margin call, market bubble, market clearing, market fundamentalism, Money creation, money market fund, mortgage debt, Myron Scholes, offshore financial centre, paper trading, pension reform, Phillips curve, Ponzi scheme, price mechanism, price stability, profit motive, proprietary trading, prudent man rule, Real Time Gross Settlement, reserve currency, risk free rate, risk tolerance, risk/return, Savings and loan crisis, seigniorage, shareholder value, short selling, short squeeze, tail risk, technology bubble, the payments system, too big to fail, transaction costs, two-sided market, value at risk, volatility smile, yield curve, zero-coupon bond, zero-sum game

Seeing this, dealers have combed the universities and other institutions to find people with strong backgrounds in math and finance—quants or rocket scientists as they have been dubbed—paying them astronomical salaries, and asking them to engineer new derivative products, including options and other hybrids, that can be sold to retail at a spread. A recent innovation that has seen rapid growth is the credit default swap (CDS), which has become the most widely used instrument in the credit derivatives market. The International Swaps and Derivatives Association (ISDA) estimates that the notional value of CDSs outstanding at the end of 2005 was a whopping $17.096 trillion, a sharp increase from four years earlier when there were $631.5 billion outstanding. In a credit default swap, an investor (the protection seller) sells protection against the possibility of a bond’s default to a buyer (the protection buyer) seeking such protection (Figure 10.1).

Dealers have profited trading the spreads on CDSs, particularly banks, which are the biggest buyers and sellers in the CDS market.2 Insurance companies rank second, followed by securities firms and hedge funds. Proprietary trading desks at some of the larger dealers 2 Jorge A. Chan-Lau and Yoon Sook Kim, “Equity Prices, Credit Default Swaps, and Bond Spreads in Emerging Markets,” The International Monetary Fund, Working Paper, August 2004. FIGURE 10.1 Credit default swap have also become active players, making bets—usually hedged—in the CDS market on the gyrations in credit spreads. Yet another way dealers seek to profit from customer business is by having their traders develop and pass on to retail good ideas on trades to be done—on what is cheap and what is expensive.

Development of Sophisticated New Products Globalization has been thrust forward not just by the breaking down of various barriers to international capital flows, but by the introduction of new financial tools. The most important of these have been swaps—cross-currency and interest-rate swaps. There has also been a sharp increase in the amount of credit default swaps outstanding (Chapter 19). Swaps have played a key role in the explosion of opportunities open to borrowers and lenders. “All of this,” noted one U.S. banker, “has created a menu for corporations that is much more efficient than just borrowing your currency from your bank. Thanks in part to the elimination of withholding taxes, U.S. and other corporations now have access to yen, the euro, and other national capital markets; they can, for example, issue Euro commercial paper hedged.


pages: 840 words: 202,245

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

Abraham Maslow, accounting loophole / creative accounting, Alan Greenspan, AOL-Time Warner, Asian financial crisis, bank run, Bear Stearns, book value, Bretton Woods, business cycle, capital controls, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Glass-Steagall Act, Greenspan put, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Bogle, John Meriwether, junk bonds, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, low interest rates, market bubble, Mary Meeker, Michael Milken, minimum wage unemployment, MITM: man-in-the-middle, Money creation, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, Phillips curve, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, scientific management, shareholder value, short selling, Silicon Valley, Simon Kuznets, tail risk, Tax Reform Act of 1986, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

Cassano, a graduate of Brooklyn College and trained in Michael Milken’s junk bond department at Drexel Burnham in the 1980s, was a managerial tyrant consumed by his mini-empire and easy profits. In the 2000s, he effortlessly generated millions of dollars a year by selling what were known as credit default swaps—an insurance policy of sorts that guarantees to pay the value of a bond if it fails—for Hank Greenberg, the hard-nosed AIG chief executive, who was forced out in early 2005 in an accounting scandal. When Greenberg left, Cassano became temporarily even more aggressive, though he soon after halted his buying.

He claimed only 6 percent of their portfolios had exposure to subprime mortgages but others estimated that up to 60 percent of Bear’s $1.5 billion in assets were in reality backed by subprimes. A still newer CDO product had also been created, a synthetic CDO, which added more risk to the mortgage market and which Cioffi and Tannin bought enthusiastically. They were created out of the credit default swaps (CDSs) that AIG and soon others were liberally selling across Wall Street—the insurance on the CDOs. The great advantage of the synthetic CDOs is that their issuance was not restricted to the number of mortgages that could be sold to prospective homeowners. There was no collateral. There was one requirement, however: someone had to be willing to buy the CDSs—the insurance was the basis of the synthetic, “collateral-less” CDOs.

In 1998, LTCM required only several billion dollars to stabilize the financial markets. The difference now was the sheer size of the pool of debt—$7–8 trillion of mortgages had been written, from which several trillion dollars of mortgage-backed securities had been created, and massive amounts of credit default swaps as well. Tim Geithner, president of the New York Fed, Ben Bernanke, chairman of the Fed, and Hank Paulson, treasury secretary, claiming helplessness, let Lehman go bankrupt. When the Lehman bankruptcy was announced on Sunday, September 14, a financial editor turned to me at a dinner party and said the crisis was now over.


pages: 261 words: 81,802

The Trouble With Billionaires by Linda McQuaig

"World Economic Forum" Davos, battle of ideas, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, British Empire, Build a better mousetrap, carried interest, Charles Babbage, collateralized debt obligation, computer age, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Douglas Engelbart, Douglas Engelbart, employer provided health coverage, financial deregulation, fixed income, full employment, Gary Kildall, George Akerlof, Gini coefficient, Glass-Steagall Act, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of the telephone, invention of the wheel, invisible hand, Isaac Newton, Jacquard loom, John Bogle, Joseph-Marie Jacquard, laissez-faire capitalism, land tenure, lateral thinking, low interest rates, Mark Zuckerberg, market bubble, Martin Wolf, mega-rich, minimum wage unemployment, Mont Pelerin Society, Naomi Klein, neoliberal agenda, Northern Rock, offshore financial centre, Paul Samuelson, plutocrats, Ponzi scheme, pre–internet, price mechanism, proprietary trading, purchasing power parity, RAND corporation, rent-seeking, rising living standards, road to serfdom, Robert Solow, Ronald Reagan, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, trickle-down economics, Vanguard fund, very high income, wealth creators, women in the workforce

What was unusual here was that the Wall Street types were taking out insurance on something in which they had no personal stake, on something that involved other people’s assets. It was like buying insurance on a car owned by a stranger, in the hope of collecting money if the stranger’s car crashed. This ‘insurance’ – known as a credit default swap (CDS) – was simply a bet. The fate of thousands of mortgage holders and their dreams of homeownership had become an opportunity for Wall Street hotshots to roll the dice, in the hope of winning a jackpot. In some ways, this form of gambling wasn’t very risky, because the most the bettor could lose would be the cost of his premiums.

Indeed, the 2008 financial meltdown has brought the disconnect between executive performance and executive pay into sharp, tragicomic relief. In the UK, Adam Applegarth collected £10 million over five years as chief executive of Northern Rock, which he transformed into an ultra-aggressive mortgage lender, only to have it collapse in 2007. Joseph Cassano, who headed the credit default swaps team in London for financial giant AIG, received a $35 million bonus – even after it was clear that the swaps had nearly bankrupted AIG in the 2008 crash. Wall Street firms paid out a staggering $18.4 billion in executive bonuses in the early months of 2008, even as many of those firms collapsed in bankruptcy or were only saved by government bailouts.

It’s worth considering whether the mindset that led Wall Street types to abandon all sanity and morality – mixing together toxic brews of junk mortgages, car loans and credit card debts and then selling pieces of these sickly concoctions to unknowing ‘investors’ – is partly the result of the overstimulation of their greed impulses. When the broader public first became aware of collateral debt obligations and credit default swaps during the financial meltdown in the autumn of 2008, the most common reaction was bewilderment. The hypercharged Wall Street world was so removed from the regular world most people inhabit – where pay bears some relationship to hours worked, effort and results – that it seemed baffling and indecipherable.


pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

Alan Greenspan, Asian financial crisis, banking crisis, Bear Stearns, Bretton Woods, business cycle, buy and hold, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, Glass-Steagall Act, green new deal, guns versus butter model, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, It's morning again in America, John Meriwether, junk bonds, kremlinology, Long Term Capital Management, low interest rates, margin call, market bubble, market fundamentalism, McMansion, Michael Milken, Minsky moment, money market fund, mortgage debt, Naomi Klein, new economy, Nixon triggered the end of the Bretton Woods system, offshore financial centre, payday loans, pets.com, plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Ronald Reagan, Savings and loan crisis, savings glut, sovereign wealth fund, structural adjustment programs, subprime mortgage crisis, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

Not to worry, responded the Wall Street geniuses. By spreading risks among more people, the miracle of “diversity” was actually turning bad loans into good ones. Anyway, banks were buying insurance policies against default, which in turn were transformed into a set of even murkier securities called “credit default swaps” and marketed to hedge funds, pension managers and in some cases back to the banks that were being insured in the first place. At the end of 2007 the market for these swaps was estimated at $45.5 trillion—roughly twice as large as all U.S. stock markets combined. This huge pyramid of debt was made possible by thirty years of relentless deregulation of financial markets, culminating in the 1999 repeal of the Glass-Steagall Act, which had prohibited banks from dealing in high-risk securities.

Above all, trading in complex derivatives—the main cause of the current disaster—has to be completely overhauled, at once. Derivatives have to be standardized and move to public exchanges that collectively guarantee them. Failure to do this will just start the whole nonsense over again. Just imagine being told a year from now that losses on credit default swaps written by firms that were bailed out under the new plan require the United States to pony up still more cash. Congressional Options It is fine for Democrats to hold out for mortgage relief and for another stimulus package. The best way to do the first, probably, is by reviving something like the Home Owners Loan Corporation that worked so well in the New Deal.

Moderated by Nation Washington editor Christopher Hayes, the panel featured national correspondent William Greider, famed author of the classic book on the Fed, Secrets of the Temple; Frances Fox Piven, longtime poor people’s activist and author of many books, including The Breaking of the American Social Compact; contributing editor Doug Henwood, author of Wall Street; Arun Gupta, activist and editor of the Indypendent newspaper; and columnist Naomi Klein, author of the bestseller, The Shock Doctrine: The Rise of Disaster Capitalism. Following is an edited transcript of their discussion. Chris Hayes: There are a lot of technical questions about this crisis that I don’t think we’re going to be able to resolve tonight: what’s a credit default swap and how does it work, for example. But the key two political questions a lot of us are asking are: how do we fit what is happening now into our political understanding, into our power analysis—what has led us to the moment we’re in politically? And second is the old organizer question, which is, what are our demands—what do we want?


pages: 285 words: 86,174

Twilight of the Elites: America After Meritocracy by Chris Hayes

"Hurricane Katrina" Superdome, "World Economic Forum" Davos, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, barriers to entry, Bear Stearns, Berlin Wall, Bernie Madoff, carried interest, circulation of elites, Climategate, Climatic Research Unit, collapse of Lehman Brothers, collective bargaining, creative destruction, Credit Default Swap, dark matter, David Brooks, David Graeber, deindustrialization, Fall of the Berlin Wall, financial deregulation, fixed income, full employment, George Akerlof, Gunnar Myrdal, hiring and firing, income inequality, Jane Jacobs, jimmy wales, Julian Assange, Kenneth Arrow, Mark Zuckerberg, mass affluent, mass incarceration, means of production, meritocracy, meta-analysis, military-industrial complex, money market fund, moral hazard, Naomi Klein, Nate Silver, peak oil, plutocrats, Ponzi scheme, post-truth, radical decentralization, Ralph Waldo Emerson, rolodex, Savings and loan crisis, The Spirit Level, too big to fail, University of East Anglia, Vilfredo Pareto, We are the 99%, WikiLeaks, women in the workforce

Between 2004 and 2007, the market for over-the-counter derivatives grew 74 percent. These derivatives, usually highly specialized, are traded one-to-one, away from the prying eyes of an organized exchange. It was this market in a specific kind of derivatives, credit default swaps, that converted a collapsed housing bubble into a global financial cataclysm. Because credit default swaps weren’t traded on a public exchange, no one knew what anyone else’s outstanding liability was. An institution that looked solvent on Tuesday could turn out to be bankrupt by Wednesday morning. And yet, astonishingly, in the wake of the crisis, the market for over-the-counter derivatives had grown 122 percent, to $25 trillion by 2011.

“You have these politicians that are selling this mistrust,” he said in reference to the ceaseless rhetoric from conservatives about government’s inevitable incompetence. “And the federal government sure as hell hasn’t helped.” And yet the private sector has fared no better: from the popping of the tech bubble, to Enron, WorldCom, and Global Crossing, to the Big Three automakers, to Lehman Brothers, subprime, credit default swaps, and Bernie Madoff, the overwhelming story of the private sector in the last decade has been perverse incentives, blinkered groupthink, deception, fraud, opacity, and disaster. So comprehensive and destructive are these failures that even those ideologically disposed to view big business in the best light have had to confront them.


pages: 289 words: 86,165

Ten Lessons for a Post-Pandemic World by Fareed Zakaria

"there is no alternative" (TINA), 15-minute city, AlphaGo, An Inconvenient Truth, anti-fragile, Asian financial crisis, basic income, Bernie Sanders, Boris Johnson, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, car-free, carbon tax, central bank independence, clean water, cloud computing, colonial rule, contact tracing, coronavirus, COVID-19, Credit Default Swap, David Graeber, Day of the Dead, deep learning, DeepMind, deglobalization, Demis Hassabis, Deng Xiaoping, digital divide, Dominic Cummings, Donald Trump, Edward Glaeser, Edward Jenner, Elon Musk, Erik Brynjolfsson, failed state, financial engineering, Francis Fukuyama: the end of history, future of work, gentrification, George Floyd, gig economy, Gini coefficient, global pandemic, global reserve currency, global supply chain, green new deal, hiring and firing, housing crisis, imperial preference, income inequality, Indoor air pollution, invention of the wheel, Jane Jacobs, Jeff Bezos, Jeremy Corbyn, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Snow's cholera map, junk bonds, lockdown, Long Term Capital Management, low interest rates, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, means of production, megacity, Mexican peso crisis / tequila crisis, middle-income trap, Monroe Doctrine, Nate Silver, Nick Bostrom, oil shock, open borders, out of africa, Parag Khanna, Paris climate accords, Peter Thiel, plutocrats, popular capitalism, Productivity paradox, purchasing power parity, remote working, reserve currency, reshoring, restrictive zoning, ride hailing / ride sharing, Ronald Reagan, secular stagnation, Silicon Valley, social distancing, software is eating the world, South China Sea, Steve Bannon, Steve Jobs, Steven Pinker, Suez crisis 1956, TED Talk, the built environment, The Death and Life of Great American Cities, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tim Cook: Apple, trade route, UNCLOS, universal basic income, urban planning, Washington Consensus, white flight, Works Progress Administration, zoonotic diseases

But those nineteen men set in motion a wave of warfare, intelligence operations, revolts, and repression around the world. Or consider the origins of the global financial crisis—one obscure financial product, the “credit default swap,” a kind of insurance policy mostly on mortgages, was bundled and re-bundled, sliced and diced, sold and resold, until it became a $45 trillion market, three times larger than the US economy, and three-quarters the size of the entire global economy. And when that market crashed, it took the world economy with it and, in due course, triggered a wave of populism. Without credit default swaps, there might never have been a President Donald Trump. And in the case of this pandemic, we now all recognize how a tiny viral particle, circulating in a bat in China’s Hubei Province, has brought the world to its knees—a real-life example of the butterfly effect, whereby the flapping of a butterfly’s wing might influence weather patterns on the other side of the world.

(All-time record for US unemployment was 24.9% in 1933, per US Census, Bicentennial Edition: Historical Statistics of the United States, Colonial Times to 1970, Chapter D: Labor, cited in Gene Smiley, “Recent Unemployment Rate Estimates for the 1920s and 1930s,” Journal of Economic History 43, no. 2 [June 1983]: 487–93, http://www.jstor.org/stable/2120839.) 11 $45 trillion market: Janet Morrissey, “Credit Default Swaps: The Next Crisis?,” Time, March 17, 2008, http://content.time.com/time/business/article/0,8599,1723152,00.html. 11 three-quarters the size: Global GDP = $63.6 trillion in 2008, World Bank DataBank, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=1W. 11 flapping of a butterfly’s wing: This idea is most prominently developed in Edward N.


pages: 291 words: 85,822

The Truth About Lies: The Illusion of Honesty and the Evolution of Deceit by Aja Raden

air gap, Ayatollah Khomeini, bank run, banking crisis, Bernie Madoff, bitcoin, blockchain, California gold rush, carbon footprint, carbon-based life, cognitive bias, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, data science, disinformation, Donald Trump, fake news, intentional community, iterative process, low interest rates, Milgram experiment, mirror neurons, multilevel marketing, offshore financial centre, opioid epidemic / opioid crisis, placebo effect, Ponzi scheme, prosperity theology / prosperity gospel / gospel of success, Ronald Reagan, Ronald Reagan: Tear down this wall, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, Steve Bannon, sugar pill, survivorship bias, theory of mind, too big to fail, transcontinental railway, Vincenzo Peruggia: Mona Lisa

See credit-default swap central nervous system (CNS) regulating drugs Chabris, Christopher change blindness Change Raising con Chaplin, Charlie Chaudron, Yves Chinese Great Wall Hoax Chinese traditional snake oil medicine CNS. See central nervous system Coca-Cola, cocaine in cocaine, pharmaceutical marketing of cognitive bias. See also specific bias authority bias as cognitive dissonance lie belief and Rasputin and collective intelligence, honesty bias advantage of confirmation bias conflicting beliefs contagiousness, of facts counterfeit, in Forgery credit-default swap (CDS) critical mass Cups and Balls magic trick Da Vinci, Leonardo dangerous drugs, in patent medicines Dawkins, Richard De Beer’s diamond cartel diamond glut and deception Alaska telegraph wire Fox on Spiritualism delusion, of novelty dental surgery study, placebo effect and diamonds, Long Con of directives deference, in authority bias disbelief, Big Lie theory of mind and Dostoyevsky, Fyodor Doyle, Arthur Conan Eiffel Tower, Lustig sale of expectation, in placebo effect facts contagiousness of truth compared to faith belief relationship with televangelists and faith healers, false-memory effect and fake news, in Hoax false-memory effect memory adjustment method in mystical experiences FDA.

The bubble stays intact by virtue of collective belief and even as that belief detaches increasingly from any reason other than belief in and of the collective, kind of like a Pyramid. (I promised Pyramids were everywhere.) In other words, everyone believes it because everyone else believes it. Until they don’t. Another really nasty instrument, a credit-default swap (CDS), was also floating around the market at the time. A CDS was basically just a bet that the bubble would never burst. Because that sounds like a great bet … AIG sold tens of billions of dollars’ worth of CDSs, all to buyers willing to put money on that shockingly stupid wager. Then again: gold rush thinking.


pages: 413 words: 117,782

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

activist fund / activist shareholder / activist investor, algorithmic trading, Bear Stearns, Berlin Wall, Bob Litterman, bonus culture, book value, BRICs, business process, buy and hold, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, commoditize, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, diversification, eat what you kill, Emanuel Derman, financial innovation, fixed income, friendly fire, Glass-Steagall Act, Goldman Sachs: Vampire Squid, high net worth, housing crisis, junk bonds, London Whale, Long Term Capital Management, merger arbitrage, Myron Scholes, new economy, passive investing, performance metric, proprietary trading, radical decentralization, risk tolerance, Ronald Reagan, Saturday Night Live, Satyajit Das, shareholder value, short selling, sovereign wealth fund, subprime mortgage crisis, systems thinking, The Nature of the Firm, too big to fail, value at risk

Some people still remember the large layoffs in the late 1980s, affecting how employees think about the firm as a place to work, and it was now happening so soon again (O, C). Despite issues, the firm is still ranked first in US and foreign common stock offerings, IPOs, worldwide completed mergers and acquisitions, investment-grade debt, and US equity research. J.P. Morgan pioneers the concept of the modern credit default swap, which will play a major role in the credit crisis. Eric Mindich, who ran the equities arbitrage department that invested the firm’s own capital, becomes, at age twenty-seven, the youngest partner in the firm’s history, signaling the importance of proprietary trading (O, C). Restrictions are put on the withdrawal of partners’ capital (O).

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

In November, Goldman establishes the Pine Street Leadership Development Initiative, in part, to help socialize larger numbers of managers (O). The Euro becomes an accounting currency and was scheduled to enter circulation in 2002, helping to accelerate pan-European banking consolidation. 2000: The Commodity Futures Modernization Act determines that credit default swaps are neither futures nor securities and therefore are not subject to regulation by the Securities and Exchange Commission or the Commodities Futures Trading Commission (CFTC) (R, T). The CFTC changes a rule called Regulation 1.25 to permit futures brokers to take money from their customers’ accounts and invest it in an expanded number of approved securities (some people think this contributed to the issues related to MF Global) (R).


pages: 493 words: 132,290

Vultures' Picnic: In Pursuit of Petroleum Pigs, Power Pirates, and High-Finance Carnivores by Greg Palast

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", anti-communist, back-to-the-land, bank run, Berlin Wall, Bernie Madoff, British Empire, capital asset pricing model, capital controls, centre right, Chelsea Manning, classic study, clean water, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, disinformation, Donald Trump, energy security, Exxon Valdez, Glass-Steagall Act, invisible hand, junk bonds, means of production, Myron Scholes, Nelson Mandela, offshore financial centre, Pepto Bismol, random walk, Ronald Reagan, sensible shoes, Seymour Hersh, transfer pricing, uranium enrichment, Washington Consensus, Yogi Berra

In May 2010, after the banks burned, Greece’s Prime Minister George Papandreou said, “Everyone in Greece, whether three years old or ninety-eight years old, now knows what a spread is.” If you’re not a Greek three-year-old, I’ll let you in on it. A spread is the extra interest demanded by speculators and banks to insure against a nation’s bankruptcy and default. When sold as a derivative, the bankruptcy insurance is called a credit default swap (CDS).25 How much does this insurance cost? If you have to ask, you can’t afford it. In 2010 and 2011, the “spread” for Greece hit as much as 10 percent versus German debt. That is, Germany could borrow at 5 percent while Greece paid 15 percent. (At the same time, U.S. banks had the right to borrow for next to nothing, less than 1 percent, from the U.S.

Apparently, a whole lot of capitalists felt more secure with their own money in the hands of socialists, even though each mid-ocean oil derrick is a floating middle finger to Summers and Rubin. Most important, Lula sealed the borders against new financial “products” from foreign banks. Guards were ordered to shoot derivatives on sight. Brazil dodged the bullet in the 2008–11 worldwide Recession by rejecting credit default swap bingo and sub-prime blind-man’s bluff. Foreign banks are particularly incensed that they couldn’t open shop in Brazil without a “presidential decree,” that is, Lula’s personal approval. And he approved of very little. It saved his nation’s life. Such conduct would not be indulged. Lula must be spanked, his allowance taken away, and his banks and his ass-kicking economy.

Because Barack Obama is not just President of the United States, he was also chief executive of AIG Insurance, which the U.S. Treasury had just bought for $170 billion in bail-out funds. One single corporation, AIG, not a bank even, was given this $170 billion (six times California’s deficit) because it was the “counter-party” that had sold the world’s banks these crap Credit Default Swaps, thereby promising insurance against the underlying loans going bust. The U.S. taxpayers had it up to here with bank bail-outs, so slipping the money to AIG was a way for the U.S. Treasury to back-door a hundred billion to The Boys indirectly. Goldman got $12.9 billion via the AIG bail-out fund, but so did the Swiss ($5 billion to UBS); and, Angela, your Deutsche Bank got $11.8 billion, all of it hidden from Americans’ jingoistic eyes.


Commodity Trading Advisors: Risk, Performance Analysis, and Selection by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant, Fabrice Douglas Rouah

Asian financial crisis, asset allocation, backtesting, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, compound rate of return, constrained optimization, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discrete time, distributed generation, diversification, diversified portfolio, dividend-yielding stocks, financial engineering, fixed income, global macro, high net worth, implied volatility, index arbitrage, index fund, interest rate swap, iterative process, linear programming, London Interbank Offered Rate, Long Term Capital Management, managed futures, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, p-value, Pareto efficiency, Performance of Mutual Funds in the Period, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, stochastic process, survivorship bias, systematic trading, tail risk, technology bubble, transaction costs, value at risk, zero-sum game

Although the latter trades futures contracts, the former engages in the active trading of the class of over-the-counter derivatives known as credit derivatives. The different types of credit derivatives and their regulatory status are discussed by Ali (2000). Credit default swaps are the most common type of credit derivative. In a credit default swap, one party (the protection seller) agrees with its counterparty (the protection buyer), in exchange for the payment of a premium or fee, to assume the credit risk on a portfolio of loans or bonds (reference obligations) made by the protection buyer to, or issued by, one or more third parties (reference entities).

., where a reference entity defaults on the reference obligations or becomes insolvent), the protection seller will be obligated to purchase the reference obligations for their face value from the protection buyer (in the case of a physically settled 266 MANAGED FUTURES INVESTING, FEES, AND REGULATION credit default swap) or make a payment to the protection buyer of the difference between the face value of the reference obligations and their then market value (in the case of a cash-settled credit default swap). Thus, just as the manager of a managed futures fund seeks to service the principal and interest payments on any debt securities issued by it out of trading profits, the issuer of debt securities in a CSO seeks to service those securities out of the premiums received by the issuer from selling credit risk protection under credit derivatives and any profits realized from the trading of credit derivatives (Tavakoli 2003).


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, currency risk, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, Glass-Steagall Act, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Minsky moment, Money creation, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uptick rule, Vanguard fund

Greenspan’s lack of concern about the buildup of risky assets in the balance sheets of financial firms was revealed when he declared before congressional committees in October 2008 that he was in a state of “shocked disbelief” that the leading lending institutions did not take measures to protect shareholders’ equity against a housing meltdown, nor had they neutralized their exposure to risk by using financial derivatives or credit default swaps.20, 21 Although Greenspan failed to foresee the financial crisis, I do not, contrary to others,22 hold him responsible for creating the housing bubble. That is because the Fed’s policy of slowly raising interest rates was not the primary force driving real estate values upward. The fall in long-term interest rates, driven by slowing of economic growth, the switch from equities to bonds in corporate pension funds, the huge buildup of reserves in Asian countries, particularly China, and the proliferation of subprime and full-funding mortgages, were far more important in propelling real estate prices higher than the level of the Fed funds rate set by Greenspan and the Federal Open Market Committee.

This tempted investment banks, such as Bear Stearns, to sell these bonds to investors with the promise of higher yield with comparable safety.24 Although many investment banks held these bonds for their own account, their holdings of subprime debt grew substantially when they were forced to take back the faltering subprime funds they sold to investors because of complaints that investors were not fully informed of their risks.25 Risks to the financial system were compounded when AIG, the world’s largest insurance company, offered to insure hundreds of billions of dollars of these mortgages against default through an instrument called the credit default swap. When the prices of these mortgages fell, AIG had to come up with billions of dollars of reserves that it did not have. At the same time, the investment banks that had borrowed heavily to purchase these mortgages found that their funding had dried up when creditors called their loans that were pledged against these assets.

The Fed’s decision to bail out AIG was necessitated by the unexpected financial chaos that immediately followed the Lehman bankruptcy. The Fed and the Treasury, shocked by investors’ sudden rush to cash and the surging risk premiums in international money markets, believed that another bankruptcy that threw hundreds of billions of dollars of bonds and credit default swaps into question would likely bring down the global financial system. Despite the fact that AIG, as an insurance company, was arguably further from the Federal Reserve’s sphere of responsibility than Lehman, the Fed saved the insurance giant.35 I have little doubt that had AIG failed first, the ensuing financial panic would have forced the Fed to bail out Lehman the next day.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

accounting loophole / creative accounting, Alan Greenspan, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, cotton gin, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, gentrification, Glass-Steagall Act, global reserve currency, Google Earth, Great Leap Forward, Guggenheim Bilbao, Gunnar Myrdal, guns versus butter model, Herbert Marcuse, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, military-industrial complex, Money creation, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, Pearl River Delta, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, Savings and loan crisis, sharing economy, Shenzhen special economic zone , Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, subprime mortgage crisis, technological determinism, the built environment, the market place, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, Timothy McVeigh, too big to fail, trickle-down economics, urban renewal, urban sprawl, vertical integration, white flight, women in the workforce

Then, towards the end of the 1980s, to offset the volatility, the practice of hedging (placing two-way bets on currency futures) became more common. An ‘over the counter’ market arose outside of the regulatory framework and the rules of the exchanges. This was the kind of private initiative that led to an avalanche of new financial products in the 1990s – credit default swaps, currency derivatives, interest rate swaps, and all the rest of it – which constituted a totally unregulated shadow banking system in which many corporations became intense players. If this shadow system could operate in New York, then why not also in London, Frankfurt, Zurich and Singapore?

The ‘shadow banking system’ emerges 1980 Currency swaps 1981 Portfolio insurance introduced; interest rate swaps; futures markets in Eurodollars, in Certificates of Deposit and in Treasury instruments 1983 Options markets on currency, equity values and Treasury instruments; collateralised mortgage obligation introduced 1985 Deepening and widening of options and futures markets; computerised trading and modelling of markets begins in earnest; statistical arbitrage strategies introduced 1986 Big Bang unification of global stock, options and currency trading markets 1987–8 Collateralised Debt Obligations (CDOs) introduced along with Collateralised Bond Obligations (CBOs) and Collateralised Mortgage Obligations (CMOs) 1989 Futures on interest rate swaps 1990 Credit default swaps introduced along with equity index swaps 1991 ‘Off balance sheet’ vehicles known as special purpose entities or special investment vehicles sanctioned 1992–2009 Rapid evolution in volume of trading across all of these instruments. Volume of trading, insignificant in 1990, rose to more then $600 trillion annually by 2008 Sources and Further reading I relied on news reports for much of the detailed information I cite throughout the text.

Index Numbers in italics indicate Figures; those in bold indicate a Table. 11 September 2001 attacks 38, 41–2 subject to perpetual renewal and transformation 128 A Abu Dhabi 222 Académie Française 91 accumulation by dispossession 48–9, 244 acid deposition 75, 187 activity spheres 121–4, 128, 130 deindustrialised working-class area 151 and ‘green revolution’ 185–6 institutional and administrative arrangements 123 ‘mental conceptions of the world’ 123 patterns of relations between 196 production and labour processes 123 relations to nature 123 the reproduction of daily life and of the species 123 slums 152 social relations 123 subject to perpetual renewal and transformation 128 suburbs 150 technologies and organisational forms 123 uneven development between and among them 128–9 Adelphia 100 advertising industry 106 affective bonds 194 Afghanistan: US interventionism 210 Africa civil wars 148 land bought up in 220 neocolonialism 208 population growth 146 agribusiness 50 agriculture collectivisation of 250 diminishing returns in 72 ‘green revolution’ 185–6 ‘high farming’ 82 itinerant labourers 147 subsidies 79 AIG 5 alcoholism 151 Allen, Paul 98 Allende, Salvador 203 Amazonia 161, 188 American Bankers Association 8 American Revolution 61 anarchists 253, 254 anti-capitalist revolutionary movement 228 anti-racism 258 anti-Semitism 62 après moi le déluge 64, 71 Argentina Debt Crisis (2000–2002) 6, 243, 246, 261 Arizona, foreclosure wave in 1 Arrighi, Giovanni: The Long Twentieth Century 35, 204 asbestos 74 Asia Asian Currency Crisis (1997–98) 141, 261 collapse of export markets 141 growth 218 population growth 146 asset stripping 49, 50, 245 asset traders 40 asset values 1, 6, 21, 23, 26, 29, 46, 223, 261 Association of South East Asian Nations (ASEAN) 200 Athabaska tar sands, Canada 83 austerity programmes 246, 251 automobile industry 14, 15, 23, 56, 67, 68, 77, 121, 160–61 Detroit 5, 15, 16, 91, 108, 195, 216 autonomista movement 233, 234, 254 B Baader-Meinhof Gang 254 Bakunin, Michael 225 Balzac, Honoré 156 Bangalore, software development in 195 Bangkok 243 Bank of England 53, 54 massive liquidity injections in stock markets 261 Bank of International Settlements, Basel 51, 55, 200 Bank of New England 261 Bankers Trust 25 banking bail-outs 5, 218 bank shares become almost worthless 5 bankers’ pay and bonuses 12, 56, 218 ‘boutique investment banks’ 12 de-leveraging 30 debt-deposit ratio 30 deposit banks 20 French banks nationalised 198 international networks of finance houses 163 investment banks 2, 19, 20, 28, 219 irresponsible behaviour 10–11 lending 51 liquidity injections by central banks vii, 261 mysterious workings of central banks 54 ‘national bail-out’ 30–31 property market-led Nordic and Japanese bank crises 261 regional European banks 4 regular banks stash away cash 12, 220 rising tide of ‘moral hazard’ in international bank lending practices 19 ‘shadow banking’ system 8, 21, 24 sympathy with ‘Bonnie and Clyde’ bank robbers 56 Baran, Paul and Sweezey, Paul: Monopoly Capital 52, 113 Barings Bank 37, 100, 190 Baucus, Max 220 Bavaria, automotive engineering in 195 Beijing declaration (1995) 258 Berlin: cross-border leasing 14 Bernanke, Ben 236 ‘Big Bang’ (1986) 20, 37 Big Bang unification of global stock, options and currency trading markets 262 billionaire class 29, 110, 223 biodiversity 74, 251 biomass 78 biomedical engineering 98 biopiracy 245, 251 Birmingham 27 Bismarck, Prince Otto von 168 Black, Fischer 100 Blackstone 50 Blair, Tony 255 Blair government 197 blockbusting neighbourhoods 248 Bloomberg, Mayor Michael 20, 98, 174 Bolivarian movement 226, 256 bonuses, Wall Street 2, 12 Borlaug, Norman 186 bourgeoisie 48, 89, 95, 167, 176 ‘boutique investment banks’ 12 Brazil automobile industry 16 capital flight crisis (1999) 261 containerisation 16 an export-dominated economy 6 follows Japanese model 92 landless movement 257 lending to 19 the right to the city movement 257 workers’ party 256 Bretton Woods Agreement (1944) 31, 32, 51, 55, 171 British Academy 235 British empire 14 Brown, Gordon 27, 45 Budd, Alan 15 Buenos Aires 243 Buffett, Warren 173 building booms 173–4 Bush, George W. 5, 42, 45 business associations 195 C California, foreclosure wave in 1, 2 Canada, tightly regulated banks in 141 ‘cap and trade’ markets in pollution rights 221 capital bank 30 centralisation of 95, 110, 113 circulation of 90, 93, 108, 114, 116, 122, 124, 128, 158, 159, 182, 183, 191 cultural 21 devalued 46 embedded in the land 191 expansion of 58, 67, 68 exploitations of 102 export 19, 158 fixed 191, 213 industrial 40–41, 56 insufficient initial money capital 47 investment 93, 203 and labour 56, 88, 169–70 liquid money 20 mobility 59, 63, 64, 161–2, 191, 213 and nature 88 as a process 40 reproduction of 58 scarcity 50 surplus 16, 28, 29, 50–51, 84, 88, 100, 158, 166, 167, 172, 173, 174, 206, 215, 216, 217 capital accumulation 107, 108, 123, 182, 183, 191, 211 and the activity spheres 128 barriers to 12, 16, 47, 65–6, 69–70, 159 compound rate 28, 74, 75, 97, 126, 135, 215 continuity of endless 74 at the core of human evolutionary dynamics 121 dynamics of 188, 197 geographic landscape of 185 geographical dynamics of 67, 143 and governance 201 lagging 130 laws of 113, 154, 160 main centres of 192 market-based 180 Mumbai redevelopment 178 ‘nature’ affected by 122 and population growth 144–7 and social struggles 105 start of 159 capital circulation barriers to 45 continuity of 68 industrial/production capital 40–41 inherently risky 52 interruption in the process 41–2, 50 spatial movement 42 speculative 52, 53 capital controls 198 capital flow continuity 41, 47, 67, 117 defined vi global 20 importance of understanding vi, vii-viii interrupted, slowed down or suspended vi systematic misallocation of 70 taxation of vi wealth creation vi capital gains 112 capital strike 60 capital surplus absorption 31–2, 94, 97, 98, 101, 163 capital-labour relation 77 capitalism and communism 224–5 corporate 1691 ‘creative-destructive’ tendencies in 46 crisis of vi, 40, 42, 117, 130 end of 72 evolution of 117, 118, 120 expansion at a compound rate 45 first contradiction of 77 geographical development of 143 geographical mobility 161 global 36, 110 historical geography of 76, 117, 118, 121, 174, 180, 200, 202, 204 industrial 58, 109, 242 internal contradictions 115 irrationality of 11, 215, 246 market-led 203 positive and negative aspects 120 and poverty 72 relies on the beneficence of nature 71 removal of 260 rise of 135, 192, 194, 204, 228, 248–9, 258 ‘second contradiction of’ 77, 78 social relations in 101 and socialism 224 speculative 160 survival of 46, 57, 66, 86, 107, 112, 113, 116, 130, 144, 229, 246 uneven geographical development of 211, 213 volatile 145 Capitalism, Nature, Socialism journal 77 capitalist creed 103 capitalist development considered over time 121–4 ‘eras’ of 97 capitalist exploitation 104 capitalist logic 205 capitalist reinvestment 110–11 capitalists, types of 40 Carnegie, Andrew 98 Carnegie foundation 44 Carnegie Mellon University, Pittsburgh, Pennsylvania 195 Carson, Rachel: Silent Spring 187 Case Shiller Composite Indices SA 3 Catholic Church 194, 254 cell phones 131, 150, 152 Central American Free Trade Association (CAFTA) 200 centralisation 10, 11, 165, 201 Certificates of Deposit 262 chambers of commerce 195, 203 Channel Tunnel 50 Chiapas, Mexico 207, 226 Chicago Board Options Exchange 262 Chicago Currency Futures Market 262 ‘Chicago School’ 246 Chile, lending to 19 China ‘barefoot doctors’ 137 bilateral trade with Latin America 173 capital accumulation issue 70 cheap retail goods 64 collapse of communism 16 collapse of export markets 141 Cultural Revolution 137 Deng’s announcement 159 falling exports 6 follows Japanese model 92 ‘Great Leap Forward’ 137, 138 growth 35, 59, 137, 144–5, 213, 218, 222 health care 137 huge foreign exchange reserves 141, 206 infant mortality 59 infrastructural investment 222 labour income and household consumption (1980–2005) 14 market closed after communists took power (1949) 108 market forcibly opened 108 and oil market 83 one child per family policy 137, 146 one-party rule 199 opening-up of 58 plundering of wealth from 109, 113 proletarianisation 60 protests in 38 and rare earth metals 188 recession (1997) 172 ‘silk road’ 163 trading networks 163 unemployment 6 unrest in 66 urbanisation 172–3 and US consumerism 109 Chinese Central Bank 4, 173 Chinese Communist Party 180, 200, 256 chlorofluoral carbons (CFCs) 74, 76, 187 chronometer 91, 156 Church, the 249 CIA (Central Intelligence Agency) 169 circular and cumulative causation 196 Citibank 19 City Bank 261 city centres, Disneyfication of 131 City of London 20, 35, 45, 162, 219 class consciousness 232, 242, 244 class inequalities 240–41 class organisation 62 class politics 62 class power 10, 11, 12, 61, 130, 180 class relations, radical reconstitution of 98 class struggle 56, 63, 65, 96, 102, 127, 134, 193, 242, 258 Clausewitz, Carl von 213 Cleveland, foreclosure crisis in 2 Cleveland, foreclosures on housing in 1 Clinton, Bill 11, 12, 17, 44, 45 co-evolution 132, 136, 138, 168, 185, 186, 195, 197, 228, 232 in three cases 149–53 coal reserves 79, 188 coercive laws of competition see under competition Cold War 31, 34, 92 Collateralised Bond Obligations (CBOs) 262 Collateralised Debt Obligations (CDOs) 36, 142, 261, 262 Collateralised Mortgage Obligations (CMOs) 262 colonialism 212 communications, innovations in 42, 93 communism 228, 233, 242, 249 collapse of 16, 58, 63 compared with socialism 224 as a loaded term 259–60 orthodox communists 253 revolutionary 136 traditional institutionalised 259 companies joint stock 49 limited 49 comparative advantage 92 competition 15, 26, 43, 70 between financial centres 20 coercive laws of 43, 71, 90, 95, 158, 159, 161 and expansion of production 113 and falling prices 29, 116 fostering 52 global economic 92, 131 and innovation 90, 91 inter-capitalist 31 inter-state 209, 256 internalised 210 interterritorial 202 spatial 164 and the workforce 61 competitive advantage 109 computerised trading 262 computers 41, 99, 158–9 consortia 50, 220 consumerism 95, 109, 168, 175, 240 consumerist excess 176 credit-fuelled 118 niche 131 suburban 171 containerisation 16 Continental Illinois Bank 261 cooperatives 234, 242 corporate fraud 245 corruption 43, 69 cotton industry 67, 144, 162 credit cards fees vii, 245 rise of the industry 17 credit crunch 140 Credit Default swaps 262 Crédit Immobilièr 54 Crédit Mobilier 54 Crédit Mobilier and Immobilier 168 credit swaps 21 credit system and austerity programmes 246 crisis within 52 and the current crisis 118 and effective demand problem 112 an inadequate configuration of 52 predatory practices 245 role of 115 social and economic power in 115 crises crises of disproportionality 70 crisis of underconsumption 107, 111 east Asia (1997–8) 6, 8, 35, 49, 246 financial crisis of 1997–8 198, 206 financial crisis of 2008 34, 108, 114, 115 general 45–6 inevitable 71 language of crisis 27 legitimation 217 necessary 71 property market 8 role of 246–7 savings and loan crisis (US, 1984–92) 8 short sharp 8, 10 south-east Asia (1997–8) 6, 8, 35, 49, 246 cross-border leasing 142–3 cultural choice 238 ‘cultural industries’ 21 cultural preferences 73–4 Cultural Revolution 137 currency currency swaps 262 futures market 24, 32 global 32–3, 34 options markets on 262 customs barriers 42, 43 cyberspace 190 D Darwin, Charles 120 DDT 74, 187 de-leveraging 30 debt-financing 17, 131, 141, 169 decentralisation 165, 201 decolonisation 31, 208, 212 deficit financing 35, 111 deforestation 74, 143 deindustrialisation 33, 43, 88, 131, 150, 157, 243 Deleuze, Gilles 128 demand consumer 107, 109 effective 107, 110–14, 116, 118, 221, 222 lack of 47 worker 108 Democratic Party (US) 11 Deng Xiaoping 159 deregulation 11, 16, 54, 131 derivatives 8 currency 21 heavy losses in (US) 261 derivatives markets creation of 29, 85 unregulated 99, 100, 219 Descartes, René 156 desertification 74 Detroit auto industry 5, 15, 16, 91, 108, 195, 216 foreclosures on housing in 1 Deutsches Bank 20 devaluation 32, 47, 116 of bank capital 30 of prior investments 93 developing countries: transformation of daily lives 94–5 Developing Countries Debt Crisis 19, 261 development path building alliances 230 common objectives 230–31 development not the same as growth 229–30 impacts and feedbacks from other spaces in the global economy 230 Diamond, Jared: Guns, Germs and Steel 132–3, 154 diasporas 147, 155, 163 Dickens, Charles: Bleak House 90 disease 75, 85 dispossession anti-communist insurgent movements against 250–51 of arbitrary feudal institutions 249 of the capital class 260 China 179–80 first category 242–4 India 178–9, 180 movements against 247–52 second category 242, 244–5 Seoul 179 types of 247 under socialism and communism 250 Domar, Evsey 71 Dongguan, China 36 dot-com bubble 29, 261 Dow 35,000 prediction 21 drug trade 45, 49 Dubai: over-investment 10 Dubai World 174, 222 Durban conference on anti-racism (2009) 258 E ‘earth days’ 72, 171 east Asia crash of 1997–8 6, 8, 35, 49, 246 labour reserves 64 movement of production to 43 proletarianisation 62 state-centric economies 226 wage rates 62 eastern European countries 37 eBay 190 economic crisis (1848) 167 economists, and the current financial crisis 235–6 ecosystems 74, 75, 76 Ecuador, and remittances 38 education 59, 63, 127, 128, 221, 224, 257 electronics industry 68 Elizabeth II, Queen vi-vii, 235, 236, 238–9 employment casual part-time low-paid female 150 chronic job insecurity 93 culture of the workplace 104 deskilling 93 reskilling 93 services 149 Engels, Friedrich 89, 98, 115, 157, 237 The Housing Question 176–7, 178 Enron 8, 24, 52, 53, 100, 261 entertainment industries 41 environment: modified by human action 84–5 environmental movement 78 environmental sciences 186–7 equipment 58, 66–7 equity futures 262 equity index swaps 262 equity values 262 ethanol plants 80 ethnic cleansings 247 ethnicity issues 104 Eurodollars 262 Europe negative population growth in western Europe 146 reconstruction of economy after Second World War 202 rsouevolutions of 1848 243 European Union 200, 226 eastern European countries 37 elections (June 2009) 143 unemployment 140 evolution punctuated equilibrium theory of natural evolution 130 social 133 theory of 120, 129 exchange rates 24, 32, 198 exports, falling 141 external economies 162 F Factory Act (1848) 127 factory inspectors 127 ‘failed states’ 69 Fannie Mae (US government-chartered mortgage institution) 4, 17, 173, 223 fascism 169, 203, 233 Federal Deposit Insurance Corporation (FDIC) 8 rescue of Continental Illinois Bank 261 Federal Reserve System (the Fed) 2, 17, 54, 116, 219, 236, 248 and asset values 6 cuts interest rates 5, 261 massive liquidity injections in stock markets 261 rescue of Continental Illinois Bank 261 feminists, and colonisation of urban neighbourhoods 248 fertilisers 186 feudalism 135, 138, 228 finance capitalists 40 financial institutions awash with credit 17 bankruptcies 261 control of supply and demand for housing 17 nationalisations 261 financial services 99 Financial Times 12 financialisation 30, 35, 98, 245 Finland: Nordic cris (1992) 8 Flint strike, Michigan (1936–7) 243 Florida, foreclosure wave in 1, 2 Forbes magazine 29, 223 Ford, Henry 64, 98, 160, 161, 188, 189 Ford foundation 44, 186 Fordism 136 Fordlandia 188, 189 foreclosed businesses 245 foreclosed properties 220 fossil fuels 78 Foucault, Michel 134 Fourierists 168 France acceptance of state interventions 200 financial crisis (1868) 168 French banks nationalised 198 immigration 14 Paris Commune 168 pro-natal policies 59 strikes in 38 train network 28 Franco-Prussian War (1870) 168 fraud 43, 49 Freddie Mac (US government-chartered mortgage institution) 4, 17, 173, 223 free trade 10, 33, 90, 131 agreements 42 French Communist Party 52 French Revolution 61 Friedman, Thomas L.: The World is Flat 132 futures, energy 24 futures markets 21 Certificates of Deposit 262 currency 24 Eurodollars 262 Treasury instruments 262 G G7/G8/G20 51, 200 Galileo Galilei 89 Gates, Bill 98, 173, 221 Gates foundation 44 gays, and colonisation of urban neighbourhoods 247, 248 GDP growth (1950–2030) 27 Gehry, Frank 203 Geithner, Tim 11 gender issues 104, 151 General Motors 5 General Motors Acceptance Corporation 23 genetic engineering 84, 98 genetic modification 186 genetically modified organisms (GMOs) 186 gentrification 131, 256, 257 geographical determinism 210 geopolitics 209, 210, 213, 256 Germany acceptance of state interventions 199–200 cross-border leasing 142–3 an export-dominated economy 6 falling exports 141 invasion of US auto market 15 Nazi expansionism 209 neoliberal orthodoxies 141 Turkish immigrants 14 Weimar inflation 141 Glass-Steagall act (1933) 20 Global Crossing 100 global warming 73, 77, 121, 122, 187 globalisation 157 Glyn, Andrew et al: ‘British Capitalism, Workers and the Profits Squeeze’ 65 Goethe, Johann Wolfgang von 156 gold reserves 108, 112, 116 Goldman Sachs 5, 11, 20, 163, 173, 219 Google Earth 156 Gould, Stephen Jay 98, 130 governance 151, 197, 198, 199, 201, 208, 220 governmentality 134 GPS systems 156 Gramsci, Antonio 257 Grandin, Greg: Fordlandia 188, 189 grassroots organisations (GROS) 254 Great Depression (1920s) 46, 170 ‘Great Leap Forward’ 137, 138, 250 ‘Great Society’ anti-poverty programmes 32 Greater London Council 197 Greece sovereign debt 222 student unrest in 38 ‘green communes’ 130 Green Party (Germany) 256 ‘green revolution’ 185–6 Greenspan, Alan 44 Greider, William: Secrets of the Temple 54 growth balanced 71 compound 27, 28, 48, 50, 54, 70, 75, 78, 86 economic 70–71, 83, 138 negative 6 stop in 45 Guggenheim Museu, Bilbao 203 Gulf States collapse of oil-revenue based building boom 38 oil production 6 surplus petrodollars 19, 28 Gulf wars 210 gun trade 44 H habitat loss 74, 251 Haiti, and remittances 38 Hanseatic League 163 Harrison, John 91 Harrod, Roy 70–71 Harvey, David: A Brief History of Neoliberalism 130 Harvey, William vii Haushofer, Karl 209 Haussmann, Baron 49, 167–8, 169, 171, 176 Hawken, Paul: Blessed Unrest 133 Hayek, Friedrich 233 health care 28–9, 59, 63, 220, 221, 224 reneging on obligations 49 Health Care Bill 220 hedge funds 8, 21, 49, 261 managers 44 hedging 24, 36 Hegel, Georg Wilhelm Friedrich 133 hegemony 35–6, 212, 213, 216 Heidegger, Martin 234 Helú, Carlos Slim 29 heterogeneity 214 Hitler, Adolf 141 HIV/AIDS pandemic 1 Holloway, John: Change the World without Taking Power 133 homogeneity 214 Hong Kong excessive urban development 8 rise of (1970s) 35 sweatshops 16 horizontal networking 254 household debt 17 housing 146–7, 149, 150, 221, 224 asset value crisis 1, 174 foreclosure crises 1–2, 166 mortgage finance 170 values 1–2 HSBC 20, 163 Hubbert, M.


pages: 279 words: 87,875

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

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", activist fund / activist shareholder / activist investor, Airbnb, Bear Stearns, business cycle, call centre, Carl Icahn, Cesare Marchetti: Marchetti’s constant, cloud computing, collateralized debt obligation, company town, coronavirus, corporate raider, COVID-19, Credit Default Swap, credit default swaps / collateralized debt obligations, data science, deep learning, Donald Trump, Home mortgage interest deduction, housing crisis, interest rate swap, low interest rates, margin call, McMansion, mortgage debt, mortgage tax deduction, negative equity, opioid epidemic / opioid crisis, pill mill, rent control, rolodex, Savings and loan crisis, sharing economy, sovereign wealth fund, transaction costs

On the same day that Vision Bank lent my now missing neighbors $137,700 to buy their house, the local lender turned around and sold the mortgage to ABN AMRO Mortgage Group, a Dutch-owned concern that originated, serviced, and bundled into securities hundreds of billions of dollars’ worth of U.S. mortgages. Vision was off the hook for the loan before it opened for business the next day. The local bank had earned transaction fees and could give a hoot whether the loan was repaid. Investment firms, AIG chief among them, also sold credit default swaps, which were essentially insurance against losses in CDOs. There were also synthetic CDOs used to bet on the performance of actual CDOs. As a result, a single ill-advised mortgage might play a role in the performance of dozens of securities. The trillions of dollars invested in securities backed by subprime mortgages represented a bet on U.S. housing that was considerably higher than the value of the actual property involved.

The riskiest slices were bought mostly by CDOs, including one called Kleros Real Estate CDO III, a billion-dollar security that Switzerland’s UBS Group created by wadding together bits of various mortgage-backed securities and then dicing them anew. A few synthetic CDOs—with names such as Auriga and Glacier Funding V—held credit default swaps, or insurance against losses, on segments of Citi’s CMLTI 2006-NC2. Not even Lewis Ranieri, who had pioneered mortgage-backed bonds in the 1980s at Salomon Brothers, was sure he understood CDOs. There wasn’t much information about what collateral they held. Plus, CDOs often invested in other CDOs, which made things muddier.

., taking deposits on Lighthouse preconstruction sales of real estate crash and sales contracts for Shallow, B., selling stock prices compared to subdivision development over for Sunset Bay’s auctioning off Connors, Cristie conservation conspiracy theories CoreLogic corporate buyout firm (KKR) corruption charges Countrywide Financial courthouse auctions credit default swaps credit scores credit-rating firms Cypress Village data science Davidson, Jerry debt debt-to-income ratio deed filings Deepwater Horizon oil spill DeLawder, C. Daniel demand growth destruction, from hurricane developers, litigious buyers and development projects Dolphin Club down payments drug charges drug overdose DuBose, Kristi Dudley, William easy money ecology economy emergency management bunker Empire Group endangered species Engels, Friedrich English, Dewey Entera Technology Environmental Protection Agency (EPA) Envision Gulf Shores EPA.


pages: 326 words: 91,532

The Pay Off: How Changing the Way We Pay Changes Everything by Gottfried Leibbrandt, Natasha de Teran

"World Economic Forum" Davos, Alan Greenspan, Ayatollah Khomeini, bank run, banking crisis, banks create money, Bear Stearns, Big Tech, bitcoin, blockchain, call centre, cashless society, Clayton Christensen, cloud computing, coronavirus, COVID-19, Credit Default Swap, cross-border payments, cryptocurrency, David Graeber, Donald Trump, Edward Snowden, Ethereum, ethereum blockchain, financial exclusion, global pandemic, global reserve currency, illegal immigration, information asymmetry, initial coin offering, interest rate swap, Internet of things, Irish bank strikes, Julian Assange, large denomination, light touch regulation, lockdown, low interest rates, M-Pesa, machine readable, Money creation, money: store of value / unit of account / medium of exchange, move fast and break things, Network effects, Northern Rock, off grid, offshore financial centre, payday loans, post-industrial society, printed gun, QR code, RAND corporation, ransomware, Real Time Gross Settlement, reserve currency, Rishi Sunak, Silicon Valley, Silicon Valley startup, Skype, smart contracts, sovereign wealth fund, special drawing rights, tech billionaire, the payments system, too big to fail, transaction costs, WikiLeaks, you are the product

Where Herstatt’s failure revealed the fault lines in the foreign exchange market and 9/11 exposed the fissures in the securities market, Lehman’s failure laid bare the world of derivatives. In particular, it shone a light into the murky world of ‘credit default swaps’, which are instruments devised to enable investors to insure against the risk of companies defaulting on their debt. These derivatives had morphed from quite sensible risk-management tools into what Warren Buffett dubbed ‘financial weapons of mass destruction’ within a very short period.3 The market had exploded in size from less than $1 trillion in 2001 to $60 trillion in 2008 and had become far more complex. Most of these credit default swaps weren’t being used for corporate debt; rather, they were being used to insure against defaults on sub-prime mortgages, and many were also part of complex financial transactions involving European and Asian banks.

Eggers) 177 Cirrus/Maestro 58 Citibank 56, 64, 133, 158, 220–1, 222, 248, 260 Clearing House Interbank Payments System (CHIPS) 240 clearing systems 117–19, 122, 239–40 Clearpay 175 Clifford, Clark 264 Clinton, Hillary 267 closed vs open payment systems 220–6 cloud computing 270 ClubMed 170 ‘code as law’ 195–6 Collison, Patrick and John 163, 165 Committee on Payments and Market Infrastructure (CPMI) 120–1 commodity money 8 Competition and Consumer Commission, Australian 224 Competition and Markets Authority, UK 180 competition authorities 223–4, 225–6 compound interest 90 ‘Confirmation of Payee’ systems 66 Connally, John 248 Consumer Reports 89 contactless payments 11, 173 conventions, payment 15, 17–19, 121–2, 215–16, 230 Corporate Transaction Banking 95 correspondent banking 138–42, 143, 144–5, 146–8, 223, 248, 267–8 Cotten, Gerald 200 counterfeiting and piracy 108, 112, 258 Covid-19 global pandemic 6, 8, 34, 37, 111, 134, 151, 159, 224, 245 credit cards business payments 95 cardboard 40, 41, 46–7, 108 debt 45, 100, 101 fraud 46, 51, 108–10 ‘honour all cards’ rule 56–7 interchange fees 42–4, 100 interest 90, 94, 173 introduction of 19, 39–44, 45–6, 70 online payments 50–1 overspending 173 paying to pay 101 real-time authorisation 47–8, 143–4 Union Pay, China 59 use in Europe 58, 101 see also Mastercard; Visa credit checks 175 credit default swaps 132 credit derivatives 131–3 Credit Suisse 65 Crelan bank 111 crime rates 33, 67 critical mass and payment systems 69–70, 79 cross-border payments 93, 133 card networks 143–4 clearing 240 correspondent banking 138–42, 143, 144–5, 146–8 debit cards 58–9 domestic instant payment systems 144 fees 137, 238–9 G20 agenda 148–9 global payments innovation (gpi) 147–8 Hawala system 142–3 interest made by banks 145–6 Letters of Credit 149–51 money remitters 144, 146 regulations 144, 145, 148, 239 TransferWise 146–7 Crossan, Doug 172 cryptocurrencies 16, 37, 63, 84, 187–209, 252, 269, 270 see also Central Bank Digital Currencies CryptoHQ 187 Cuba 149–50, 211 Cunliffe, John 11 currency controls 144 Currency Education Program (CEP), US 25 current account bank charges 91–2, 100–1 customer-loyalty programmes 219–20 CVV and CVV2 (Card Verification Value) codes 109, 171 cybercrime 107–8, 110–14, 232–3, 270 D Danske Bank 256–7 dark net 199 data privacy regulations 179, 233–4 dating-app fraud 111–12 de-risking 267–8 debit cards 19, 49, 50, 56–9, 91, 98 debts 8–10, 13–14, 45, 170, 173–4 Decentralized Autonomous Organization (DAO) 196 Deliveroo 82–3 Deloitte 264 Denmark 172, 256, 257 derivatives market 131–3, 208 Deutsche Bank 64, 133, 166, 260 devaluation 203 DG Comp 224, 225–6 Diem/Libra 63 digital wallets 224 Dimon, Jamie 206 Diners Club 40 direct debits 67, 119 disgorgement 198 distributed computing platform 194–6 Dodd-Frank legislation 98 dollar bills, circulation overseas 24–5, 213 dollars, global power of US 246–54 domestic securities market, US 247 Dorsey, Jack 155 drugs economy 27, 255, 258, 263 Dubai First Royal Mastercard 52 Durbin Amendment 57, 98 Dutch Data Protection Authority 234 Dutch Golden Age 5 Dutch parliament 266 Dutch resistance 7–8 E EBA Clearing 239–40 eBanking 36, 181 eBay 19, 51, 52, 70, 161, 163, 165 The Economist 55, 184 email fraud 110–11 embassies, diplomatic 266–7 embedded payments 169 E.On 119 Epic Games 225 Eriksson, Björn 35 errors, payment 64–6 Escobar, Pablo 255 escrow account systems 52 Estonia, Danske Bank 256–7 Ethereum/Ether 194–6, 198–9 euro E500 bills 24, 25, 28 see also Europe; European Central Bank; European Commission; European Union; Eurozone Europaisch-Iranische Handelsbank (EIH) 248 Europay 59, 90–1 Europe bank fines and financial crime 259–60 bank revenue 98, 99, 100–1, 102–3, 237–9, 241, 242 credit card use 58, 101 current accounts 100–1 Eastern 78, 213 financial literacy 172 instant payment systems 86 own payment network 59–60 paying to pay 98, 100–1 protection of personal data 179 regulatory authorities 224, 225–6, 231, 232, 237–42, 244 use of debit cards 58–9 European Banking Authority 256 European Banking Federation 239 European Central Bank 34, 86, 205–6, 233, 237, 240–1, 271 European Commission 60, 83, 85–6, 224, 225, 237, 238, 239, 240, 271 European Payments Council (EPC) 240 European Payments Initiative 60, 271 European Union (EU) 79, 148, 180–1, 237, 238–9, 243, 244–5, 265–6 Eurozone 102–3, 119, 183, 240 eWallets 36, 52, 216, 217 executive-whaling 110–11 F FACC AG 111 Facebook 63, 70, 110, 147, 158, 165, 179, 184, 201–2, 204–6, 209, 220, 222, 224, 269 facilitators, payment 162 Fantástico 234 far-right groups 4 Faster Payments Service (FPS) 82, 83, 84, 86 FBI (Federal Bureau of Investigation) 113 federal debt 9 Federal Reserve Bank 12, 36, 37, 113–14, 131, 232, 259 Fedwire 126–7 Financial Action Task Force (FATF) 262 Financial Conduct Authority, UK 37–8 financial crime 255–64 see also counterfeiting; fraud; money laundering; robbery financial literacy 172 Financial Stability Board (FSB) 135, 268, 269 Financial Times 103, 128, 129, 166–7 FinCEN 253, 255 FinTech 38, 147, 151, 155–9, 162–7, 240 lack of regulation 156, 235–6 First American Bankshare 264 foreign ATM fees 90 foreign exchange 56, 89, 90, 93, 131, 133, 140, 144, 205, 208, 246 Foreign Funds Control (FFC), US 249 foreign reserves, dollars and 247 Fortnite 225 four-corner payment model 41–2, 174, 220 France 63, 67, 119, 243, 245, 259, 260 Frankfurt Stock Exchange 166 fraud bank 261–5 card payment 46, 51, 52, 108–9 dating-app 111 cryptocurrency 199–200 detection services 56, 162 emails 110–11 and frictionless payments 170, 171–2 social media 110 free-banking era, US 208 free speech 184 Freis, Jim 167 French foreign ministry 234 frictionless payments 170–5 Friedlein, Joe 127 G G20 148–9 geographic payment preferences 67–8, 72 George, Edward 126 Germany 28, 67, 78–9, 111, 123, 158, 166–7, 183, 243, 245, 247, 248–9 Giannini, A.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Bernie Madoff, Black-Scholes formula, book value, British Empire, business cycle, buy and hold, buy the rumour, sell the news, Claude Shannon: information theory, clean tech, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, do what you love, Edward Thorp, family office, financial independence, fixed income, Flash crash, global macro, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, legacy carrier, Long Term Capital Management, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, Michael Milken, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Reminiscences of a Stock Operator, Right to Buy, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Savings and loan crisis, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

Overall credit spread levels will widen during times of financial crisis when investors will demand higher interest rate differentials for accepting the greater risk implicit in holding corporate bonds instead of Treasuries. There are several ways to initiate a trade that will profit if credit spreads widen. The most direct trade is shorting the corporate bond. The equivalent trade can also be implemented through derivatives by buying credit default swap (CDS) protection on the bond. A CDS is essentially an insurance policy that pays off if the bond defaults. The buyer of CDS protection, however, does not need to own the underlying bond—that is, the transaction can be made strictly as a speculative trade (one that profits from a deterioration in credit quality).

We are just as fanatical about capital preservation, but instead of achieving a margin of safety by knowing that a company has assets or cash flow that are not valued properly by the market, we achieve our margin of safety by having a high expected value. We are comfortable losing 100 percent of our premium four times in a row, as long as we believe that a 25-times payout is likely to occur if we make the same bet 10 times consecutively. High conviction on an event path priced like a low-probability event is our Holy Grail. The subprime credit default swap (CDS) trade was the poster child for a high-conviction trade priced as an improbable event. We got to the trade late, which is typical for us because we like situations where there is a compelling reason why a trade should be working, and the only counterargument is that everyone says it should work, but it hasn’t.

Although the AAA ratings for tranches of individual mortgages could be defended to some extent, it is difficult to make the same claim for the AAA ratings of CDO tranches consisting of only the BBB tranches of mortgage bonds. In regard to the CDO ratings, the credit rating agencies were either conflicted or incompetent. Cornwall Capital’s primary strategy for shorting the housing bubble was buying credit default swaps (CDS) on the AA tranches of CDOs. The buyer of CDS makes ongoing premium payments (equivalent to the bond interest rate payments) to the seller for protection against the risk of default in the underlying security. How did you get involved in trading the subprime mortgage market? I first became aware of the opportunity in October 2006 when a friend sent us a write-up of a presentation made by Paul Singer of Elliot Associates.


pages: 165 words: 48,594

Democracy at Work: A Cure for Capitalism by Richard D. Wolff

asset-backed security, Bear Stearns, Bernie Madoff, business cycle, collective bargaining, Credit Default Swap, declining real wages, feminist movement, financial intermediation, Glass-Steagall Act, green new deal, Howard Zinn, income inequality, John Maynard Keynes: technological unemployment, laissez-faire capitalism, means of production, military-industrial complex, moral hazard, mortgage debt, Occupy movement, Ponzi scheme, profit maximization, quantitative easing, race to the bottom, Ronald Reagan, too big to fail, trickle-down economics, wage slave, women in the workforce, Works Progress Administration

For thirty years, these interconnections generated enough gains—in the forms of rising debt-based consumption for the masses and rising wealth for the employers and the rich—to reproduce the system. But the pattern was unsustainable. A pyramid of speculations was erected on ABS—as ever more profit-based incomes piled into them—and on their allied financial instruments, such as the peculiar ABS insurance policies called credit default swaps (CDS). Hedge funds and banks took ever-greater risks as they competed for high returns to lure investments from those who kept accumulating profits. Alongside rising investor risks, workers’ rising debt levels combined with stagnant real wages to erode their capacity to service their debts.

To lend to any bank—even overnight—meant risking being told the next morning, week, or month that the borrowing bank could not repay because its ABS values were collapsing and its access to credit had vanished. Other financial enterprises were likewise drawn into the credit freeze. Some held ABS or depended on banks that did. Others had hedged their holdings of ABS—as many banks did—by purchasing credit default swaps (CDS) as insurance against the defaults that were proliferating in 2008 and 2009. Still others had found new profit opportunities by speculating in CDS themselves, since CDS values rose (mostly) and fell (sometimes) as rumors swirled about ABS insured by those CDS. Yet another shock took the credit markets over the edge as they were hit by a three-part punch.


pages: 348 words: 97,277

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, Big Tech, bitcoin, blockchain, blood diamond, Blythe Masters, business process, buy and hold, carbon credits, carbon footprint, cashless society, circular economy, cloud computing, computer age, computerized trading, conceptual framework, content marketing, Credit Default Swap, cross-border payments, crowdsourcing, cryptocurrency, cyber-physical system, decentralized internet, dematerialisation, disinformation, disintermediation, distributed ledger, Donald Trump, double entry bookkeeping, Dunbar number, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, failed state, fake news, fault tolerance, fiat currency, financial engineering, financial innovation, financial intermediation, Garrett Hardin, global supply chain, Hernando de Soto, hive mind, informal economy, information security, initial coin offering, 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, post-truth, prediction markets, pre–internet, price mechanism, profit maximization, profit motive, Project Xanadu, 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, Tragedy of the Commons, transaction costs, Travis Kalanick, Turing complete, Uber and Lyft, uber lyft, unbanked and underbanked, underbanked, universal basic income, Vitalik Buterin, web of trust, work culture , zero-sum game

Other times, it involved assigning arbitrarily high values to “hard-to-value” assets—when the great selloff came, the shocking reality hit home: the assets had no value. The crash of 2008 revealed most of what we know about Wall Street’s confidence game at that time. It entailed a vast manipulation of ledgers. The recorded value of the assets those ledgers were supposed to track—including those havoc-causing credit default swaps—turned out to be largely vapor. The shock of Lehman wasn’t so much that it happened, but that even most experts trusted the ledgers so completely until it was too late. Governments and central banks around the world spent trillions to clean up the mess, but all they really did was restore the old order, because they misdiagnosed the problem.

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. At the age of just twenty-five, and as part of a crack team at J.P. Morgan, she conceived of CDSs as a way for investors to buy insurance against the risk they bear on their balance sheets—and thus to unlock capital hitherto tied up against that risk—as well as for other investors, the banks, and other institutions that issue the CDS to place a bet on the underlying asset without actually owning it.

Chainalysis Charrúa China Chipotle Chowdry, Bhagwan Christianity Chromaway Cisco climate change Climate Coin Clinton, Hillary cloud computing CME Group “code is law” Code of Hammurabi Coin Center CoinCircle CoinDesk Bitcoin Price Index Cointracker Consensus conference Coinfund Coinlist Cold War Colored Coins Comcast commons, the. See also Creative Commons; Tragedy of the Commons Commuterz ConsenSys Constitution, U.S. Context Labs Cooley COP 23 Corda platform. See also R3 CEV Cosmos costs-per-impression measures (CPMs) Craigslist Creative Commons credit default swap (CDS) Crowdfunder crowdfunding crypto-asset analysts crypto-assets Crytpo Company cryptocurrency and criminality and Cypherpunk movement and decentralization and fair distribution and financial sector and Fourth Industrial Revolution hoarding investors and privacy and quantum computing and regulatory challenges See also Bitcoin cryptography and blockchain technology and data storage and financial sector hashes history of and identity and math Merkle Tree practical byzantine fault tolerance (PBFT) and registers and security and privacy signatures and supply chains and tokens triple-entry bookkeeping and trust crypto-impact-economics Cryptokernel (CK) crypto-libertarians cryptomoney Cryptonomos Cuende, Luis Iván Cuomo, Jerry cyber-attacks ransom attacks cybersecurity and decentralized trust model device identity model shared-secret model Cypherpunk manifesto Cypherpunk movement and community DAO, The (The Decentralized Autonomous Organization) Dapps.


pages: 357 words: 99,684

Why It's Still Kicking Off Everywhere: The New Global Revolutions by Paul Mason

anti-globalists, back-to-the-land, balance sheet recession, bank run, banking crisis, Berlin Wall, business cycle, capital controls, capitalist realism, centre right, Chekhov's gun, citizen journalism, collapse of Lehman Brothers, collective bargaining, creative destruction, credit crunch, Credit Default Swap, currency manipulation / currency intervention, currency peg, disinformation, do-ocracy, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, foreign exchange controls, Francis Fukuyama: the end of history, full employment, ghettoisation, illegal immigration, informal economy, land tenure, Leo Hollis, low skilled workers, mass immigration, means of production, megacity, Mohammed Bouazizi, Naomi Klein, Network effects, New Journalism, Occupy movement, price stability, quantitative easing, race to the bottom, rising living standards, short selling, Slavoj Žižek, Stewart Brand, strikebreaker, union organizing, We are the 99%, Whole Earth Catalog, WikiLeaks, Winter of Discontent, women in the workforce, working poor, working-age population, young professional

The other half of Greece’s debts were held by northern European banks and states, and by the ECB; they, too, would be dragged into fiscal crisis by a Greek default. But there was even more to worry about.On top of the actual debt, the global derivatives market had facilitated the erection of default insurance positions worth an estimated $1 trillion. These ‘credit default swaps’ would act like an accumulator bet, and significant losses on Greek debt would explode like an anti-tank missile, straight through the armour of the entire global system. It would, said one bond market contact, be a ‘Credit-Anstalt moment’: he was referring to the Austrian banking collapse in 1931 that turned the Wall Street Crash into a global slump.

Exhibit One: the average US house price at the peak, in 2006, was double what the historic trend line said it should be, even when compared to every other boom–bust cycle since the war. This was no ordinary housing bubble. Exhibit Two: the value of mortgage-backed securities issued (that is, of complex debt products designed to mask the risks involved in riding the house-price bubble) increased fivefold between 2000 and 2003, to $3.2 trillion. Credit default swaps, where unknown actors in the market can bet on the future failure of another’s investment, had grown from zero to $68 trillion in eight years. This was no ordinary credit cycle. Exhibit Three: there was a massive rise in so-called global imbalances. China’s foreign currency reserves grew from $150 billion in 1999 to $2.85 trillion in 2010.

P. 127 cellphones 75–76, 133–34 Central Security (Egypt) 9, 11, 17 Challenge of Slums, The (UN) 198–99 Charles, Prince 51–52 Chávez, Hugo 33 China 38, 78, 108, 112, 121, 125; consumption 109; foreign currency reserves 107; monetary policy 123 Chomsky, N. 28–29 Chris (student demonstrator) 48 Cinco, Mena 196–98, 206, 206–9 Citigroup 67 civil disobedience 56 class struggles 131 Clegg, Nick 44 Climate Camp movement 1, 55 Clinton, Hillary 26 collaborative production 139–41 Coming Insurrection, The 189–91 commodity price inflation 120–22, 195 communes 189, 190 Communiqué from an Absent Future 38–39 Communist Manifesto, The (Marx and Engels) 174, 188–89 communists 80 computer gamers 136 Conservative/Liberal Democrat coalition 44 consumption, and self-esteem 80–81 control 148 co-operatives 84 corruption, threat of 177–78, 205 creative destruction 106 credit crisis 106, 109 credit default swaps 99, 107 Critical Legal Thinking website 54 cross-border links 69–70 Cruz, Gloria 204 cultural stereotypes 27 culture: mass 29–30; popular 65, 176; transnational 69; working-class 72; youth 70 culture wars 178–84 currency manipulation 121–22 currency war 122–24 cyber-repression 78 Czechoslovakia 173 Darkness at Noon (Koestler) 128–29 Davies, Nick 148 Davos 17, 111 Dawkins, Richard 75, 150 Day X, 24 November 2010, London 41–42, 46–48 Debord, Guy 42, 46–17, 51 debt, toxic 110–11 default theory 111 deflationary slump 123 Deleuze, Gilles 46, 85 Delius, Frederick 127, 132, 152, 176 democratic counter-revolution 177, 188 demographics of revolt 66, 66–73; Athens, December 2008 uprising 73; students 66–71; the urban poor 70–72 Deptford 57 Detrick, Terry 154, 155–56, 156 devaluation 91, 122–23 @digitalmaverick 1–2 discontent, three tribes 68–69 disillusionment 68–69 disinformation, counteracting 146 disposable income 67 Dodd–Frank Act (USA) 167 @dougald 1 Dubstep Rebellion 48–52; blog 52; the Book Bloc 50–51; casualties 51; Fleet Street photographers 51; graffiti 51; marchers 49; police–student confrontation 50–51 durable authoritarianism 27, 30, 191 Durkheim, Emile 103–4 Dworkin, Ronald 46 eBay 74 e-commerce 81 economic crisis 3; revolutions, 1848 173 economic stagnation 191–92 economic theory 111 Economist, the 25 egoism 132 Egypt: bread prices 11; democratic counter-revolution 177; economic growth 119; economic indicators 119–20; elections, November 2011 177; Gini Index 119; inflation 120–21; opposition movement 10; organized workforce 72; police corruption 11; privatizations 17–18; unemployment 119–120; urban poor 71; working class 19–20 Egyptian revolution, the: the Army and 178; balance sheet 5; bread prices 11; casualties 17; chants 191, 211; counter-revolution 18; Day of Rage, 28 May 15–17; and Facebook 6, 10, 11, 12, 14; freedom 5; immolations 11, 71; Internet switched off 14; medical professions 20–22; military coup 17–19; numbers involved 13; outbreak, 25 January 10–14, 83; police violence 15; questions facing 23–24; Twitter blocked 14; Twitter feeds 13, 14; ultras 16–17; working class 20; on YouTube 11, 14, 15–16; zabbaleen riots 6–10 email 10 emancipated life 143–44 Engels, Friedrich 174, 188–89, 190 @eponymousthing 184 equity withdrawal 114 Estero de San Miguel, Manila 196–99, 205–6, 206–9 Eternal Sunshine of the Spotless Mind, The (film) 29 Eurobonds 113 Eurocrisis, the 111–13 European Central Bank 92, 98, 104, 112 European Financial Stability Facility 92, 104 European Financial Stabilization Facility 113 European monetary union 112, 113 European Union: response to Greek debt crisis 91–92, 96, 98–99, 104; sovereign debt crisis 104 Europe, revolutions, 1848 172 Eurozone 104; debt crisis 91–92, 99, 111–13 Execution of Maximilian (Manet) 53 exploitation 85 Facebook 74; Arab world growth of 135; and the Egyptian revolution 6, 10, 11, 12, 14; establishing connections with 75; ‘We are all Khaled Said’ page 11; and the Iranian revolution 34; and London trade-union demonstration, March 2011 57–58; Middle East usage 135; reciprocity 77; user numbers 135 Farewell to the Working Class (Gorz) 79–80 fatalism 30, 31 feedback loops 187 Feldstein–Horioka paradox 107 Feldstein, Martin 107 Fennimore and Gerda (Delius) 127, 132 First World War 128 Fisher, Mark 30 Flaubert, Gustave 171, 192 Flickr 10, 75 Food Price Index 121 Fordist era 28 Foucault, Michel 46, 84–85 fragmentation 80–81, 82 fragmented power 17 ‘Fragment on Machines’ (Marx) 143–44 France 173; Languedoc, 1848 174, 187; socialism 188; see also Paris freedom 27, 124; of expression 127; individual 127–30; Marx on 141–42; suppression of 131–33 Freeman, Richard 108 free-market economics 92, 188 Friedman, Milton 111 Fukuyama, Francis 30 G20 Summit, 2009 48, 122 Gaddafi, Muammar 25, 31 Gapan City, Philippines 193–96 Gates, Bill 23, 110 gay rights 132 Gaza 37; Israeli invasion of 33 Gaza City 31 Gaza Flotilla, May 2010 55 general intellect, the 144, 145–47 General Motors 39 Germany 113, 191; revolution of 1848 172; wages 108, 112 @Ghonim 13 Giddens, Anthony 31 Gide, André 127 Giffords, Gabrielle 182 Gini Index 119 Gladwell, Malcolm 81–82, 83 global capital flows 107–8 global financial crisis 31, 39, 66–67, 85, 110–11, 115, 191 globalization 69,72, 105, 108, 109, 122, 124, 149, 191 Golkar, Saeid 78 Googlebombs 78 Gorz, André 79–80, 143 graduate with no future, the 66–73, 96–97; disposable income 67; as international sub-class 69; life-arc 67; numbers 70; revolutionary role 72–73; and the urban poor 70–71 Grapes of Wrath, The (Steinbeck) 153, 155, 159, 163, 164 Great Britain: anti-road movement 56; benefit system 113–14; changing forms of protest 54–57; collapse of Labour 113–15; devaluation 123; Education Maintenance Allowance 47; end of winter of discontent 61–62; equity withdrawal 114; European elections, 2009 115; general election, 2010 43; the graduate with no future 96–97; Millbank riot 42–44; non-UK born workers 115; police failures 61; public spending cuts 54–55; radical tactics 54–57; spontaneous horizontalists 44–46; Strategic Security and Defence Review 124; student population 70; UK Uncut actions 54–55; university fees 44, 47, 50, 54; youth 41–42, 44, 53–54; youth unemployment 66 Great Depression, lessons of 123–25 Great Doubling 108 Great Unrest, 1914 175–76 Greece 37, 188; anomic breakdown 103–4; austerity programme 92–93, 102; bailouts 92, 96, 98, 113; cabinet reshuffle 96, 97–98; debt crisis 90, 91–92, 98–99, 112; GDP 91; general election, 2009 91; general strike 99; the left 100; media ownership 87; Medium Term Fiscal Strategy 91; model of capitalism 102; MP resignations 89; Papandreou government falls 96; political legitimacy lost 104; the salariat 101; tax evasion 97; tax revenues 92; tax system 91; see also Athens Greek Communist Party (KKE) 88, 90 Grigoropoulos, Alexandras 32 grime (music) 52 Grossman, Vasily 129 @GSquare86 69 Guindi, Ezzat 9 hackers 35 el-Hamalawy, Hossam, @3arabawy 10, 22, 71 Hardy, Simon 69 Hayek, Friedrich 111, 209 Henderson, Maurice 161–62 Hennawy, Abd El Rahman, @Hennawy89 12–13 Here Comes Everybody (Shirky) 138 Herman, Edward S. 28–29 hidemyass.com 14 hierarchy: erosion of 80–81; informal 83; predictability of 77 higher education market 67 Hill, Joe 176 historical materialism 131 Hogge, Becky 140 homelessness 159–63 Hoon, Geoff 114 Horioka, Charles 107 horizontalism 45, 55, 56, 62, 100 Huffington Post blog 184 human rights 143 Hungary 172 Ian’s Pizza, Madison, Wisconsin 184 Ibrahim, Gigi, @GSquare86 69 ideology 29, 149 immolations 11, 32, 71 impotence, zeitgeist of 29–30 impoverishment 209 Inception (film) 29 India 120–21 Indiana 116–17, 125 indignados, the 88, 100–1, 104 individual: freedom of 127–30; power of the 65, 79; rise of the 127–30 Indorama group 22 industrialization 192 Indymedia 74 inequality 209 inflation 109, 120–21 info-capitalism 148, 211 info-hierarchies 147–52 info-revolution, the 146, 149–50 informal hierarchies 83 information capitalism 145 information management 147 information networks 77 information tools 75 Inkster, Nigel 65 institutional loyalty 68 interest rates 67 International Labour Organization 19–20, 120 International Monetary Fund 92 Internet consciousness 136–38 Internet, the: access in slums 207; Arab world growth 135; and behaviour changes 131; and the Iranian revolution 35; out of reach for some 152; power of 29; shutdowns 14, 78; and the spread of ideas 150–51 investment, and savings 107 Invisible Committee, the 189–91 Iran 25; causes of failure of revolution 36–37; election, 2009 33–34; and the Internet 35; and the Middle East balance of power 178; rooftop poems 36; Twitter Revolution 33–37, 78, 178; on YouTube 34, 35 Iraq 25, 55 Ireland 92, 111, 112, 188 Islam 30, 37 Israel 26, 33, 179–80 Italy 104 Jakarta 33 James, C.


pages: 364 words: 99,613

Servant Economy: Where America's Elite Is Sending the Middle Class by Jeff Faux

air traffic controllers' union, Alan Greenspan, back-to-the-land, Bear Stearns, benefit corporation, Bernie Sanders, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, call centre, centre right, classic study, cognitive dissonance, collateralized debt obligation, collective bargaining, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, David Brooks, David Ricardo: comparative advantage, disruptive innovation, falling living standards, financial deregulation, financial innovation, full employment, Glass-Steagall Act, guns versus butter model, high-speed rail, hiring and firing, Howard Zinn, Hyman Minsky, illegal immigration, indoor plumbing, informal economy, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kevin Roose, Kickstarter, lake wobegon effect, Long Term Capital Management, low interest rates, market fundamentalism, Martin Wolf, McMansion, medical malpractice, Michael Milken, military-industrial complex, Minsky moment, mortgage debt, Myron Scholes, Naomi Klein, new economy, oil shock, old-boy network, open immigration, Paul Samuelson, plutocrats, price mechanism, price stability, private military company, public intellectual, radical decentralization, Ralph Nader, reserve currency, rising living standards, Robert Shiller, rolodex, Ronald Reagan, Savings and loan crisis, school vouchers, Silicon Valley, single-payer health, Solyndra, South China Sea, statistical model, Steve Jobs, Suez crisis 1956, Thomas L Friedman, Thorstein Veblen, too big to fail, trade route, Triangle Shirtwaist Factory, union organizing, upwardly mobile, urban renewal, War on Poverty, We are the 99%, working poor, Yogi Berra, Yom Kippur War, you are the product

The commentators assured their audiences that by spreading risks among more people, the miracle of “diversity” was actually turning bad loans into good ones. And there was nothing to worry about, they said, for the banks were buying insurance policies against default. In fact, these policies were quickly transformed into a set of even murkier derivatives called credit default swaps, which are bets on price movements of securities that in turn are bets on the default rate of loans held by other people. These swaps were marketed to hedge funds, pension managers, and, in some cases, back to the banks that were being insured in the first place. With money on all sides of every trade, it was hard for many players to tell at the end of the day whether they’d lost or won.

It extended the government’s regulatory authority and required more transparency in the trading of exotic securities. It also created a government subagency within the Federal Reserve to protect consumers from abuses. But Dodd-Frank, as the law is known, restored none of the Glass-Steagall Act’s firewall between lenders and borrowers. It allowed trading in the most volatile and dangerous derivatives, credit default swaps, and other securities that represented exotic gambling with other people’s money. It did not end the embedded conflict of interest among securities underwriters and rating agencies, accountants, and insurers. And it did little to curb the influence of the financial sector over its regulators through the corrupt revolving door between Washington and Wall Street.

See social mobility Clay, Henry Clinton, Bill on education financial meltdown of 2008 and fiscal policy 1992 election of Reagan’s influence on Clinton, Hillary Coehlo, Tony Cognizant Technology Solutions Corporation Colbert, Steve collateralized debt obligations (CDO) college education for-profit free trade policy and Obama on servant economy and See also education Colombia, U.S. military spending and Commission on Wartime Contracting Commodities Futures Trading Commission (CFTC) communism China and Marx Soviet Union and in the United States Complex, The (True) Congressional Budget Office (CBO) Congress of Industrial Organizaitons (CIO) consumer debt. See subprime mortgage bubble (2000–2008) Consumer Financial Protection Agency Coolidge, Calvin Cooper, Keysha Cordesman, Anthony H. Coughlin, Father Charles Council of Economic Advisors credit default swaps Crocker, David Cuomo, Andrew Cuomo, Mario currency dollar pound sterling ruble trade deficit and yuan Daley, William Danner, Mark Davis-Bacon Act de Beauvoir, Simone Debs, Eugene Dell Corporation Democratic Party. See government spending; U.S. politics; individual names of Democratic politicians Democrats for Education Reform deposit insurance deregulation Bill Clinton and Carter and financial meltdown of 2008 and Reagan and derivatives Dodd, Christopher Dodd-Frank dollar “domino theory,” dot-com bubble (1990s) Dow Chemical drugs government spending and servant economy and economic austerity trade deficit and Duhigg, Charles Duncan, Arne Economic Policy Institute Economic Report of the President (Obama) economic security austerity austerity and servant economy Carter and Cold War and Great Society and institutionalists and Keynesians vs.


pages: 329 words: 99,504

Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud by Ben McKenzie, Jacob Silverman

algorithmic trading, asset allocation, bank run, barriers to entry, Ben McKenzie, Bernie Madoff, Big Tech, bitcoin, Bitcoin "FTX", blockchain, capital controls, citizen journalism, cognitive dissonance, collateralized debt obligation, COVID-19, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cryptocurrency, data science, distributed ledger, Dogecoin, Donald Trump, effective altruism, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, experimental economics, financial deregulation, financial engineering, financial innovation, Flash crash, Glass-Steagall Act, high net worth, housing crisis, information asymmetry, initial coin offering, Jacob Silverman, Jane Street, low interest rates, Lyft, margin call, meme stock, money market fund, money: store of value / unit of account / medium of exchange, Network effects, offshore financial centre, operational security, payday loans, Peter Thiel, Ponzi scheme, Potemkin village, prediction markets, proprietary trading, pushing on a string, QR code, quantitative easing, race to the bottom, ransomware, regulatory arbitrage, reserve currency, risk tolerance, Robert Shiller, Robinhood: mobile stock trading app, Ross Ulbricht, Sam Bankman-Fried, Satoshi Nakamoto, Saturday Night Live, short selling, short squeeze, Silicon Valley, Skype, smart contracts, Steve Bannon, systems thinking, TikTok, too big to fail, transaction costs, tulip mania, uber lyft, underbanked, vertical integration, zero-sum game

In January, the Fed slashed interest rates by three-fourths of a point, the biggest cut in twenty-five years. It wasn’t nearly enough: More decisive action was needed to stem the collapse of the finance industry and, by extension, the overall economy. In March, the government began bailing out bond dealers, the people who had made toxic mortgage-backed securities and credit-default swaps. It was the first in a long list of actions that essentially guaranteed the finance industry’s bad debt, but did little to help homeowners and everyday Americans. After Lehman Brothers declared bankruptcy in September 2008, equities and commodities prices crashed, and the world economy appeared on the brink of collapse.

They didn’t really have to do anything except rise in price. The entire economic foundation of crypto-currency quickly became “number go up.” With a price tag attached, they could be treated as digital assets unto themselves, capable of being used as collateral for loans or transformed into complex financial products, not unlike the credit-default swaps of the mid-2000s. This was the beginning of DeFi (decentralized finance), in which tokens would be routed through complex, mostly automated protocols that added leverage and risk to the system—and a chance at huge rewards. Turning that magic internet money into fiat, into real dollars that could be spent in the mainstream economy, still presented some challenges.

They may not have wanted to play in the crypto waters before, I pointed out, but now it’s making so much money. “Correct, which is why the J.P. Morgans and the Goldman Sachs and everybody works with this (crypto) now,” he agreed. “It’s become a big enough business.” “Interesting.” I hazarded a comparison, “Sort of like the financial crisis, right? All the companies were taking on CDO and credit-default swaps. They saw a lot of money to be made, right?” Brock shifted on the stool. “Clearly large markets attract large businesses.” There was an awkward pause. The interview appeared to be over. But as we got up from our stools, he kept talking, despite the fact that the cameras were still rolling.


pages: 289 words: 95,046

Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis by Scott Patterson

"World Economic Forum" Davos, 2021 United States Capitol attack, 4chan, Alan Greenspan, Albert Einstein, asset allocation, backtesting, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, bitcoin, Bitcoin "FTX", Black Lives Matter, Black Monday: stock market crash in 1987, Black Swan, Black Swan Protection Protocol, Black-Scholes formula, blockchain, Bob Litterman, Boris Johnson, Brownian motion, butterfly effect, carbon footprint, carbon tax, Carl Icahn, centre right, clean tech, clean water, collapse of Lehman Brothers, Colonization of Mars, commodity super cycle, complexity theory, contact tracing, coronavirus, correlation does not imply causation, COVID-19, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, decarbonisation, disinformation, diversification, Donald Trump, Doomsday Clock, Edward Lloyd's coffeehouse, effective altruism, Elliott wave, Elon Musk, energy transition, Eugene Fama: efficient market hypothesis, Extinction Rebellion, fear index, financial engineering, fixed income, Flash crash, Gail Bradbrook, George Floyd, global pandemic, global supply chain, Gordon Gekko, Greenspan put, Greta Thunberg, hindsight bias, index fund, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, Jeffrey Epstein, Joan Didion, John von Neumann, junk bonds, Just-in-time delivery, lockdown, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, Mark Spitznagel, Mark Zuckerberg, market fundamentalism, mass immigration, megacity, Mikhail Gorbachev, Mohammed Bouazizi, money market fund, moral hazard, Murray Gell-Mann, Nick Bostrom, off-the-grid, panic early, Pershing Square Capital Management, Peter Singer: altruism, Ponzi scheme, power law, precautionary principle, prediction markets, proprietary trading, public intellectual, QAnon, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Nader, Ralph Nelson Elliott, random walk, Renaissance Technologies, rewilding, Richard Thaler, risk/return, road to serfdom, Ronald Reagan, Ronald Reagan: Tear down this wall, Rory Sutherland, Rupert Read, Sam Bankman-Fried, Silicon Valley, six sigma, smart contracts, social distancing, sovereign wealth fund, statistical arbitrage, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, systematic trading, tail risk, technoutopianism, The Chicago School, The Great Moderation, the scientific method, too big to fail, transaction costs, University of East Anglia, value at risk, Vanguard fund, We are as Gods, Whole Earth Catalog

He could bet against bundles of bonds grouped together in indexes, just like the Dow Jones Industrial Average is a bundle of thirty large companies. If the bond indexes fell just a little, he might lose it all. If they crashed, he’d make a fortune. It would be a giant bet on chaos. Ackman quickly built up a massive position. He purchased insurance contracts known as credit default swaps on $42 billion in U.S. investment-grade debt, more than $20 billion in an index of European debt, and a $3 billion position in junk bonds. In all, he had insurance tied to $71 billion of corporate debt. It cost Ackman a mere $26 million to make the bet. Like fire insurance, it would pay off if those bond indexes got torched.

Because hardly anyone thought the U.S. housing market could implode, making that bet before the implosion started was extremely cheap. In some ways, those trades were similar to Universa’s. They were bets on volatility—in housing prices. The financial instrument that traders like Paulson utilized was called a credit default swap. Think of it like an insurance policy on a mortgage. If the mortgage holder defaults (or if ten thousand mortgage holders default), the swap pays off, just like a put option pays off if the price of a stock falls to a certain price. Paulson and Burry had identified a systemic weakness in the U.S. housing market and had devised an ingenious way to profit when it blew up.

It wasn’t completely crazy to think it might work out for Schmalbach. History provides plenty of examples of niche instruments becoming core financial products on Wall Street. In the 1970s, few traders had heard of options, much less how to price them. In the 1990s, another product with insurance-like properties—the credit default swap—was little more than a theoretical construct sketched out on whiteboards by Wall Street’s growing legions of quants. By 2008, swaps valued in the trillions of dollars, euros, and yen had spread through the innards of the global financial system like a contagious virus. And then they blew up, causing a collapse from which the system barely recovered


Britannia Unchained: Global Lessons for Growth and Prosperity by Kwasi Kwarteng, Priti Patel, Dominic Raab, Chris Skidmore, Elizabeth Truss

Airbnb, banking crisis, Carmen Reinhart, central bank independence, clockwatching, creative destruction, Credit Default Swap, demographic dividend, Edward Glaeser, eurozone crisis, fail fast, fear of failure, financial engineering, glass ceiling, informal economy, James Dyson, Kenneth Rogoff, knowledge economy, long peace, margin call, Mark Zuckerberg, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, Neil Kinnock, new economy, North Sea oil, oil shock, open economy, paypal mafia, pension reform, price stability, profit motive, Ronald Reagan, Sand Hill Road, Silicon Valley, Stanford marshmallow experiment, Steve Jobs, Suez crisis 1956, tech worker, Walter Mischel, wealth creators, Winter of Discontent, working-age population, Yom Kippur War

The City’s cult of the ‘quant’, who might have a PhD in theoretical physics or mathematical logic, created a division between the analysts and the managers. Quite simply, those in charge didn’t understand the maths. The epitome of this cult was David Li. A brilliant Chinese mathematician with a PhD in statistics, his development of a Gaussian copula function for CDSs (credit default swaps) and CDOs (collateralised debt obligations) was lauded as a watershed in measuring risk.51 Adopted by Standard & Poor’s and Moody’s, his formula became widely accepted in measuring risk. It even formed part of the Basel II regulations.52 The problem was, as Li himself admitted in 2005, that few people understood how the model worked.53 Rather 48 Britannia Unchained than questioning the outputs, fund managers did exactly what Li warned them not to do.

Index Compiled by Sue Carlton 9/11 terrorist attacks 29 Addison Lee minicabs 62, 63 Airbnb 98 Allensbach Institute 40 America see United States Amin, Idi 9 antisemitism 86 Antrobus, Lavern 75 AOL 81 Apple 60, 81, 91, 105 The Apprentice 75 apprenticeships 74 ArcelorMittal 73 Argentine military junta, defeat of (1982) 10 ARM 68 austerity measures 3, 36, 66 Australia 30, 32–3, 65, 88, 111 Bakewell, Joan 109–10 Balls, Ed 25–6, 27, 28, 29, 30, 31, 33 Balls, Michael 25 Bank of England independence 25 see also central banks bankruptcy 91, 92 see also business, and failure banks Australian 33 bailouts 12, 33 Canadian 4, 13, 33–5 Chinese 95 and mathematical knowledge 45, 47–8 Bar-Natan, Bernard 78–80, 84 Basel II regulations 47 Beleza Natural 103–4 Beuchler, Simone 102 Black Wednesday 25 Blair, Tony 17, 24, 27, 29, 115 Blanchflower, David 20 boom and bust, end of 25, 27, 30, 115 Branson, Richard 97 Brazil 5, 100–6, 112, 113, 115 crime 102–3, 105 democratic elections 104 demographics 104 education system 105 and global recession 101 and international investment 105 military coups 104 Olympic Games (2016) 101–2, 103 and optimism 5, 100–2, 103, 105, 106, 111 poverty and inequality 102, 104–5 productivity 105, 115 BRIC (Brazil, Russia, India, China) economies 10 see also emerging economies Britain see United Kingdom British Chamber of Commerce survey (2011) 87 British film industry 97 British Social Attitudes survey 109 Brittan, Samuel 20 Brown, Gordon 17, 24, 25, 26–9, 30, 33, 36 Buckley, Sir George 58 business 2, 3–4 enterprise zones 88 and failure 91–2, 95–6, 99 and informal economy 88–9 and regulation 87–8, 89 Callaghan, James 24, 114 Cameron, David 20 Campbell, Kim 16 137 138 Britannia Unchained Canada 4, 12, 13–19, 32, 33–7 banks 4, 13, 33–5 cutting deficits 4, 14–18, 30, 32, 37 diversified economy 34 education 36, 37 financial regulation 34–5 points-based immigration system 36 spending cuts 17–18 CDOs (collateralised debt obligations) 47, 48 CDSs (credit default swaps) 47 celebrity culture 4, 74–5, 76, 115 central banks independence 25, 27 see also Bank of England Centre for Economics and Business Research 101 Centre for Social Justice 67, 70, 73 Charles II, King of England 21 childcare, cost of 71 Chile 30, 32 China 10, 46, 53, 113, 115 aging population 106, 107 education 43, 44, 113 Chinese students in UK 58–9, 72 enterprise culture 95 informal economy 89 patent registration 54 Chrétien, Jean 16–18, 35, 36 chutzpah 81–2 Cidade de Deus slum 100 City of God (2002) 100 Clark, Joe 15 Clarke, Ken 27–8 Clinton, Bill 25 ComRes poll 87 Confederation of British Industry 74 Conservative Party (Canada) 35 consumer law 89 Cool Britannia 10, 115 Costa, Edivan 103 credit card debt 12, 30 Crosland, Anthony 26 Crow, Bob 63 Crowdcube 98 crowdfunding 98 Darling, Alistair 111 Day Care Trust 71 De Gaulle, Charles 8, 105–6 Deak, Lex 92 debt 10, 12, 19–24, 30–3, 115 debt delusion 19–20, 23 and default 21–2, 101 and economic growth 21, 22, 23–4 and financial crises 22–3 and future generations 67, 70 and responsible spending 24, 33 deficits 23–4 see also United Kingdom (UK), and deficit; Canada, cutting deficits; debt delayed gratification 71–2 demographics 106–11 population aging 32, 100, 101, 106–7 population growth 9, 113 Devey, Hilary 75–6 Dickson, Julie 35 Diefenbaker, John 15 dot com bubble 11, 29, 94 Dragons’ Den 75 Duncan, Arne 38 Duncan, Emma 57 Duncan-Smith, Iain 75 Dyson, , James 97 Economic Freedom of the World (Cato Institute) 36 economic growth 113 and demographic dividend 108 unsustainability of 9, 10 Economic Stabilisation Plan (Israel) 83 Edison, Thomas 91 education 4–5, 38–60 comparing school systems 38–41 cramming establishments 43–4 and graduate jobs market 44–5 and hard work 50, 57, 59 Index and parental aspiration 57, 59, 72–3 students choosing easier subjects 42–3, 45, 46–7 and work experience 43, 74 see also United Kingdom (UK), education; Programme for International Student Assessment (PISA) Edward III, King of England 21 emerging economies 3, 11, 113, 115 and scientific development 52, 53 and women 50 see also Brazil; China; India; Mexico; South Korea Enron 92 enterprise zones 88, 94 entrepreneurship Brazilian shantytowns 103–4 and courage 98–9 in US 90, 93–4, 96–7 and work ethic 67–8 see also Israeli entrepreneurial culture Erlich, Yigal 83, 84–5 Eurozone crisis 3, 12, 21, 37, 114 Exchange Rate Mechanism 24–5, 115 Facebook 55, 76, 95 failure as part of business 91–2, 95–6, 99 see also risk Famine, 1975!


pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Alan Greenspan, Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, bond market vigilante , borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Glass-Steagall Act, green new deal, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, land bank, Leo Hollis, light touch regulation, London Interbank Offered Rate, low interest rates, market fundamentalism, Martin Wolf, mobile money, Money creation, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, Post-Keynesian economics, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

The board had agreed to loan $85 billion to AIG – an insurance company that wasn’t a bank at all, and should never have had an account with the Fed. Under both Governors Greenspan’s and Bernanke’s watch, AIG had accumulated (in some cases fraudulently) extraordinary liabilities as a player in the $62 trillion credit-default swaps (CDS) market. Mr Bernanke explained to Scott Pelly that the Fed’s $85 billion bailout of AIG, which was one of several loans to AIG, was a short-term, urgent measure to prevent the systemic failure of the global finance sector. But Pelley was puzzled by it all and posed this question. Where had the Fed found the money?

Although their debts were not substantial in the grand scheme of things, nevertheless they were the poorest, most vulnerable borrowers in the market – and because they were charged the highest rates, were most likely the first to go under. Balanced precariously above sub-prime debts were huge sums of ‘structured’ and often ‘synthetic’ debt, made up of collateralised securities, credit default swaps and other complex financial products. These financially engineered products, created artificially by the shadow banking system in the run-up to the crisis, were explosive precisely because they bore no relation to the real world of productive activity. However, they were tenuously linked to the properties and mortgages – the assets – of poor workers.


pages: 204 words: 53,261

The Tyranny of Metrics by Jerry Z. Muller

Affordable Care Act / Obamacare, Atul Gawande, behavioural economics, Cass Sunstein, Checklist Manifesto, Chelsea Manning, collapse of Lehman Brothers, corporate governance, Credit Default Swap, crowdsourcing, delayed gratification, deskilling, Edward Snowden, Erik Brynjolfsson, financial engineering, Frederick Winslow Taylor, George Akerlof, Goodhart's law, Hyman Minsky, intangible asset, Jean Tirole, job satisfaction, joint-stock company, joint-stock limited liability company, Minsky moment, Moneyball by Michael Lewis explains big data, performance metric, price mechanism, RAND corporation, Salesforce, school choice, scientific management, Second Machine Age, selection bias, Steven Levy, tacit knowledge, TED Talk, total factor productivity, transaction costs, Tyler Cowen, WikiLeaks

Behind all of this was a belief in the financial sector that such diversification was a substitute for due diligence on each asset. The idea was that if one bundled enough assets together, one didn’t have to know much about the assets, or make judgments about their viability. New, mathematically complex financial instruments were created, such as credit default swaps, which were intended to insure against the risk of sudden changes in the value of mortgage-backed securities. This was supposed to use mathematical sophistication to diminish risk, but instead led to an inability of any but a few analysts to get a clear sense of what was happening. And the creation of arcane financial instruments made effective supervision virtually impossible, both by superiors in the firm and by outside regulators.

Thus metrics provided the means, and pay-for-performance supplied the motivation, for undue risk-taking under conditions of opacity.19 Then, as mortgagees proved unable to make their mortgage payments, the simultaneous drop in value of mortgage-backed securities led to huge, unanticipated losses to those financial firms that had insured the securities through credit default swaps. The result was a near meltdown of the financial system. SHORT-TERMISM Another way in which dubious indicators of measured performance have distorted the economy is through short-termism. Perhaps the most consequential change in the business world in recent decades has been the financialization of the economy, above all in the United States.20 As late as the 1980s, finance was an essential but limited element of the American economy.


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

3D printing, Airbnb, Alan Greenspan, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, book value, Boris Johnson, Bretton Woods, BRICs, British Empire, business cycle, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, clean tech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Crossrail, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, disruptive innovation, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, financial engineering, first-past-the-post, Ford Model T, forward guidance, full employment, Gini coefficient, global supply chain, Great Leap Forward, Growth in a Time of Debt, high-speed rail, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, labour mobility, land bank, liquidity trap, low interest rates, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, peer-to-peer rental, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen, Tyler Cowen: Great Stagnation, working-age population, Zipcar

A weaker economy, in turn, further corrodes both banks’ balance sheets (as more households and businesses are unable to repay their loans) and governments’, as tax revenues fall and social spending rises. A banking crisis combined with a government backstop is thus a toxic mix. Banks in other eurozone countries were affected too, because they had lent to southern Europe or were exposed in other ways, notably through credit default swaps and other derivatives contracts. At the end of the first quarter of 2010, French banks had a €780.4 billion exposure to Greece, Ireland, Italy, Portugal and Spain; German banks a €557.8 billion exposure; Spanish banks a €134.5 billion foreign exposure, primarily to Portugal; Italian banks a $66.3 billion exposure; and other eurozone banks a €396.2 billion exposure.

Offering Greece’s creditors new bonds of lesser value that were likely to be repaid in full in exchange for old ones that the government was incapable of repaying (and markets were pricing as such) would have given them much greater certainty.143 Nor can one compare a global investment bank’s very complex balance sheet and huge derivatives exposures to many counterparties, to the Greek government’s much simpler liabilities, with a relatively small amount of credit default swaps (contracts that insure holders against a borrower’s default) written on them. Yes, after a Greek restructuring, some banks would have needed recapitalising, but since markets were already pricing in a write-down, their balance sheets were impaired in any case. Last but not least, whereas investors didn’t know which banks were exposed to Lehman and so lost confidence in all of them, exposures to Greek debt were known after the first EU bank stress tests in 2009 and could have been publicised.

In June 2011, eurozone leaders officially recognised that Greece would need additional EU-IMF loans and a debt restructuring.257 They called for “voluntary private sector involvement… while avoiding a selective default” – a twisted piece of jargon which meant that owners of Greek government bonds should “voluntarily” agree to exchange them for less valuable ones so that the pretence that Greece had not defaulted could be maintained and credit default swaps (contracts that pay out in the event that a borrower defaults) wouldn’t be triggered. While there were incentives to exchange one’s bonds – notably that unlike the old ones issued under Greek law, the terms of which could be easily rewritten by the Greek parliament, the new ones would be issued under English law – there was also a threat that bondholders might otherwise get a worse deal.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, blockchain, Boeing 747, Bonfire of the Vanities, Bretton Woods, Brexit referendum, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, driverless car, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, Glass-Steagall Act, global macro, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, low interest rates, machine readable, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Minsky moment, Money creation, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, operational security, Paul Samuelson, Peace of Westphalia, Phillips curve, Pierre-Simon Laplace, plutocrats, prediction markets, price anchoring, price stability, proprietary trading, public intellectual, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk free rate, risk-adjusted returns, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, sovereign wealth fund, special drawing rights, stock buybacks, stocks for the long run, tech billionaire, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, We are all Keynesians now, Westphalian system

It was a merry-go-round of risk passed around and around, ending up in the same place—the banks. It seemed the carousel music would never stop. LTCM’s financial technology was not limited to the fixed income arbitrage Meriwether invented in the 1980s. New structures were discovered. LTCM coinvented the sovereign credit default swap market in 1994 around the same time as a better-known initiative by JPMorgan bankers on a lost weekend in Miami, as recounted in Gillian Tett’s brilliant book Fool’s Gold. LTCM was the largest holder of Italian government debt, part of a complex arbitrage involving Italian interest rates, different debt classes, and Italian withholding taxes on interest paid to foreign investors.

But there are numerous ways for governments to renege on obligations to bondholders, including capital controls, withholding taxes, asset freezes, and hyperinflation. We had to think of them all; otherwise the insurance might not pay off when needed. That was like buying hurricane insurance that covered wind damage, but not floods. We wanted to make sure we were covered against floods. The sovereign credit default swap was our first innovation. It was not the last. Avarice After initial success and billions of dollars in profits, greed came to call. The search was on for new ways to make money using leverage and derivatives. The partners expanded into stock market arbitrage on mergers and takeovers.

A coming-out announcement for LTCM: Saul Hansell, “John Meriwether Rides, Again, Without Salomon This Time,” The New York Times, September 5, 1993, accessed August 8, 2016, www.nytimes.com/1993/09/05/business/john-meriwether-rides-again-without-salomon-this-time.html. LTCM coinvented the sovereign credit default swap market: Gillian Tett, Fool’s Gold: The Inside Story of J. P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe (New York: Free Press, 2009). To illustrate, imagine an office desk: The following example using file drawers is based on highly similar examples from Johnson, Simply Complexity, 21–24, 41–50.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Bear Stearns, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, bond market vigilante , Bretton Woods, British Empire, business cycle, 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, currency risk, 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, Goodhart's law, Greenspan put, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, junk bonds, Kenneth Rogoff, Kickstarter, labour market flexibility, Les Trente Glorieuses, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market clearing, Martin Wolf, Minsky moment, Money creation, 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, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, Suez crisis 1956, 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

As mortgage-related losses spread, each bank was determined to secure its own funding and equally determined not to be exposed to firms in trouble. Rumour fed upon rumour; the weak banks saw their share prices plunge and the cost of insuring their debt surge. That insurance was in the form of another derivative, called a ‘credit default swap’ (CDS). The name was more complicated than the concept: Party A worries that a bond issuer might default on its interest payments, so it pays Party B a regular payment, like an insurance premium, as protection against this eventuality. If the bond issuer does default, Party B will compensate Party A for its losses, just as an insurer will cover fire damage.

After spending years touting the benefits of free markets and decrying government intervention, the Wall Street barons now called on the authorities to prevent people speculating in CDSs and from selling their shares short. In many cases, it was the Wall Street firms who had financed these activities. A ban would cost their clients money. Credit default swaps also created a further problem. Someone had to bear the losses when bonds actually did default. Even a rise in the cost of insurance was a problem for those who had already written insurance, since it increased the potential size of their losses. That was because of a technicality in the way the swaps were designed; the insurer had to put up collateral to show they were good for the money if default occurred.

Business Week Butler, Eamonn Calder, Lendol California Callaghan, Jim Calvin, John Canada Canadian Tar Sands capital controls capital economics capital flows capital ratios carried interest carry trade Carville, James Cassano, Joseph Cato Institute Cayne, Jimmy CDU Party ‘Celtic tiger’ central bank reserves Cesarino, Filippo ‘Chapter’ Charlemagne Charles I, King of England cheques/checks chief executive pay Chile China Churchill, Winston civil war (English) civil war (US) Citigroup clearing union Clientilism Clinton, Bill CNBC collateralized debt obligations commerical banks commercial property commodity prices Compagnie D’Occident comparative advantage conduits confederacy Congdon, Tim Congress, US Connally, John Conservative Party Consols Constantine, Emperor of Rome consumer price inflation continental bonds convergence trade convertibility of gold suspended Coolidge, Calvin copper Cottarelli, Carlo Council of Nicea Cowen, Brian cowrie shells Credit Anstalt credit cards credit crisis of 2007 – 8 credit crunch credit default swaps ‘cross of gold’ speech Cunliffe committee Currency Board currency wars Dante Alighieri David Copperfield Davies, Glyn debasing the currency debit cards debt ceiling debt clock debt deflation spiral debt trap debtors vs creditors, battle defaults defined contribution pension deflation Defoe, Daniel Delors, Jacques Democratic convention of 1896 Democratic Party Democratic Republic of Congo demographics denarii Denmark deposit insurance depreciation of currencies derivatives Deutsche Bank Deutschmark devaluation Dickens, Charles Dionysius of Syracuse Dodd – Frank bill dollar, US Dow Jones Industrial Average drachma Duke, Elizabeth Dumas, Charles Duncan, Richard Durst, Seymour Dutch Republic East Germany East Indies companies Economist Edward III, King of England Edwards, Albert efficient-market theory Egypt Eichengreen, Barry electronic money embedded energy energy efficiency estate agents Estates General Ethelred the Unready euro eurobonds eurodollar market European Central Bank European Commission European Financial Stability Facility European Monetary System European Union eurozone Exchange Rate Mechanism, European exorbitant privilege farmers Federal Reserve Federal Reserve Bank of Philadelphia Federalist party fertility rate ‘fiat money’ Fiji final salary pension Financial Services Authority Financial Times Finland First Bank of the United States First World War fiscal policy fiscal union Fisher, Irving fixed exchange rates floating currencies florin Florio, Jim Ford, Gerald Ford, Henry Ford Motor Company Foreign & Colonial Trust foreign direct investment foreign exchange reserves Forni, Lorenzo Forsyte Saga France Francis I, King of France Franco-Prussian War Franklin, Benjamin French Revolution Friedman, Milton Fuld, Dick futures markets Galbraith, John Kenneth Galsworthy, John GATT Gaulle, Charles de Geithner, Tim General Electric General Motors general strike of 1926 Genghis Khan Genoa conference George V, King of England Germany gilts Gladstone, William Glass – Steagall Act Gleneagles summit Glorious Revolution GMO Gokhale, Jagadeesh gold gold exchange standard gold pool gold standard Goldman Sachs goldsmiths Goodhart, Charles Goodhart’s Law Goschen, George Gottschalk, Jan government bonds government debt Graham, Frank Granada Grantham, Jeremy Great Compression Great Depression Great Moderation Great Society Greece Greenspan, Alan Gresham, Sir Thomas Gresham’s Law Gross, Bill G7 nations G20 meeting Guinea Habsburgs Haiti Haldane, Andrew Hamilton, Alexander Hammurabi of Babylon Havenstein, Rudolf von Hayek, Friedrich Heavily Indebted Poor Countries initiative hedge funds Henderson, Arthur Henry VIII, King of England Hien Tsung, Chinese emperor Hitler, Adolf Hoar, George Frisbie Hohenzollern monarchy Holy Roman Empire Homer, Sydney Hoover, Herbert House of Representatives houses Hume, David Hussein, Saddam Hutchinson, Thomas Hyde, H.


pages: 221 words: 55,901

The Globalization of Inequality by François Bourguignon

Berlin Wall, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Credit Default Swap, deglobalization, deindustrialization, Doha Development Round, Edward Glaeser, European colonialism, Fall of the Berlin Wall, financial deregulation, financial intermediation, gender pay gap, Gini coefficient, Glass-Steagall Act, income inequality, income per capita, labor-force participation, liberal capitalism, low interest rates, minimum wage unemployment, offshore financial centre, open economy, Pareto efficiency, purchasing power parity, race to the bottom, Robert Gordon, Simon Kuznets, structural adjustment programs, The Spirit Level, too big to fail, very high income, Washington Consensus

Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton, NJ: Princeton University Press, 2010); Stiglitz, The Price of Inequality. 12 Daron Acemoglu, “Thoughts on Inequality and the Financial Crisis,” presentation at the American Economic Association, 2011; http:// economics.mit.edu/files/6348. 11 Globalization and Costly Inequality139 tal into the United States, the loosening of monetary policy following the 9/11 attacks and the dot-­com crisis of the early 2000s had lowered the cost of credit and led banks to lend more and therefore to take on more risk. In addition, we should not leave out a financial sector submerged in securitization, subprime mortgages, and credit default swaps,13 which had significantly increased its systemic vulnerability. Because of this, it will be some time before we can measure with precision the role rising inequality played in the crash. We can nonetheless surmise that the explosive rise in inequalities, which resulted in the slower growth, sometimes even stagnation, of real income for the majority of the American population, would not have been compatible with high levels of American economic growth without some motor pushing U.S. households to increase their consumption spending.

Index 9/11 attacks, 139 Abacha, 151 Abu Dhabi, 127 Africa: Economic Partnership Agreements (EPAs) and, 156; evolution of inequality and, 46t, 54–55; fairer globalization and, 147, 151, 154–56, 179, 183; global inequality and, 16, 21, 23, 30–31, 34, 36; globalization and, 122–23, 126–27; population growth and, 183; rise in inequality and, 90, 109, 111–12, 185 African Growth Opportunity Act (AGOA), 155 agriculture, 12, 82, 84, 122–23, 127–28, 155 AIDS, 156 Alesina, Alberto, 134 Anand, Sudhir, 13n4 Argentina, 46t, 110, 172 artists, 86–87 Asian dragons, 34, 82 Bangladesh, 30, 46t, 54 Belgium, 46t, 53, 101–2, 169 Berlin Wall, 91 Big Bang, 95 Bolivia, 16, 24 Bolsa Familia, 166 bonuses, 87, 174 Bottom Billion, The (Collier), 23 Brazil, 110, 186; evolution of inequality and, 46t, 55, 59, 70; fairer globalization and, 150, 154, 166–68, 173; Gini coeffi- cient of, 22; global inequality and, 21–23; globalization and, 127, 133 Buffett, Warren, 5–6, 159–60 Cameroon, 46t, 54 Canada, 46t, 51f capital: developed/developing countries and, 5; evolution of inequality and, 55–58, 60, 73; fairer globalization and, 158–62, 167, 171, 175, 182; GDP measurement and, 13–15, 20–21, 23, 26, 27f, 29–30, 39, 41–45, 56–57, 94, 123, 127, 165–66, 176; globalization and, 117, 125–26, 132, 137; human, 74, 167, 175; labor and, 3–4, 55– 58, 60, 158, 161n7, 185; liberalization and, 96; mobility of, 3, 73–74, 93, 98–99, 115, 160, 162, 182, 185; rise in inequality and, 74, 76–80, 84–85, 89, 93, 95–99, 103, 109, 114–15; taxes and, 187, 189 (see also taxes) Card, David, 105–6 Caruso, Enrico, 86 Checchi, Daniele, 107 China: evolution of inequality and, 47, 53, 57–60; fairer globalization and, 150, 154, 165–66, 172, 178; geographical disequilibria and, 83; global inequality and, 16; globalization and, 120– 22, 128; Huajian and, 155; Human Development Report and, 25; international trade and, 75; Kuznets hypothesis and, 192 China (cont.) 113; protectionism and, 178; Revolution of, 26; rise in inequality and, 2, 11n2, 17, 25, 30, 36, 38, 46t, 75, 82–83, 112–13; standard of living and, 16, 120– 22; taxes and, 165 Cold War, 149, 153 Collier, Paul, 23 Colombia, 133 commodity prices, 147, 182 competition: Asian dragons and, 34, 82; deindustrialization and, 75–82; effect of new players and, 75–76; emerging economies and, 178, 187–88; fairer globalization and, 155, 169, 173, 176–79, 182; globalization and, 117–18, 130; markets and, 76– 77, 79–82, 84, 86, 94–98, 102, 104, 115–18, 130, 155, 169, 173, 176–79, 182, 186–88; offshoring and, 81–82; rents and, 102; rise in inequality and, 76– 77, 79–82, 84, 86, 94–96, 98, 102, 104, 115–16; Southern perspective on, 82–85; United Kingdom and, 78–79; United States and, 78–79; wage ladder effects and, 78–79 conditional cash transfers, 165–66 consumers: fairer globalization and, 177–78; spending of, 10, 12–13, 61; subsidies and, 109–10 consumption: evolution of inequality and, 42t, 44t; expenditure per capita and, 13, 15, 42t, 44t; fairer globalization and, 159, 177; globalization and, 137–39; growth and, 13–15, 42t, 44t, 80, 137–39, 159, 177; protection- Index ism and, 7, 147, 154, 157, 176– 79; rise in inequality and, 80 convergence: evolution of inequality and, 65, 69; fairer globalization and, 146–47, 157; globalization and, 120–22, 125; growth and, 16; income and, 16; poverty reduction and, 147–48; standard of living and, 7, 147–48 credit: default swaps and, 139; evolution of inequality and, 61; fairer globalization and, 164–65, 172, 180; globalization and, 131–32, 137–40; rise in inequality and, 96; taxes and, 164 credit cards, 165 criminal activity, 133–34, 152 crises: evolution of inequality and, 48, 50, 54, 57, 73–74; fairer globalization and, 163, 176; Glass-­ Steagall Act and, 174n15; global inequality and, 20, 38–41; globalization and, 119–22, 125, 135–39, 142; recent, 48, 110, 135, 142, 163, 188; rise in inequality and, 92, 94, 96, 99, 109–11; “too big to fail” concept and, 174–75 Current Population Survey, 21 debit cards, 165 deindustrialization, 1, 102, 188; effects on developed countries, 75–82; exports and, 76, 82; globalization and, 120; international trade and, 75–76, 78–79; manufacturing and, 75–82, 84, 123; North vs.


pages: 559 words: 169,094

The Unwinding: An Inner History of the New America by George Packer

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Apple's 1984 Super Bowl advert, bank run, Bear Stearns, big-box store, citizen journalism, clean tech, collateralized debt obligation, collective bargaining, company town, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, DeepMind, deindustrialization, diversified portfolio, East Village, El Camino Real, electricity market, Elon Musk, Fairchild Semiconductor, family office, financial engineering, financial independence, financial innovation, fixed income, Flash crash, food desert, gentrification, Glass-Steagall Act, global macro, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, high-speed rail, housing crisis, income inequality, independent contractor, informal economy, intentional community, Jane Jacobs, Larry Ellison, life extension, Long Term Capital Management, low skilled workers, Marc Andreessen, margin call, Mark Zuckerberg, market bubble, market fundamentalism, Maui Hawaii, Max Levchin, Menlo Park, military-industrial complex, Neal Stephenson, Neil Kinnock, new economy, New Journalism, obamacare, Occupy movement, off-the-grid, oil shock, PalmPilot, Patri Friedman, paypal mafia, peak oil, Peter Thiel, Ponzi scheme, proprietary trading, public intellectual, Richard Florida, Robert Bork, Ronald Reagan, Ronald Reagan: Tear down this wall, Savings and loan crisis, shareholder value, side project, Silicon Valley, Silicon Valley billionaire, Silicon Valley startup, single-payer health, smart grid, Snow Crash, Steve Jobs, strikebreaker, tech worker, The Death and Life of Great American Cities, the scientific method, too big to fail, union organizing, uptick rule, urban planning, vertical integration, We are the 99%, We wanted flying cars, instead we got 140 characters, white flight, white picket fence, zero-sum game

At some point in late 2005 or early 2006, with the housing market at its dizzying mid-decade height, speculators suddenly lost confidence, the faith that kept Florida aloft gave way, and the economy plummeted like a Looney Tunes character who, suspended in midair, looks down. Prices did what borrowers, lenders, flippers, Wall Street traders betting long, credit default swap desks, Fannie Mae, Asian bankers looking for 8 percent, antic boosters on CNBC, and Alan Greenspan somehow never imagined possible: they started to decline. It took a year or two for the effects to be seen across the landscape of boomburgs, brokers’ offices, construction sites, and retail malls.

How else, other than unchecked fraud, could those banks have been “technically insolvent,” with only a handful of insiders knowing the truth? But there were deeper causes—the dismantling of the rules that had kept banking stable for half a century. Connaughton saw Kaufman—seventy years old, with a musty MBA from Wharton—as Rip Van Winkle, waking up in the age of “synthetic collateralized debt obligations” and “naked credit default swaps.” What the hell happened to Glass-Steagall, which maintained a wall between commercial and investment banking? (Passed by Congress in 1933, repealed by Congress in 1999, bipartisan vote, Clinton’s signature.) What about the “uptick rule,” which required investors to wait until a stock rose in price before selling it short?

He once told a group of executives, “The most important financial innovation that I have seen the past twenty years is the automatic teller machine … I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy. Maybe you can show me that I am wrong. All I know is that the economy was rising very nicely in the 1950s and 1960s without all of these innovations. Indeed, it was quite good in the 1980s without credit default swaps and without securitization and without CDOs.” Volcker made the perfect foil for Obama: he could be used to appease the reformers and give cover with the establishment. The president appointed Volcker to lead his economic advisory group, without taking the advice seriously. Volcker’s main proposal—to ban banks from setting up hedge funds or private equity funds and from trading for their own accounts with depositors’ money—was a half step back toward Glass-Steagall.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, book value, BRICs, butter production in bangladesh, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

Second-order derivatives were sold on the derivative mortgage-backed bonds. Credit-default swaps were issued as insurance policies on the mortgage-backed bonds. Briefly, the swap market allowed two parties—called counterparties—to bet for or against the performance of the mortgage bonds, or the bonds of any other issuer. For example, suppose I hold bonds issued by General Electric and I begin to worry about GE’s creditworthiness. I could buy and hold an insurance policy from a company like AIG (the biggest issuer of credit default swaps) that would pay me if GE defaulted. The problems with this market lay in the fact that the issuers of the insurance such as AIG had inadequate reserves to pay the claims if trouble occurred.

The problems with this market lay in the fact that the issuers of the insurance such as AIG had inadequate reserves to pay the claims if trouble occurred. And anyone from any country could buy the insurance, even without owning the underlying bonds. Eventually, the credit-default swaps trading in the market grew to as much as ten times the value of the underlying bonds, pushed by demand from institutions around the world. This change, where the derivative markets grew to a large multiple of the underlying markets, was a crucial feature of the new finance system. It made the world’s financial system very much riskier and much more interconnected.


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bike sharing, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, export processing zone, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, general purpose technology, Gini coefficient, Glass-Steagall Act, global supply chain, Great Leap Forward, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low interest rates, low-wage service sector, manufacturing employment, market bubble, means of production, middle-income trap, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, technological determinism, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Despite this, the banking sector had, or so it thought, found a way to mitigate the increased riskiness of lending. Riskier mortgages could be repackaged with others into mortgage-backed securities (MBS) and given the highest (AAA) credit ratings for the creditworthiness of the debt, while still offering a higher rate of return than other safe assets such as Treasury bills. Credit default swaps (CDS) could be purchased to provide insurance against any losses should there be a default. Bankers created funds, such as special purpose vehicles (SPVs) and structured investment vehicles (SIVs), to hoover up these financially engineered securities offering better returns than safe assets like government debt, and sell the SPVs and SIVs to clients.

Bernanke was later to argue in a 2012 speech that because Lehman was insolvent and posed less of a systemic risk than Bear Stearns, the Federal Reserve had no legal standing to make a bailout using public funds. The next day, however, the giant insurance firm AIG was rescued as the Fed was concerned about the impact on the credit default swap market if it were allowed to fail. In the global financial crisis, the Federal Reserve provided direct credit to specific markets and businesses in need of liquidity. Friedman’s recommended approach in the Great Depression was simply to flood the economy with general liquidity and allow solvency issues to sort themselves out.

Buccleuch, Henry Scott, 3rd Duke of budget deficits and austerity Burns, Arthur Burns, Mary business cycle theory Fisher Hayek Schumpeter Callaghan, James Cambridge School see also Keynes, John Maynard; Marshall, Alfred; Robinson, Joan Cambridge University Girton College Kings College Newnham College St Johns and women Canon capital accumulation capital investment capitalism in aftermath of 2008 financial crisis and communism derivation of term and Engels and the financial crisis of 2008 free-market and Hayek inequality and capitalist economies laissez-faire see laissez-faire and Marx and the Occupy movement and Schumpeterian ‘creative destruction’ socialism vs welfare state capitalism car industry Carney, Mark Carter, Jimmy Case, Elizabeth central banks Bank of England Bank of Japan European Central Bank Fed see Federal Reserve forward guidance macroprudential policy monetary policy tools see also quantitative easing (QE) Chamberlin, Edward Chicago School see also Friedman, Milton Chile China 1949 revolution asset management companies banking system Beijing Consensus Communist Party corporate debt Cultural Revolution domestic innovation economic transformation ‘effect’/‘price’ employment system entrepreneurs exports Five Year Plan (1953) foreign direct investment (FDI) and Germany industrialization and reindustrialization inequality innovation challenge legal institutions manufacturing Maoism and Marx national debt openness ‘paradox’ poverty reduction privatization R&D investment regional free trade agreement renminbi (RMB) as second largest economy services sector shadow banking smartphones social networks trade-to GDP ratio and the USSR wage increases women Churchill, Winston class Engels’ The Condition of the Working Class in England and Marx middle see middle class and Ricardo wage earner class Classical School of economics see also Mill, John Stuart; Ricardo, David; Smith, Adam Clinton, Bill Clinton, Hillary cloth clothing Coase, Ronald Cold War Collectivist Economic Planning collectivization Collier, Paul Columbia University communism Bolshevik Party and capitalism Chinese Communist League First International Marxism see Marxism and Robinson Socialist/Second International Third International USSR see Soviet Union Vietnamese vs welfare state capitalism Communist League comparative advantage theory competition ‘competing down’ (Schumpeter) imperfect between money providers perfect and Robinson wages and competitiveness computers Conard, Ed construction consultancy firms consumerism consumption and comparative advantage theory consumer spending and marginal utility analysis convergence hypothesis corn, free trade in Corn Laws repeal and Ricardo corporate debt Cowles Commission Crafts, Nicholas crafts credit crunch credit default swaps (CDS) credit rating Crimean War crypto-currencies currency crises first-generation second-generation third-generation currency stability Cyprus death duties debt Chinese corporate debt-deflation spiral and government bonds indexation and protection from and Minsky’s financial instability hypothesis mortgage debt national see national debt private corporate as share of GDP decentralization defence deflation debt-deflation spiral Fisher and combating deflation Japan self-fulfilling deindustrialization and globalization premature reversing/reindustrialization and trade US Deng Xiaoping depression see Great Depression (1930s); Long Depression (1880s); recession/depression diminishing returns to capital distributive lag model Douglas, David, Lord Reston Douglas, Janet DuPont East Asian ‘tiger’ economies see also Hong Kong; Singapore; South Korea; Taiwan eastern Europe Eastman Kodak Econometric Society Econometrica economic development challenges and Beijing Consensus financial/currency crises and institutions and Lewis model Myanmar and North and path dependence poverty eradication/reduction South Africa Sustainable Development Goals Vietnam and Washington Consensus economic equilibrium economic freedom economic growth and austerity barriers convergence hypothesis development challenges see economic development challenges drivers of 2 see also innovation; institutions; public investment; technology endogenous growth theories inclusive growth through investment Japan’s growth and Japan’s ‘lost decades’ Lewis model mercantilist doctrine of and new technologies policy debates on raising and poverty reduction and productivity debate/challenge slow growth and the future Solow model UK government’s renewed focus on and unemployment Economic Journal economic rent Ricardo’s theory of economies ‘animal spirits’ of crises see financial crises deflation see deflation emerging see emerging economies equilibrium in GDP see gross domestic product global macroeconomic imbalances growth of see economic growth inequality and capitalist economies inflation see inflation and international trade and investment see investment; public investment national debt see national debt QE see quantitative easing rebalancing of recession see recession/depression services economy see services sector and stagnant wages state intervention Economist education higher role in reducing inequality universal Eliot, T.


pages: 387 words: 119,244

Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy by Iain Martin

Alan Greenspan, asset-backed security, bank run, Basel III, Bear Stearns, beat the dealer, Big bang: deregulation of the City of London, Bletchley Park, call centre, central bank independence, computer age, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, deindustrialization, deskilling, Edward Thorp, Etonian, Eugene Fama: efficient market hypothesis, eurozone crisis, falling living standards, financial deregulation, financial engineering, financial innovation, G4S, Glass-Steagall Act, high net worth, interest rate swap, invisible hand, joint-stock company, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, long term incentive plan, low interest rates, moral hazard, negative equity, Neil Kinnock, Nick Leeson, North Sea oil, Northern Rock, old-boy network, pets.com, proprietary trading, Red Clydeside, shareholder value, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, value at risk, warehouse robotics

It had been deemed close to impossible imagining it blowing up in any serious way. Indeed the models used tended not to allow for this possibility. As well as CDOs there was the multi-trillion-dollar market for credit default swaps (CDSs), traded to try to offload risk. The American investor Warren Buffet famously called the CDS a ‘weapon of financial destruction’. Buffet was not wrong. Some investment banks had created sets of CDOs to sell to other banks and investors, and then taken out credit default swaps, effectively gambling against their own clients who had been daft enough to buy their products. In the name of innovation, a sinister alternative financial universe had been created, in which customer care and ethics had been swapped for pure greed and downright treachery.

., ref 1, ref 2, ref 3 Bush, Laura, ref 1 Butler, Lord, ref 1 Cable, Vince, ref 1 Caledonia, naming of, ref 1 Cameron, Donald, ref 1 Cameron, Johnny, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7 passim, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9 passim, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7 and ABN Amro, ref 1, ref 2, ref 3, ref 4 FG stands by, ref 1 FSA investigates, ref 1, ref 2 at Gogarburn opening, ref 1 and hedging exposure, ref 1 and worsening liquidity situation, ref 1 Camerons of Locheal, ref 1, ref 2, ref 3, ref 4 Campbell, Archibald, see Ilay, Earl of Campbell, John, ref 1, ref 2, ref 3 Canary Wharf, ref 1 Caplan, Rick, ref 1, ref 2, ref 3, ref 4, ref 5 Carpenter, Ben, ref 1, ref 2, ref 3 Charles, Prince of Wales, ref 1, ref 2, ref 3 Charter One, ref 1, ref 2 Chase, ref 1 Chirac, Jacques, ref 1 Chisholm, Andy, ref 1 Churchill, ref 1, ref 2 Churchill, Winston, ref 1 Cicutto, Frank, ref 1, ref 2, ref 3 Citibank, ref 1 Citigroup, ref 1, ref 2, ref 3 Citizens Bank, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11, ref 12 and Mellon, ref 1 new CEO for, ref 1 City of Glasgow Bank, ref 1 City of London, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11, ref 12, ref 13, ref 14, ref 15 modernisation of, ref 1 see also banks Clarke, Charles, ref 1 Clarke, Ken, ref 1 Clinton, Bill, ref 1, ref 2, ref 3 Clydesdale Bank, ref 1, ref 2, ref 3, ref 4, ref 5 away days of, ref 1 celebrations at, as FG leaves, ref 1 FG becomes CEO of, ref 1 Cochrane, Alan, ref 1 Cole-Hamilton, Richard, ref 1 Coleman, David, ref 1, ref 2 collateralised debt obligations (CDOs), ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11 index of, ref 1 varieties of, ref 1 see also sub-prime mortgages Commonwealth Bancorp, ref 1 Community Bancorp, ref 1 Compagnie Bancaire, ref 1 Company of Scotland, ref 1 founding of, ref 1 ‘Competition in UK Banking’, ref 1 Connolly, John, ref 1, ref 2, ref 3, ref 4, ref 5 ConocoPhillips, ref 1 Conservatives, see Tories consumer debt, ref 1 Conti, Tom, ref 1 Cooper, Yvette, ref 1, ref 2 Corbett, R.Y., ref 1 Cornwall, Duchess of, ref 1 Countrywide Financial, ref 1 County NatWest, ref 1, ref 2 Coutts, ref 1, ref 2, ref 3, ref 4, ref 5 Cox, Archie, ref 1 credit crunch, see financial crisis credit default swaps (CDSs), ref 1 Crosby, James, ref 1, ref 2, ref 3, ref 4, ref 5 knighthood lost by, ref 1 Crowe, Brian, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11, ref 12 and CDOs, ref 1 and hedging exposure, ref 1 moved to ABN Amro, ref 1 ordination of, ref 1, ref 2 withdrawn from ABN Amro, ref 1 and worsening liquidity situation, ref 1 Crowe, Russell, ref 1 Cruickshank, Don, ref 1 Crutchley, John-Paul, ref 1 Cryan, John, ref 1, ref 2 Cummings, Peter, FSA fines, ref 1 Cummins, John, ref 1 Currie, Jim, ref 1 Daily Telegraph, ref 1, ref 2 Daniels, Eric, ref 1 Darien Scheme, ref 1, ref 2, ref 3, ref 4 Caledonia emerges from, ref 1 Darling, Alistair, ref 1, ref 2 and bank bailouts, ref 1, ref 2, ref 3 banks’ CEOs meet with, ref 1 and Brown–George spat, ref 1 Brown joint press conference with, ref 1 at ECOFIN meeting, ref 1 and FG knighthood, ref 1 and FG pension, ref 1, ref 2, ref 3 FSA and BoE meet with, ref 1 at Gogarburn opening, ref 1 Goodwin meets (2007), ref 1 King follows plan of, ref 1 King relationships with, ref 1 memoirs of, ref 1 MPs briefed on financial crisis by, ref 1 RBS bailout announced by, ref 1, ref 2 and RBS collapse, ref 1 Treasury meeting called by, ref 1 UK banks supported by, ref 1 Darroch, Kim, ref 1 Davidson, Joanna, ref 1, ref 2 Davies, Howard, ref 1, ref 2 Davos, ref 1 de la Renta, Oscar, ref 1 deficit, sharp rise in, ref 1 Deloitte & Touche, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7 Deutsche Bank, ref 1, ref 2 Dewar, Donald, ref 1 Diamond, Bob, ref 1, ref 2, ref 3 forced out of post, ref 1 Dickinson, Alan, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11, ref 12, ref 13 Dime Bancorp, ref 1 Direct Line, ref 1, ref 2, ref 3 District Bank, ref 1 Dixon Motors, ref 1 Dixon, Paul, ref 1 Dixon, Simon, ref 1 dotcom bubble, ref 1 Dow Jones, ref 1 Drake-Brockman, Symon, ref 1 Dresdner Kleinwort Wasserstein, ref 1, ref 2 ‘Drivers for Growth’ conference, ref 1 Drummond Bank, ref 1, ref 2, ref 3 Dundas, Lawrence, ref 1 Dundee Banking Company, ref 1 Dutch Central Bank, ref 1 Duthie, Robin, ref 1 East India Company, ref 1 Economic and Financial Affairs Council (ECOFIN), ref 1, ref 2 Economist, ref 1, ref 2 Eden, James, ref 1, ref 2 Elizabeth II, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7 emerging economies, ref 1 Emirates Stadium, ref 1 Enron, ref 1, ref 2 Equitable Life, ref 1 Equivalent Company, ref 1 Ernst & Young, ref 1 euro, see single currency Exchange Rate Mechanism (ERM), ref 1, ref 2 ‘failure of the Royal Bank of Scotland, The’ (FSA), ref 1, ref 2 Fastow, Andy, ref 1 Federal Reserve, ref 1, ref 2, ref 3 Ferguson, Adam, ref 1 Ferguson, Alex, ref 1 Ferguson, William, ref 1 Ferrovial, ref 1 Fidelity, ref 1 Fildes, Christopher, ref 1 Financial Conduct Authority., ref 1 financial crisis: beginning of, ref 1 Darling updates Commons on, ref 1 government spending at start of, ref 1 insurers crack under weight of, ref 1 recessions follow, ref 1 spreads to UK high street, ref 1 studies and reports of, ref 1 Financial Services Authority (FSA), ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11, ref 12 ‘Arrow’ reports of, ref 1 and auditors, ref 1 and RBS collapse, ref 1 RBS on watch-list of, ref 1 self-investigation by, ref 1 successors to, ref 1 and tripartite regulation, ref 1, ref 2, ref 3, ref 4, ref 5; see also Bank of England Financial Times, ref 1, ref 2 First Active, ref 1 Fish, Larry, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9 chairs RBS Americas, ref 1 criticised, ref 1 pension of, ref 1 Fisher, Mark, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7 at Gogarburn opening, ref 1 moved to ABN Amro, ref 1 Fitch Ratings, ref 1, ref 2 Fleming, Ian, ref 1 Fletcher, Andrew, ref 1 Forbes, ref 1 foreign exchange, ref 1, ref 2 Formula 1, ref 1, ref 2 Fortis, ref 1, ref 2, ref 3 Fountain Workshop, ref 1 Franklyn Resources, ref 1 Freshfields, ref 1 Friedrich, Bill, ref 1, ref 2 Fuld, Dick, ref 1 Gaddafi, Muammar, ref 1 Gartmore, ref 1 GE, ref 1 George II, ref 1 George, Eddie, ref 1, ref 2, ref 3, ref 4 Gibson, Mel, ref 1, ref 2 Gieve, John, ref 1 Giles, Chris, ref 1 Gladiator, ref 1 Glass–Steagall Act, ref 1 global financial crisis, see financial crisis Global Transaction Services, ref 1, ref 2 Glyn, Mills & Co., ref 1, ref 2 Goldman Sachs, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9 Goodwin, Andrew (brother), ref 1 Goodwin, Dale (sister), ref 1 Goodwin, Fred: affair of, ref 1, ref 2, ref 3, ref 4 after RBS, ref 1 and away days, ref 1, ref 2 bailout terms heard by, ref 1 Barclays hated by, ref 1 becomes Clydesdale CEO, ref 1 becomes RBS CEO, ref 1 birth of, ref 1 Brown compared to, ref 1 Brown likes, ref 1 Bush dinner guest, ref 1 and car dealership, ref 1 CDO presentation by, ref 1 at CEOs–Darling meeting, ref 1 at CEOs meeting, ref 1 Chequers invitation to, ref 1 ‘classic bully’, ref 1 cleanliness campaigns of, ref 1 at Clydesdale, see Clydesdale Bank colleagues testify to abilities of, ref 1 cult status of, ref 1 at Darling 2008 meeting, ref 1 Darling visited by (2007), ref 1 document criticises management of, ref 1 early life of, ref 1, ref 2 extraordinary general meeting appearance of, ref 1 face-to-face firing disliked by, ref 1, ref 2, ref 3 first job of, ref 1 fixation on detail by, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6 and Forbes, ref 1 ‘Fred the Shred’ nickname of, ref 1, ref 2, ref 3, ref 4 and FSA, ref 1, ref 2 at Gogarburn opening, ref 1 Harvard study on, ref 1, ref 2 ‘has shut out the world’, ref 1 Hester view of, ref 1 ‘I want to be bigger than J.


pages: 257 words: 71,686

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

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

The British bank Barings collapses due to unsupervised and aggressive speculation by a rogue trader – using advanced foreign currency derivatives. Second example: a company or government can go bust, meaning investors lose their money. So a group of quants developed an insurance of sorts against default: the credit default swap or CDS. This was another good idea – but a good decade later, hyper-complex products using CDS hit the headlines when they played a crucial enabling role in the crash of 2008. Finally: mortgages. These run for a long time and could be perfect investments for pension funds and other long-term asset managers.

Index ABN Amro 1, 2 accountancy firms 1, 2, 3 and incentives 1 Adoboli, Kweku 1 AIG 1, 2, 3 al-Qaida 1 amorality 1, 2, 3, 4 Anderson, Geraint 1 Ankenbrand, Bernd 1 Asperger’s syndrome 1, 2 asset management 1 author’s Guardian blog 1 (see also Guardian) first interviews posted on 1 ‘Going native …’ subtitle of 1 readers’ comments posted on 1, 2, 3, 4, 5, 6, 7, 8 responses to interviews on 1, 2 traditional banking said to be under-represented on 1 Back from the Brink (Darling) 1, 2, 3 back office 1, 2 Bank of America, mixed investment–commercial nature of 1 banker types: blinkered 1, 2 cold fish 1 and Faustian pacts 1 legality defines ‘ethics’ of 1 corresponding to animals 1 delusional 1, 2 Masters of the Universe 1 passim, 1, 2 cold fish’s scorn for 1 criticism of sector resented by 1 sector readily defended by 1 neutrals 1, 2, 3, 4, 5, 6, 7 nicknames for 1 teeth grinders 1, 2, 3, 4 bankers (see also banks): in back office 1, 2 evaluation of colleagues by 1 and Faustian pacts 1 and hopping between jobs 1, 2 leisure-time spending by 1, 2 (see also financial sector: remuneration in) and love life 1 in middle office 1, 2, 3, 4, 5 more power and status in, post-crash 1 nicknames used by 1 not alone in causing financial crisis 1 (see also global financial crisis) and religion 1 types of, see banker types working hours of 1, 2, 3, 4 banks (see also bankers; central banks; financial sector): ABN Amro 1, 2 abusive culture in 1 accountancy firms used by 1, 2, 3 annual results announcements of 1 balances of, as ‘blackest of black holes’ 1 Bank of America, mixed investment–commercial nature of 1 Barclays, mixed investment– commercial nature of 1 Barings 1 rogue trader at 1 BNP Paribas, mixed investment–commercial nature of 1 capital buffers of 1, 2, 3 capital buffers of 1, 2 Casenove 1 and caveat emptor 1, 2, 3, 4, 5, 6 Citigroup 1, 2 mixed investment–commercial nature of 1 ‘close and continuous supervision’ of 1 (see also regulators) combined investment–commercial nature of 1 commercial: definition of, clarified 1 vs investment 1, 2 investment banks taken over by 1 Deutsche Bank 1 mixed investment–commercial nature of 1 divide between different types of 1 as dog-eat-dog world 1 Goldman Sachs 1 as exception to short-termism 1 as ‘pure’ investment bank 1 Smith’s book on 1 Smith’s NYT piece on 1, 2 HR personnel in, and redundancy 1 HSBC 1 annual results announcement of 1, 2 and drugs money 1, 2 mixed investment–commercial nature of 1 and incentives: ‘perverse’ 1, 2, 3, 4, 5, 6 short-termism encouraged by 1 insurance’s overlap with 1 as ‘intensely political’ workplaces 1 investment: ‘animal’ types within 1 books about 1 as ‘casinos’ 1, 2, 3 and ‘castes’ 1 vs commercial 1, 2 commercial banks begin to take over 1 culpability of, in global financial crash 1 daily routine of 1, 2, 3 definition of, clarified 1 and dot-com bubble 1, 2, 3 job titles within 1, 2, 3 radically changed ownership structure of 1 and risk and compliance 1, 2, 3, 4, 5, 6 (see also regulators) risk-taker–risk-bearer dichotomy in 1 and ‘rock’n’roll traders’ 1 speculation by 1 subcultures engendered by 1 and IT 1, 2 patches and workarounds in 1 JP Morgan 1 rogue trader at 1, 2 Lehman Brothers: collapse of 1, 2, 3, 4, 5 inadequate buffers of 1 as ‘pure’ investment bank 1 Lloyds, annual results announcement of 1, 2 mega- 1 investment banks’ mutation with 1 speculate with people’s savings 1 Merrill Lynch 1 Morgan Grenfell 1 and prop trading 1, 2, 3, 4 rating agencies paid by 1 (see also credit-rating agencies) RBS, annual results announcement of 1, 2 recruitment in 1, 2 and redundancy 1, 2, 3, 4, 5, 6 as ‘enhanced severance’ 1 as rite of passage 1 termed ‘the cull’ 1 in UK vs US 1, 2 and work-related visas 1 and regulators 1 fighting symptoms rather than cause 1 and Financial Services Authority, Financial Conduct Authority, Prudential Regulation Authority 1 identification of, with financial sector 1 ‘idiots’ description applied to 1, 2 ‘losing people at all levels’ post-crash 1 numbers working for 1 and self-declaration 1 Salomon Brothers 1 Samuel Montagu 1 Schroders 1 silo mentality in 1 Société Générale: mixed investment–commercial nature of 1 rogue trader at 1 and ‘too big to fail’ concept 1, 2, 3, 4 and ability to blackmail 1 and ‘too big to manage’ concept 1 UBS 1 rogue trader at 1, 2 unpopularity of employees in 1 zero job security in 1, 2 and diminishing employee loyalty 1, 2, 3 Barbarians at the Gate (Burrough, Helyar) 1 Barclays: mixed investment–commercial nature of 1 Sants offered top job at 1 Barings, rogue trader at 1, 2 Binge Trading: The Real Inside Story of Cash, Cocaine and Corruption in the City (Freedman) 1 Blair, Tony, ‘adviser’ role of 1, 2, 3 blinkered bankers 1, 2 (see also banker types) BNP Paribas, mixed investment–commercial nature of 1 Bonfire of the Vanities (Wolfe) 1 bonuses 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 (see also remuneration) Labour’s plan to levy extra tax on 1 Brown, Gordon, financial sector praised by 1 buffers, see capital buffers Buiter, Willem 1 Canary Wharf 1 capital buffers 1, 2, 3, 4 ‘capture’ 1 Casenove 1 caveat emptor 1, 2, 3, 4, 5, 6 CDOs (collateralised debt obligations) 1, 2, 3, 4 ‘hybrid’ 1, 2 and rating agencies 1 ‘squared’ 1 ‘synthetic’ 1, 2 central banks 1, 2 (see also banks) Bank of England 1 reaction of, to global financial crisis 1 Swiss 1 CERN 1 charity donations 1 Chinese walls 1, 2, 3 Citigroup 1, 2 mixed investment–commercial nature of 1 City (see also banks; financial sector): amorality in 1, 2, 3 anti-Semitism, sexism, snobbery and homophobia in 1 codes and mores of 1 collection of interviews from (City Lives) 1 crude terminology used in 1 and discrimination 1 ethical dilemmas in 1 greed-driven as popular image of 1 ‘it’s only other people’s money’ mentality in 1 jargon and language of 1 law firms that dominate (‘magic circle’) 1 long-term relationships in 1 and ‘my word is my bond’ 1, 2 as term 1 UK and Europe reshaped in image of 1 City Lives (Courtney, Thompson) 1 Cityboy: Beer and Loathing in the Square Mile (Anderson) 1, 2 Clinton, Hillary 1 code of silence 1, 2, 3, 4 cold fish 1 (see also banker types) and Faustian pacts 1 legality defines ‘ethics’ of 1 collateralised debt obligations (CDOs) 1, 2, 3, 4 ‘hybrid’ 1, 2 and rating agencies 1 ‘squared’ 1 ‘synthetic’ 1, 2 commercial banks (see also banks): definition of, clarified 1 vs investment 1, 2 investment banks taken over by 1 Confessions of a City Girl: The Devil Wears Pinstripes (Stcherbatcheff) 1 confidentiality 1 Cooper, George 1 credit-default swaps (CDSs) 1 credit-rating agencies 1, 2, 3, 4, 5 and CDOs 1 Moody’s 1, 2 ‘oligopoly’ of 1 paid by banks 1 Damn, It Feels Good to Be a Banker (Leveraged Sell-Out) 1 Darling, Alistair 1, 2, 3 memoir of, see Back from the Brink Darwinism, social 1 Das, Satyajit 1 Davies, Howard 1 deals, code names for 1 Deloitte 1 delusional bankers 1, 2 (see also banker types) Der Spiegel 1 Derman, Emanuel 1 Deutsche Bank 1, 2 mixed investment–commercial nature of 1 dot-com bubble 1, 2, 3 economists, unhelpful 1 ‘enhanced severance’ 1 (see also redundancy) Ernst & Young 1 European Banking Union 1 European Commission 1 executive search 1 Financial Conduct Authority 1 financial crash 1 passim bankers not alone in causing 1 books written about 1, 2 and domino effect 1, 2 and government bail-outs 1 harrowing beginnings of 1 ignorance about 1, 2 ignorance of real threat posed by 1 indifference towards 1 investment banks’ culpability in 1 more ‘cock-up than conspiracy’ 1 next 1 parliamentary commissions into 1, 2 political impasse before and after 1 and redundancy 1 regulators’ personnel losses since 1 regulators’ symptoms-overcause response to 1 seen as ‘black swan’ 1 Western world ‘crippled’ by 1 The Financial Crisis: Who Is to Blame?


pages: 247 words: 68,918

The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer

"World Economic Forum" Davos, affirmative action, Asian financial crisis, banking crisis, Berlin Wall, BRICs, British Empire, centre right, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, cuban missile crisis, Deng Xiaoping, diversified portfolio, Doha Development Round, Exxon Valdez, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, Glass-Steagall Act, global reserve currency, global supply chain, household responsibility system, invisible hand, joint-stock company, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, low skilled workers, mass immigration, means of production, megacity, Mikhail Gorbachev, military-industrial complex, mutually assured destruction, Naomi Klein, Nelson Mandela, new economy, offshore financial centre, open economy, race to the bottom, reserve currency, risk tolerance, Savings and loan crisis, shareholder value, Shenzhen special economic zone , South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, trade route, tulip mania, uranium enrichment, Washington Consensus, Yom Kippur War, zero-sum game

After all, the recession originated in the United States, where poorly regulated credit markets, limited restraints on speculative leveraging of borrowed capital, and the nonregulation of the so-called shadow banking system (mainly hedge funds and private-equity firms) inflicted heavy damage on markets around the world. These shadow banks traded heavily in underregulated “derivative” financial products like packages of mortgages or other debt (known as collateralized debt options) and insurance against the failure of these options (known as credit-default swaps). By 2007, the United States had moved far to the right along the market spectrum—especially in the financial-services sector. This shift over the past three decades produced successive pieces of deregulation—like the repeal in 1999 of the barriers between commercial banks and more speculative investment institutions, which had been in place since the Glass-Steagall Act of 1933.

Calderón, Felipe Camara, Moussa Dadis Canada capitalism, free market better government produced by different models of mixed skepticism of Capitalism, Socialism, and Democracy (Schumpeter) capitalism, state, see state capitalism Caribbean Community (Caricom) Castro, Fidel CEDIGAZ Chávez, Hugo Chayefsky, Paddy Check Point Software Chemezov, Sergei Chen Yun child-labor laws Chile China African commercial ties with banks in decoupling and in economic crisis economic growth in economic reforms in foreign direct investment in Internet in IPR violations by military of oil demand in sovereign wealth funds in Soviet split with “special economic zones” in state-owned enterprises in stimulus package in trade by China Development Bank China Investment Corporation (CIC) China Mobile China National Offshore Oil Corporation (CNOOC) China National Petroleum Corporation (CNPC) Christian Science Monitor Citgo Petroleum Corporation Citigroup Clinton, Bill Clinton, Hillary Coca-Cola Colbert, Jean-Baptiste Cold War collateralized debt options Commercial International Merchant Bankers Committee on Foreign Investment in the United States (CFIUS) communism Communist Party, Chinese Communist Party, India Companhia Vale do Rio Doce companies, privately owned see also specific companies companies, state-owned see also national oil and gas corporations consumer sovereignty Conté, Lansana Correa, Rafael Costa Rica Council on Foreign Relations credit-default swaps Cuba Cuban missile crisis Daimler/Chrysler Davidson, Christopher Declaration of Independence decoupling Defense Department, U.S. democracy Democratic Party, U.S. Deng Xiaoping Denmark Deripaska, Oleg derivatives Deutsche Bank dictatorship dirigisme dollar, U.S. Dongfeng Motor Corporation dot-com bubble Drake, Francis Dubai Dubai Ports World Dubai: The Vulnerability of Success (Davidson) Dubai World Dutch East India Company Dutch tulip mania East Siberian Gas Company Economist Intelligence Unit’s (EIU) Democracy Index Ecuador Egypt Egyptian General Petroleum Company Eisenhower, Dwight D.


pages: 254 words: 68,133

The Age of Illusions: How America Squandered Its Cold War Victory by Andrew J. Bacevich

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, anti-communist, Bear Stearns, Berlin Wall, Bernie Sanders, clean water, Columbian Exchange, Credit Default Swap, cuban missile crisis, David Brooks, deindustrialization, Donald Trump, Fall of the Berlin Wall, Francis Fukuyama: the end of history, friendly fire, gig economy, Glass-Steagall Act, global village, Gordon Gekko, greed is good, Greenspan put, illegal immigration, income inequality, Jeff Bezos, Kickstarter, Marshall McLuhan, mass incarceration, Mikhail Gorbachev, military-industrial complex, Monroe Doctrine, Norman Mailer, obamacare, Occupy movement, opioid epidemic / opioid crisis, planetary scale, plutocrats, Potemkin village, price stability, Project for a New American Century, Ronald Reagan, Ronald Reagan: Tear down this wall, Saturday Night Live, school choice, Seymour Hersh, Silicon Valley, Steve Bannon, Thomas L Friedman, too big to fail, traumatic brain injury, trickle-down economics, We are all Keynesians now, WikiLeaks

In 1996, General John Shalikashvili, Powell’s successor as JCS chairman, signed off on what the Pentagon chose to style Joint Vision 2010, which purported to provide a “conceptual template for how America’s Armed Forces will … leverage technological opportunities to achieve new levels of effectiveness in joint warfighting.”18 Considered in retrospect, JV2010 was to the art of war what credit default swaps became to the business of banking: the means to perpetuate a breathtakingly impudent fraud. Yet better than any other single source, that glossy, jargon-laced pamphlet documented the techno-militarism and fevered groupthink to which the officer corps succumbed in the first decade after the Cold War.

During the Obama-engineered recovery, it broke through the $20 trillion barrier.30 Justified as necessary to restore economic health, these mushrooming deficits suggested that federal authorities had once and for all abandoned even the pretense of minimal fiscal discipline. Sadly, the mendacity and malfeasance that had paved the way for the Great Recession went essentially unpunished. Through their marketing of complex financial instruments such as mortgage-backed securities and credit default swaps, investment banks had essentially perpetrated a gigantic swindle. Deeming these banks “too big to fail,” Obama let off the hook the very predators who had almost destroyed the system from which they handsomely profited. Not for the first time in American history, the malefactors of great wealth got away with their crimes.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accelerated depreciation, accounting loophole / creative accounting, Airbus A320, Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, Boeing 747, book value, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, capital controls, Carl Icahn, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cross-subsidies, currency risk, discounted cash flows, disintermediation, diversified portfolio, Dutch auction, equity premium, equity risk premium, eurozone crisis, fear index, financial engineering, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, James Webb Space Telescope, junk bonds, Kenneth Rogoff, Larry Ellison, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, PalmPilot, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk free rate, risk tolerance, risk/return, Robert Shiller, Scaled Composites, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, Skype, SpaceShipOne, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, systematic bias, Tax Reform Act of 1986, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, vertical integration, yield curve, zero-coupon bond, zero-sum game, Zipcar

Notice the sharp increase in the cost of the default swaps in 2009. By the end of February 2009 it cost €3.19 a year to insure €100 of UBS debt. FIGURE 23.3 Credit default swaps insure the holders of corporate bonds against default. This figure shows the cost of default swaps on the 10-year senior debt of four companies. Source: Datastream FINANCE IN PRACTICE ● ● ● ● ● What Exactly Is a Default? At the start of 2012, holders of $3.2 billion of Greek government debt had bought credit default swaps that insured them against default. Governments in Europe worried that if the insurance were triggered, the banks that had sold it would suffer significant losses.

Covered option Option position with an offsetting position in the underlying asset. Cramdown Action by a bankruptcy court to enforce a plan of reorganization. Credit default swap (CDS) Credit derivative in which one party makes fixed payments while the payments by the other party depend on the occurrence of a loan default. Credit derivative Contract for hedging against loan default or changes in credit risk (e.g., credit default swap). Credit rating Debt rating assigned by a rating agency such as Moody’s or Standard & Poor’s. Credit scoring A procedure for assigning scores to borrowers on the basis of the risk of default.

The law of one price tells us that two equivalent risk-free investments must cost the same. Our example tells us how to interpret the spread on corporate bonds. It is equal to the annual premium that would be needed to insure the bond against default.3 By the way, you can insure corporate bonds; you do so with an arrangement called a credit default swap (CDS). If you buy a default swap, you commit to pay a regular insurance premium (or spread).4 In return, if the company subsequently defaults on its debt, the seller of the swap pays you the difference between the face value of the debt and its market value. For example, when American Airlines defaulted in 2011, its unsecured bonds were auctioned for 23.5% of face value.


pages: 550 words: 124,073

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

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

Greatly complicating the situation was the expansion of two financial instruments which had radically reduced the riskiness of individual assets: one was collateral debt obligation (CDOs) that bundled loans such as mortgages, credit card debt, student loans, and bank loans, and thus minimized individual default risk, and cut the securitized packages into different risk tranches. The other was credit default swaps (CDSs) that “insured” assets against a wide range of defaults. These instruments were not new—in some form or other they had always existed—but they had expanded in a massive and increasingly complex way over the previous two decades. In turn, both CDSs and CDOs were or could be rated by the rating agencies.

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

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


pages: 192 words: 75,440

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

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

c08.indd 100 1/10/08 11:09:05 AM Operations 101 Although pedigree is not as important, funds will pay close attention to undergraduate and graduate school GPAs and SAT scores and want to see excellence in both areas. In addition to academics, hedge funds look for specific product knowledge and will pay up for experience in the more sophisticated products such as derivatives, credit default swaps (CDS), collateralized debt obligations (CDOs), and collateralized loan obligations (CLOs). As with other hedge fund roles, it’s good to know the different hedge fund investment strategies. Hedge funds can be extremely picky when hiring, so whatever you can do to differentiate yourself and show you have additional skills will be helpful.

. • Step into daily settlements role to assist with basic prime brokerage issues—trade breaks, fails, and margin. • Complete ad hoc projects as needed. Requirements Must have: • Two to five years of operations/accounting experience. • Derivatives experience and detailed knowledge about derivatives especially credit default swaps and documents required by the International Swaps and Derivatives Association (ISDA). • Exceptional math and communication skills. • Extremely detail-oriented, with the ability to multitask and prioritize. • Top academic credentials. Search 2: Trade Operations Analyst Responsibilities • Resolve all trade-related breaks on a daily basis for all products (OTC, listed, and other derivatives products). • Monitor and report on all trade exceptions and trade fails on a daily basis. • Monitor and control all trade allocations for all the funds. • Reconcile all discrepancies to effectively run EOD process. • Create management reports to track efficiencies. • Oversee and maximize prime brokerage relationships from an operations support and technology perspective. • Participate in continuing education programs and remain current on all applicable operational matters. • Participate in the development of procedures and systems to consolidate all pertinent information to perform all the preceding tasks. • Identify redundancies and suggest improvements in the existing process.


pages: 283 words: 77,272

With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful by Glenn Greenwald

Alan Greenspan, Ayatollah Khomeini, banking crisis, Bear Stearns, Bernie Madoff, Clive Stafford Smith, collateralized debt obligation, Corrections Corporation of America, crack epidemic, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, deskilling, financial deregulation, full employment, high net worth, income inequality, Julian Assange, mandatory minimum, nuremberg principles, Ponzi scheme, Project for a New American Century, rolodex, Ronald Reagan, Seymour Hersh, too big to fail, Washington Consensus, WikiLeaks

Over that same time financial sector corporate profits have gone through the roof, with the financial sector reporting up to 40% of corporate profits in recent years. Blumenthal offered just a “sampling” of what that money has bought: the deregulation of financial derivatives and credit default swaps, the elimination of the line between investment banks and commercial banks, the increased hardship for those filing for bankruptcy, and the total free hand for Fannie Mae and Freddie Mac to muddle their books and evade responsibility. And all of this has been fueled by the 3,000 or so finance sector lobbyists meeting with, calling up, and emailing congressional offices and executive branch agencies.

(Lederman) Card, Andrew Carney, John Carothers, Thomas Carter, Jimmy CBS network CBS News Center for Labor Market Studies Center for Responsive Politics Central Intelligence Agency (CIA) contractors detainee interrogation videos inspector general’s report of 2004 Iran-Contra and Obama and Plame outing and renditions and torture and warrantless eavesdropping and whistle-blowers and Cheney, Dick Iran-Contra and Iraq war and Libby and torture and warrantless eavesdropping and China Church Committee Citigroup civil rights movement civil suits Clarke, Richard Clinton, Bill campaign of 1992 campaign of 1996 Bush and financial deregulation and impeachment of Iraqgate and law and order and NSA and telecoms and Clinton, Hillary CNBC CNN Español Coats, Dan cocaine Cohen, Richard Cole, David Cole, USS, attacks Columbia Journalism Review Comcast Comey, James Commerce and Labor Department Commodity Future Trading Commission Common Sense (Paine) Communications Act Congressional Quarterly Conrad, Kent Consortium News Consumer Federation of America Contract with America Convention Against Torture Conyers, John Coolidge, Calvin Cordray, Richard Corn, David Corp Watch correctional population Corrections Corporation of America Countrywide Cox, Archibald Cox, Douglas W. Cramer, Bud Crawford, Susan J. credit default swaps credit rating agencies criminal justice Croatia Daily Finance Dark Side, The (Mayer) Davis, Morris Deal Defense Department Democratic Congressional Campaign Committee Democratic Party Bush-era crime and financial elites and law and order and National Convention of 2008 presidential primary of 2007–8 Tammany Hall and Teapot Dome and telecom immunity and U.S. attorney firings and warrantless eavesdropping and Watergate and Democratic Senatorial Campaign Committee Dempsey, Joan Depression of 1930s derivatives Dershowitz, Alan Digby Dimon, Jamie Dissertations on First Principles of Government (Paine) Dodd, Chris Domestic violence Dominican Republic Donilon, Tom Donovan, Shaun Drake, Thomas Drug Enforcement Agency (DEA) Drug Policy Alliance drugs, “war on,” due process Dukakis, Michael Durbin, Dick Easton, Nina ECONned (Smith) economic inequality Economist Edwards, Don Egypt Eisinger, Jesse elections of 1876 of 1988 of 1992 of 1996 of 2002 of 2004 of 2008 Electronic Frontier Foundation (EFF) Emanuel, Rahm Emblematical Representations (Franklin) Emmanuel, Charles England, Lynndie equality under the law abandonment of erosion of, and economic inequality as founding principle public opinion on rigid enforcement vs. ordinary Americans and Erzinger, Martin Joel Escobedo v.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Abraham Maslow, Alan Greenspan, Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, currency risk, diversification, diversified portfolio, family office, financial engineering, fixed income, glass ceiling, Glass-Steagall Act, global macro, Greenspan put, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, inverted yield curve, John Meriwether, junk bonds, land bank, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, Market Wizards by Jack D. Schwager, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, oil shock, out of africa, panic early, paper trading, Paul Samuelson, Peter Thiel, price anchoring, proprietary trading, purchasing power parity, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, tail risk, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, Vision Fund, yield curve, zero-coupon bond, zero-sum game

Maybe it was the 1997 blow-up in Asia that made me nervous, that something else was lurking out there. Right now, there are all kinds of bad things lurking but I’m just not sure when we’re going to fall on the knife. One of the things that makes me nervous today is how cheap credit risk has become. The whole credit default swaps (CDS) market has grown tremendously and derivatives have become ubiquitous. People are using derivatives with very little understanding of the kinds of risk they are taking on. I don’t think the Bob Citrons of the world really thought about what they could lose if things went wrong. Human biases tend to force people to focus exclusively on the good side of trades, which can be very dangerous.We are in an environment today where yields are very low and people are reaching for yield.

Taiwan is very important to the Chinese as it is part of the whole national psyche and it would be a very strong display of strength on the world stage. The other risk is North Korea flexing their nuclear muscles.There is a chance they could use them out of desperation. One of the things Everest uses to hedge these low-probability but nonnegligible events is credit default swaps on China and Korea which, interestingly, are extremely cheap. Do you think markets underprice tail risk? Yes.We’ve seen it time and again.Things happen that nobody thought possible.The crash of 1987, the Mexican devaluation of 1994, the Asian devaluations of 1997, and September 11 all were unimaginable.

See also specific types of commodities Commodities Corporation (CC), 9–10 Commodity market, 6–7, 9–10 Commodity Specialist, see Anderson, Dwight Commodity Trading Advisors (CTAs), 67, 203, 258–259, 332 Computer technology, economic impact, 203 Confidence, significance of, 137, 153–154 Consumer price index (CPI), 276, 312 Consumer spending bubble, 195 Contrarian investing, 105, 307 Convertible arbitrage, 183 Convertible bonds, 177 Cooling-off period, 131 Copper, 250–251, 256 Corn, 256 Corporate bonds, 141 Corporate spreads, 281 INDEX Correlated markets, 151 Cotton, 226, 239 Counterparty risk, 25 Craig, Grenville, 9 Credit curve, 327 Credit default swap (CDS), 50, 305 Credit lines, 98–99 Credit markets, 204, 313 Credit risk, 23, 49 Credit spreads, 188 Credit Suisse Financial Products (CSFP), 182, 192 Credit Suisse First Boston (CSFB), 32, 104, 116–118, 128 Crude oil, 252, 263–264, 288 Currency/currencies, 6–7, 15, 20, 22, 24, 36, 38, 66, 86, 110, 126–127, 200–201, 203–204.


pages: 441 words: 136,954

That Used to Be Us by Thomas L. Friedman, Michael Mandelbaum

addicted to oil, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, Amazon Web Services, American Society of Civil Engineers: Report Card, Andy Kessler, Ayatollah Khomeini, bank run, barriers to entry, Bear Stearns, Berlin Wall, blue-collar work, Bretton Woods, business process, call centre, carbon footprint, carbon tax, Carmen Reinhart, Cass Sunstein, centre right, Climatic Research Unit, cloud computing, collective bargaining, corporate social responsibility, cotton gin, creative destruction, Credit Default Swap, crowdsourcing, delayed gratification, drop ship, energy security, Fall of the Berlin Wall, fear of failure, full employment, Google Earth, illegal immigration, immigration reform, income inequality, Intergovernmental Panel on Climate Change (IPCC), job automation, Kenneth Rogoff, knowledge economy, Lean Startup, low interest rates, low skilled workers, Mark Zuckerberg, market design, mass immigration, more computing power than Apollo, Network effects, Nixon triggered the end of the Bretton Woods system, obamacare, oil shock, PalmPilot, pension reform, precautionary principle, proprietary trading, Report Card for America’s Infrastructure, rising living standards, Ronald Reagan, Rosa Parks, Saturday Night Live, shareholder value, Silicon Valley, Silicon Valley startup, Skype, Steve Jobs, the long tail, the scientific method, Thomas L Friedman, too big to fail, University of East Anglia, vertical integration, WikiLeaks

One of those new financial instruments—a derivative known as the credit-default swap, a form of private insurance that paid off if a subprime package of loans defaulted—was specifically kept out of the jurisdiction of government regulators through aggressive lobbying by the financial industry. We wound up with a trillion-dollar market in these swaps without either meaningful government oversight or transparency. Its implosion helped to create the worst financial crash since 1929. That lack of oversight was a bipartisan effort. In 1999, Republicans passed legislation specifically exempting credit-default swaps from regulation—and President Bill Clinton signed it.

Connecticut connectivity; wireless Conniff, Richard Constitution, U.S.,; Preamble; First Amendment; Fifth Amendment consumer electronics Cooper, Anderson Council of Chief State School Officers Council of Educational Facility Planners International (CEFPI) Council on Foreign Relations Craigslist Crazy Heart (movie) creativity; education and credit-default swaps Credit Suisse First Boston critical thinking Cronkite, Walter Cruise, Tom Cuba; immigrants from Culture War? (Fiorina) Cummings, Elijah Cuttino, Phyllis CVS pharmacies Czechoslovakia D Darwin, Charles Das, Paul Masih Dawn (newspaper) Dean, Howard DeBenedictis, Erika Alden Declaration of Independence Deere, John Defense Advanced Research Projects Agency deficits: education; trade; see also budget deficits Degrees of Separation (Brooking Institution) Delaware DeLay, Tom Dell, Michael Delta Airlines Democracy (Adams) Democracy in America (Tocqueville) Democratic Party; campaign contributions to; economic and fiscal policies of; energy and climate policies of; entitlement programs and; Leadership Council; news media and; origins of; polarization of Republican Party and Democratic-Republicans Dempsey, General Martin Denmark deregulation Detroit; Regional Workforce Fund Dietrich, Marlene Dillon, Sam Dimon, Jamie Disneyland Dixiecrats DNA Dodd, Chris Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) Doerr, John Dole, Bob Domenici, Pete Douglas, Michael Dow Jones Industrial Average Drudge Report Druid City Arts Festival Duke University Duncan, Arne DuPont Corporation E Earth Policy Institute East Anglia, University of, Climate Research Unit Eastman Machine Company Eat People (Kessler) Economist, The Edison, Thomas education; in Army; attainment levels; businesses and; in California; in China; during Cold War; Colorado as model for reform of; community role in; cuts in spending for; higher (see also specific colleges and universities); history of government support for; improvement in quality of; income inequality and; innovation and; IT revolution and; neighbors and; parents’ role in; religious, of Muslims; responsibility of students for; in Singapore; Teach for America as model program for; teachers and principals and; Tea Party and; underperformance of; workforce and Education, U.S.


pages: 462 words: 129,022

People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, AlphaGo, antiwork, barriers to entry, basic income, battle of ideas, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Big Tech, business cycle, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, carried interest, central bank independence, clean water, collective bargaining, company town, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, DeepMind, deglobalization, deindustrialization, disinformation, disintermediation, diversified portfolio, Donald Trump, driverless car, Edward Snowden, Elon Musk, Erik Brynjolfsson, fake news, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, Glass-Steagall Act, global macro, global supply chain, greed is good, green new deal, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low interest rates, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, opioid epidemic / opioid crisis, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, search costs, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Bannon, Steve Jobs, surveillance capitalism, TED Talk, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population, Yochai Benkler

Less intermediation and more gambling, more efforts in creating market power Banks also turned to activities which were much more lucrative than intermediation—for instance, taking on big gambles. What at Las Vegas might simply be called a bet, on Wall Street takes on a fancier name, a “derivative” (just a bet, for instance, on what’s going to happen with interest rates, exchange rates, or oil prices) or a “credit default swap,” a bet on whether a firm or another bank is going to go into bankruptcy or near it. These are not like quarter slot machine bets; they are typically mega-million dollar bets. This betting market exists because it is effectively partially insured by the government. If the loss is too great, the government will bail the bank out.

Foreign banks rightly complain that the US government has been more assiduous at going after them rather than American banks for wrongdoing. 13.These advantages occur because most of the money received is taxed as capital gains rather than as dividends. 14.The wealthy recipients of this money will consume a little; they may spend some on real estate—inflating real estate prices; they may diversify their portfolio, investing abroad. They may take some of this and gamble, buying derivatives and CDSs (credit default swaps). Or they may channel some of this money into new productive investments elsewhere in the economy. The worry is that a much smaller fraction of corporate profits gets redeployed in real economic investment in the US, one of the reasons for the fall in the nation’s investment rate. 15.The total flow of funds out of firms (dividends plus share buybacks) doubled from less than 3 percent of GDP in the ’60s to around 6 percent in more recent years.

., 226–28 Constitution of the United States collective action reference in preamble, 138–39 economic changes since writing of, 227 “General Welfare” in Preamble, 242 individual liberties vs. collective interest in, 229 and minority rights, 6 as product of reasoning and argumentation, 229 three-fifths clause, 161 consumer demand, See demand consumer surplus, 64 cooperatives, 245 Copenhagen Agreement, 207 copyright extensions, 74 Copyright Term Extension Act (1998), 74 corporate taxes, 108, 206, 269n44 corporate tax rates, globalization and, 84–85 corporate welfare, 107 corporations and labor force participation, 182 and money in politics, 172–73 as people, 169–70 rights as endowed by the State, 172 corruption, 50 cost-benefit analysis, 146, 204–5 Council of Economic Advisers (CEA), xii credit, 102, 145, 186, 220 credit cards, 59–60, 70, 105 credit default swaps, 106 credit unions, 245 culture, economic behavior and, 30 customer targeting, 125–26 cybersecurity, 127–28 cybertheft, 308n35 Daraprim, 296n72 data exclusivity, 288n40 data ownership, 129–30 Deaton, Angus, 41–42 debt, 220; See also credit DeepMind, 315n1 defense contractors, 173 deficits, See budget deficits deglobalization, 92 deindustrialization early days of, xix effect on average citizens, 4, 21 facilitating transition to postindustrial world, 186–88 failure to manage, xxvi in Gary, Indiana, xi globalization and, 4, 79, 87 place-based policies and, 188 deliberation, 228–29 demand automation and, 120 and job creation, 268n41 Keynesian economics and, xv market power’s effect on, 63 demand for labor, technological suppression of, 122 democracy, 159–78 agenda for reducing power of money in politics, 171–74 curbing the influence of wealth on, 176–78 fragility of norms and institutions, 230–36 inequality as threat to, 27–28 maintaining system of checks and balances, 163–67 need for a new movement, 174–76 new technologies’ threat to, 131–35 and power of money, 167–70 as shared value, 228 suppression by minority, xx Trump’s disdain for, xvii voting reforms, 161–63 democratic institutions, fragility of, 230–36 Democratic Party gerrymandering’s effect on, 159 and Great Recession, 152 need for reinvention of, 175 popular support for, 6 renewal of, 242 and voter disenfranchisement, 162 demographics, xx, 181 “deplorables,” 4 deregulation, 25, 105, 143–44, 152, 239; See also supply-side economics derivatives, 80, 88, 106–7, 144 Detroit, Michigan, 188 Dickens, Charles, 12 Digital Millennium Copyright Act, 320–21n32 disadvantage, intergenerational transmission of, 199–201 disclosure laws, 171 discourse, governance and, 11 discrimination, 201–4; See also gender discrimination; racial discrimination by banks, 115 and economics texts, 23 forms of, 202 under GI Bill, 210 and inequality, 40–41, 198–99 and labor force participation, 183 means of addressing, 203–4 and myths about affirmative action, 225 reducing to improve economy, 201–4 diseases of despair, 42–43 disenfranchisement, 27, 161–62 disintermediation, 109 Disney, 65, 74 dispute resolution, 56–57, 309n40 Dodd–Frank Wall Street Reform and Consumer Protection Act, 70, 102, 107 driverless cars, 118 drug overdoses, 42 Durbin Amendment, 70 East Asia, 149 economic justice historical perspectives, 241–42 intergenerational justice, 204–5 racial justice and, 176, 203–4 tax system and, 205–8 economics, assumptions about individuals in, 29–30, 223 economic segregation, 200 economies of scale, 72 economies of scope, 347–48n15 economy and collective action, 153–54 decent jobs with good working conditions, 192–97 deterioration since early 1980s, 32–46 failure’s effect on individuals and society, 29–31 failure since late 1980s, 3–5 government involvement in, 141–42, 150–55 intergenerational transmission of advantage/disadvantage, 199–201 reducing discrimination in, 201–4 restoring fairness to tax system, 205–8 restoring growth and productivity, 181–86 restoring justice across generations, 204–5 restoring opportunity and social justice, 197–201 social protection, 188–91 “sugar high” from Trump’s tax cut, 236–38 transition to postindustrial world, 186–88 education equalizing opportunity of, xxv–xxvi, 219–20 improving access to, 203 returns on government investment in, 232 taxation and, 25 undermining of institutions, 233–34 Eggers, Dave, 128 Eisenhower, Dwight, and administration, 210 elderly, labor force growth and, 181–82 election of 1992, 4 election of 2000, 165–66 election of 2012, 159, 178 election of 2016, xix, 132, 178 elections, campaign spending in, 171–73 elite control of economy by, 5–6 and distrust in government, 151 and 2008 financial crisis, 5 promises of growth from market liberalization, 21–22 rules written by, 230 employers, market power over workers, 64–67 employment, See full employment; jobs; labor force participation End of History, The (Fukuyama), 3 Enlightenment, the, 10–12 attack on ideals of, 14–22 and standard of living, 264n24 environment carbon tax, 194, 206–7 and collective action, 153 economic growth and, 176 economists’ failure to address, 34 markets’ failure to protect, 24 and true economic health, 34 environmental justice, economic justice and, 176 Environmental Protection Agency (EPA), 267n38 epistemology, 10, 234 equality as basis for well-running economy, xxiv–xxv economic agenda for, xxvii as shared value, 228 Equifax, 130 equity value, rents as portion of, 54 ethnic discrimination, 201–4 Europe data regulation, 128–29 globalization, 81 infrastructure investment, 195–96 privacy protections, 135 trade agreements favoring, 80 unity against Trump, 235 European Investment Bank, 195–96 evergreening, 60 excess profits, as rent, 54 exchange rate, 89, 307n28, 307n32 exploitation in current economy, 26 in economics texts, 23 financial sector and, 113 market power and, 47–78 reducing, 197 as source of wealth, 144–45 wealth creation vs., 34 and wealth redistribution, 50 exports, See globalization; trade wars Facebook anticompetitive practices, 70 and Big Data, 123, 124, 127–28 competition for ad revenue, 56 and conflicts of interest, 124 market power in relaxed antitrust environment, 62 as natural monopoly, 134 and preemptive mergers, 60, 73 reducing market power of, 124 regulation of advertising on, 132 fact-checking, 132, 177 “Fading American Dream, The” (Opportunity Insights report), 44–45 “fake news,” 167 family leave, 197 Farhi, Emmanuel, 62 farmers, Great Depression and, 120 fascism, 15–16, 18, 235 Federal Communication Commission (FCC), 147 Federal Reserve Board, 70, 112 Federal Reserve System, 121, 214–15 Federal Trade Commission, 69 fees bank profits from, 105, 110 credit card, 60, 70, 105 for mergers and acquisitions, 108 mortgages and, 107, 218 “originate-to-distribute” banking model, 110 private retirement accounts and, 215 fiduciary standard, 314n21, 347n10 finance (financial sector); See also banks and American crisis, 101–16 contagion of maladies to rest of economy, 112 disintermediation, 109 dysfunctional economy created by, 105–9 gambling by, 106–8 and government guarantees, 110–11 history of dysfunctionality, 109–12 as microcosm of larger economy, 113 mortgage reform opposed by, 216–18 private vs. social interests, 111–12 and public option, 215–16 shortsightedness of, 104–5 stopping societal harm created by, 103–5 and trade agreements, 80 financial crisis (2008), 101; See also Great Recession bank bailout, See bank bailout [2008] China and, 95 deregulation and, 25, 143–44 as failure of capitalism, 3 government response to, 5 housing and, 216 as man-made failure, 153–54 market liberalization and, 4 and moral turpitude of bankers, 7 regulation in response to, 101–2 as symptomatic of larger economic failures, 32–33 and unsustainable growth, 35 financial liberalization, See market liberalization First National Bank, 101 “fiscal paradises,” 85–86 fiscal policy, 121, 194–96 fiscal responsibility, 237 food industry, 182 forced retirement, 181–82 Ford Motor Company, 120 Fox News, 18, 133, 167, 177 fractional reserve banking, 110–11 fraud, 103, 105, 216, 217 freedom, regulation and, 144 free-rider problem, 67, 155–56, 225–26 Friedman, Milton, 68, 314–15n22 FUD (fear, uncertainty, and doubt), 58 Fukuyama, Francis, 3, 259n1 full employment, 83, 193–94, 196–97 Galbraith, John K., 67 gambling, by banks, 106–7, 207 Garland, Merrick, 166–67 Gates, Bill, 5, 117 GDP elites and, 22 as false measure of prosperity, 33, 227 financial sector’s increasing portion of, 109 Geithner, Tim, 102 gender discrimination, 41, 200–204 gene patents, 74–75 general welfare, 242–47 generic medicines, 60, 89 genetically modified food (GMO), 88 genetics, 126–27 George, Henry, 206 Germany, 132, 152 gerrymandering, 6, 159, 162 GI Bill, 210 Gilded Age, 12, 246 Glass-Steagall Act, 315n25, 341n39 globalization, 79–100 budget deficits and trade imbalances, 90 collective action to address, 154–55 effect on average citizens, 4, 21 in era of AI, 135 failure to manage, xxvi false premises about, 97–98 and global cooperation in 21st century, 92–97 and intellectual property, 88–89 and internet legal frameworks, 135 and low-skilled workers, 21, 82, 86, 267n39 and market power, 61 pain of, 82–87 and protectionism, 89–92 and 21st-century trade agreements, 87–89 and tax revenue, 84–86 technology vs., 86–87 and trade wars, 93–94 value systems and, 94–97 GMO (genetically modified food), 88 Goebbels, Joseph, 266n35 Goldman Sachs, 104 Google AlphaGo, 315n1 antipoaching conspiracy, 65 and Big Data, 123, 127, 128 conflicts of interest, 124 European restrictions on data use, 129 gaming of tax laws by, 85 market power, 56, 58, 62, 128 and preemptive mergers, 60 Gordon, Robert, 118–19 Gore, Al, 6 government, 138–56 assumption of mortgage risk, 107 Chicago School’s view of, 68–69 debate over role of, 150–52 and educational system, 220 failure of, 148–52 in finance, 115–16 and fractional reserve banking, 111 and Great Depression, 120 hiring of workers by, 196–97 increasing need for, 152–55 interventions during economic downturns, 23, 120 lack of trust in, 151 lending guarantees, 110–11 managing technological change, 122–23 and need for collective action, 140–42 and political reform, xxvi pre-distribution/redistribution by, xxv in progressive agenda, 243–44 public–private partnerships, 142 regulation and rules, 143–48 restoring growth and social justice, 179–208 social protection by, 231 government bonds, 215 Great Britain, wealth from colonialism, 9 Great Depression, xiii, xxii, 13, 23, 120 “great moderation,” 32 Great Recession, xxvi; See also financial crisis (2008) deregulation and, 25 diseases of despair, 42 elites and, 151 employment recovery after, 193 inadequate fiscal stimulus after, 121 as market failure, 23 pace of recovery from, 39–40 productivity growth after, 37 and retirement incomes, 214–15 weak social safety net and, 190 Greenspan, Alan, 112 Gross Fixed Capital Formation, 271n4 gross investment, 271n4 growth after 2008 financial crisis, 103 in China, 95 decline since 1980, 35–37 economic agenda for, xxvii failure of financial sector to support, 115 and inequality, 19 international living standard comparisons, 35–37 knowledge and, 183–86 labor force, 181–82 market power as inimical to, 62–64 in post-1970s US economy, 32 restoring, 181–86 taxation and, 25 guaranteed jobs, 196–97 Harvard University, 16 Hastert Rule, 333n31 health inequality in, 41–43 and labor force participation, 182 health care and American exceptionalism, 211–12 improving access to services, 203 public option, 210–11 in UK and Europe, 13 universal access to, 212–13 hedonic pricing, 347n13 higher education, 219–20; See also universities Hispanic Americans, 41 hi-tech companies, 54, 56, 60, 73 Hitler, Adolf, 152, 266n35 Hobbes, Thomas, 12 home ownership, 216–18 hours worked per week, US ranking among developed economies, 36–37 House of Representatives, 6, 159 housing, as barrier to finding new jobs, 186 housing bubble, 21 housing finance, 216–18 human capital index (World Bank), 36 Human Development Index, 36 Human Genome Project, 126 hurricanes, 207 IA (intelligence-assisting) innovations, 119 identity, capitalism’s effect on, xxvi ideology, science replaced by, 20 immigrants/immigration, 16, 181, 185 imports, See globalization; trade wars incarceration, 161, 163, 193, 201, 202 incentive payments for teachers, 201 voting reform and, 162–63 income; See also wages average US pretax income (1974-2014), 33t universal basic income, 190–91 income inequality, 37, 177, 200, 206 income of capital, 53 India, guaranteed jobs in, 196–97 individualism, 139, 225–26 individual mandate, 212, 213 industrial policies, 187 industrial revolution, 9, 12, 264–65n24 inequality; See also income inequality; wealth inequality benefits of reducing, xxiv–xxv and current politics, 246 in early years after WWII, xix economists’ failure to address, 33 education system as perpetuator of, 219 and election of 2016, xix–xxi and excess profits, 49 and financial system design, 198 growth of, xii–xiii, 37–45 in health, 41–43 in opportunity, 44–45 in race, ethnicity, and gender, 40–41 and 2017 tax bill, 236–37 technology’s effect on, 122–23 in 19th and early 20th century, 12–13 20th-century attempts to address, 13–14 tolerance of, 19 infrastructure European Investment Bank and, 195–96 fiscal policy and, 195 government employment and, 196–97 public–private partnerships, 142 returns on investment in, 195, 232 taxation and, 25 and 2017 tax bill, 183 inheritance tax, 20 inherited wealth, 43, 278n38 innovation intellectual property rights and, 74–75 market power and, 57–60, 63–64 net neutrality and, 148 regulation and, 134 slowing pace of, 118–19 and unemployment, 120, 121 innovation economy, 153–54 insecurity, social protection to address, 188–91 Instagram, 70, 73, 124 institutions fragility of, 230–36 in progressive agenda, 245 undermining of, 231–33 insurance companies, 125 Intel, 65 intellectual property rights (IPR) China and, 95–96 globalization and, 88–89, 99 and stifling of innovation, 74–75 and technological change, 122 in trade agreements, 80, 89 intelligence-assisting (IA) innovations, 119 interest rates, 83, 110, 215 intergenerational justice, 204–5 intergenerational transmission of advantage/disadvantage, xxv–xxvi, 199–201, 219 intermediation, 105, 106 Internal Revenue Service (IRS), 217 International Monetary Fund, xix internet, 58, 147 Internet Explorer, 58 inversions, 302n10 investment buybacks vs., 109 corporate tax cuts and, 269n44 and intergenerational justice, 204 long-term, 106 weakening by monopoly power, 63 “invisible hand,” 76 iPhone, 139 IPR, See intellectual property rights Ireland, 108 IRS (Internal Revenue Service), 217 Italy, 133 IT sector, 54; See also hi-tech companies Jackson, Andrew, 101, 241 Janus v.


pages: 455 words: 138,716

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

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Alan Greenspan, banking crisis, Bear Stearns, Bernie Madoff, book value, butterfly effect, buy and hold, collapse of Lehman Brothers, collateralized debt obligation, company town, Corrections Corporation of America, Credit Default Swap, credit default swaps / collateralized debt obligations, Edward Snowden, ending welfare as we know it, fake it until you make it, fixed income, forensic accounting, Glass-Steagall Act, Gordon Gekko, greed is good, illegal immigration, information retrieval, London Interbank Offered Rate, London Whale, Michael Milken, naked short selling, off-the-grid, offshore financial centre, Ponzi scheme, profit motive, regulatory arbitrage, Savings and loan crisis, short selling, social contagion, telemarketer, too big to fail, two and twenty, War on Poverty

The government similarly decided not to press forward with cases against a number of other prominent financial fraud targets. In early 2010 the DOJ decided to end the investigation of AIG Financial Products chief Joe Cassano, the patient zero of the financial crisis, whose half-trillion-dollar portfolio of unsecured credit default swaps imploded in 2008, forcing the government to bail out AIG and sending the world economy into a tailspin. Cases involving Ponzi scheme artists Bernie Madoff and Allen Stanford were restricted to a few defendants apiece, while banks and other institutions that aided their frauds got off clean.

Incredibly, the DOJ still ultimately lost the Clemens case, and it was the way they lost it that was most distressing. “There were two pieces of evidence in that case, the needle and the trainer, and it still took them ten weeks to put on the trial,” groans one former federal prosecutor. “And they lost. That’s the kind of thing that makes you hesitate before you try a credit-default-swaps case.” The key thing, the one thing that almost every current and former federal prosecutor who lived through this period talks about, is that in the early years of the Obama administration, a huge premium was placed on not losing. Breuer and Holder acted like the corporate stewards they were and gravitated toward a bottom-line strategy of prosecution.

Her name seems to pop up in case after important case involving big-time targets that the government ultimately decided not to prosecute. Most notably, White led a successful presentation to Justice Department officials about why it should not press a case against a trio of executives from AIG Financial Products, the unit whose exploding half-trillion-dollar portfolio of toxic credit default swaps led to the collapse of AIG and the federal bailout of same and, according to some, triggered the crash of 2008. White represented Tom Athan, deputy to Joe Cassano, the infamous head of AIGFP, who along with Angelo Mozilo is one of the most conspicuous nontargets of this era. After White’s presentation, the DOJ dropped its investigation of AIGFP.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

"Friedman doctrine" OR "shareholder theory", Abraham Wald, activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, AOL-Time Warner, asset allocation, asset-backed security, bank run, beat the dealer, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Carl Icahn, Cass Sunstein, collateralized debt obligation, compensation consultant, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, democratizing finance, Dennis Tito, discovery of the americas, diversification, diversified portfolio, Dr. Strangelove, Edward Glaeser, Edward Thorp, endowment effect, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Glass-Steagall Act, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Bogle, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, market design, Michael Milken, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, power law, prediction markets, proprietary trading, prudent man rule, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, rolodex, Ronald Reagan, seminal paper, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Skinner box, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, tech worker, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, Two Sigma, Tyler Cowen, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

Books directly or indirectly descended from Fisher’s work now adorn the desks of hedge fund managers, pension consultants, financial advisers, and do-it-yourself investors. The increasingly dominant quantitative side of the financial world—that strange wonderland of portfolio optimization software, enhanced indexing, asset allocators, credit default swaps, betas, alphas, and “model-derived” valuations—is a territory where Professor Fisher would feel intellectually right at home. He is perhaps not the father, but certainly a father of modern Wall Street. Hardly anyone calls him that, though. Economists honor Fisher for his theoretical breakthroughs, but outside the discipline his chief claim to lasting fame is the horrendous stock market advice he proffered in the late 1920s.

Perversely, Fannie and Freddie were allowed to buy these, and acquired tens of billions of dollars in subprime-mortgage-backed securities to meet affordable housing goals set by Congress. The Wall Street firms also repackaged mortgage securities into collateralized debt obligations (CDOs) that allowed them to transmute even the dodgiest subprime mortgages into triple-A debt. The new derivatives called credit default swaps, which allowed CDO packagers and buyers to offload some of their risks, allowed for even more credit creation. Backing up all this packaging and repackaging and derivatization were options-theory-based risk models that were, of course, only as good as the information fed into them. In many cases, because the securitization of these kinds of loans was so new, the models relied on only two or three years of historical data.

., 223–24 commodities market, 20, 39–40, 69–72, 133, 145, 194–95 Commodity Futures Trading Commission, 244 Common Stocks as Long-Term Investments (Smith), 22 competition, 160, 181, 353–54n. 25 complexity theory, 134, 301–2, 304 Complexity (Waldrop), 302 computers, 29, 86–87, 99–101, 204, 219, 224, 232, 234, 303–4 The Condition of the Working-Class in England in 1844 (Engels), 369n. 1 conglomerates, 120, 166 Convertible Hedge Associates, 218 Cootner, Paul, 71, 134, 223 corporations, 4, 14, 66, 137, 153–55, 159–61, 351–52n. 2 Corrigan, Gerald, 243 Council of Institutional Investors, 272–73 Cowles, Alfred, III, 35–39, 42, 43, 51–52, 55, 68, 70, 98, 111, 323 Cowles Commission for Research in Economics, 37, 51–53, 65, 76–78, 89, 341n. 9 Cowles Foundation, 55, 58 credit default swaps, 314 credit markets, xii, 317 currency markets, 92–93, 145, 236, 241, 250 Darwin, Charles, 9 De Bondt, Werner, 187, 201, 206, 296 Debreu, Gerard, 77–78, 150, 344n. 9 debt, 25, 170, 313–15 decision theory, 177–78 deflation, 11, 19–20 DeLong, Brad, 251 demand curves, 39 Department of Applied Economics (Cambridge), 64 deregulation, 152, 258, 320 derivatives, xii, xiv, 150–52, 220–21, 235, 236–37 dice games, 27.


Super Continent: The Logic of Eurasian Integration by Kent E. Calder

"World Economic Forum" Davos, 3D printing, air freight, Asian financial crisis, Bear Stearns, Berlin Wall, blockchain, Bretton Woods, business intelligence, capital controls, Capital in the Twenty-First Century by Thomas Piketty, classic study, cloud computing, colonial rule, Credit Default Swap, cuban missile crisis, deindustrialization, demographic transition, Deng Xiaoping, disruptive innovation, Doha Development Round, Donald Trump, energy transition, European colonialism, export processing zone, failed state, Fall of the Berlin Wall, foreign exchange controls, geopolitical risk, Gini coefficient, high-speed rail, housing crisis, income inequality, industrial cluster, industrial robot, interest rate swap, intermodal, Internet of things, invention of movable type, inventory management, John Markoff, liberal world order, Malacca Straits, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, new economy, oil shale / tar sands, oil shock, purchasing power parity, quantitative easing, reserve currency, Ronald Reagan, seigniorage, Shenzhen special economic zone , smart cities, smart grid, SoftBank, South China Sea, sovereign wealth fund, special drawing rights, special economic zone, Suez canal 1869, Suez crisis 1956, supply-chain management, Thomas L Friedman, trade liberalization, trade route, transcontinental railway, UNCLOS, UNCLOS, union organizing, Washington Consensus, working-age population, zero-sum game

High on the Bush policy agenda were thus the Medicare prescription drug benefit, enacted in 2003, and favorable housing-finance policies, which appealed especially to the lower middle class.44 The latter had been a mainstay of sustained conservative rule in Britain under Margaret Thatcher and attracted the Bush administration as well.45 The financial world of this period was also in transition, fueled by the repeal in 1999 of the Glass-Steagall separation of commercial and investment banking functions. This transformation, coupled with new, computer-oriented financial technology of the day, facilitated the emergence of powerful credit-default swaps that sharply boosted both profits for financial firms and bonuses for their savvy and technically sophisticated employees. The de- Eurasia in the Making 63 rivatives were arcane but blessed by AAA-rated insurance companies such as AIG, turning them into marketable commodities that foreign as well as American firms traded with confidence, to their later chagrin.46 The confluence of political incentives to make housing affordable with the potential of the new financial technology led to loosened restrictions on new forms of housing finance.

The de- Eurasia in the Making 63 rivatives were arcane but blessed by AAA-rated insurance companies such as AIG, turning them into marketable commodities that foreign as well as American firms traded with confidence, to their later chagrin.46 The confluence of political incentives to make housing affordable with the potential of the new financial technology led to loosened restrictions on new forms of housing finance. It also led to the marketing of new, innovative financial products, such as credit default swaps. The newly deregulated environment led initially to a housing boom, just as America entered the 2004 electoral season. George W. Bush, who had struggled so desperately in 2000, carried Florida by a solid 52 –47 margin over John Kerry and was triumphantly reelected.47 As inflation began rising during the 2005 –2006 electoral aftermath, the US Federal Reserve Board began raising interest rates, despite stagnation in middle-class incomes, thus raising pressures on overextended borrowers and setting the stage for a deeper financial crisis.

And on August 15 the Soros Fund, previously known for its farsighted appreciation of global economic trends, increased its stake in the troubled Lehman Brothers investment banking firm from 10,000 to 9.47 million shares. Within weeks the financial crisis, quietly deepening amid the massive risks posed by new derivatives such as credit default swaps, boiled dramatically into the open. On September 7, 2008, Fannie Mae and Freddie Mac, two of the most important dealers in mortgage-backed securities, were placed in conservatorship by the federal government. Just three days later, on September 10, Lehman Brothers posted a $3.93 billion third-quarter loss, after write-downs on toxic mortgages of $5.6 billion, and put itself up for sale the next day.


pages: 526 words: 144,019

A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History by Diana B. Henriques

Alan Greenspan, asset allocation, bank run, banking crisis, Bear Stearns, behavioural economics, Bernie Madoff, Black Monday: stock market crash in 1987, break the buck, buttonwood tree, buy and hold, buy low sell high, call centre, Carl Icahn, centralized clearinghouse, computerized trading, Cornelius Vanderbilt, corporate governance, corporate raider, Credit Default Swap, cuban missile crisis, Dennis Tito, Edward Thorp, Elliott wave, financial deregulation, financial engineering, financial innovation, Flash crash, friendly fire, Glass-Steagall Act, index arbitrage, index fund, intangible asset, interest rate swap, It's morning again in America, junk bonds, laissez-faire capitalism, locking in a profit, Long Term Capital Management, margin call, Michael Milken, money market fund, Myron Scholes, plutocrats, Ponzi scheme, pre–internet, price stability, proprietary trading, quantitative trading / quantitative finance, random walk, Ronald Reagan, Savings and loan crisis, short selling, Silicon Valley, stock buybacks, The Chicago School, The Myth of the Rational Market, the payments system, tulip mania, uptick rule, Vanguard fund, web of trust

The day after “Lehman Monday,” the U.S. Treasury Department and the Federal Reserve were fighting frantically to rescue the massive insurance firm AIG, which neither agency officially regulated but which was linked to other giant firms around the world through a set of financial derivatives called “credit default swaps.” Those events triggered widespread panic that eclipsed almost anything the markets had seen since 1929. Almost anything. Because the events just described, the events at the core of this story, did not happen in the harrowing weeks of September 2008. They happened on October 19, 1987, a day almost immediately dubbed “Black Monday.”

It is an oft-told tale, also recounted at length in Bernstein, Capital Ideas, pp. 269–73; Fox, The Myth of the Rational Market, p. 151; and Kupfer, “Leland, O’Brien, and Rubinstein.” What sane insurance company would write policies: Unfortunately, that idea did not seem absurd during the late 1990s and early 2000s to firms, such as AIG, that sold vast numbers of credit default swaps. The swaps essentially were insurance policies protecting the buyers from losses from corporate defaults. Since corporate defaults were likely to be highly correlated with turbulent economic conditions, it was likely that all those “insurance policies” would produce big claims at the same time—which is precisely what happened in the crisis of 2008.

Todd Continental Illinois National Bank Black Monday and Brady Report and Chicago futures market and Fed and financial crisis of 2008 and lessons from First Options and holding company and Mexican debt crisis and Penn Square and and rescue of 1984 corporate stock buy backs Corrigan, E. Gerald “Jerry” Council of Economic Advisers Council of Institutional Investors Cox, Charles C. crashes and crises of 1929 of 1962 (air pocket drop) of 1970 of 1980 (see Silver Thursday) of 1986 (September 11–12) of 1987 (see Black Monday) of 2008 credit default swaps credit rating agencies credit unions dark pools Dean Witter Reynolds Debreu, Gérard Democratic Party deregulation derivatives. See also financial futures; financial options; and other specific types cash cushions and insider trading and SEC vs. CFTC and regulation of systemic risk and unregulated Designated Order Turnaround (DOT) system SuperDOT system Dillon, Read and Company Dingell, John discount brokerages Disney Corporation Dole, Robert dollar Donovan, Tom Dow Jones and Co.


pages: 345 words: 86,394

Frequently Asked Questions in Quantitative Finance by Paul Wilmott

Abraham Wald, Albert Einstein, asset allocation, beat the dealer, Black-Scholes formula, Brownian motion, butterfly effect, buy and hold, capital asset pricing model, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discrete time, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, iterative process, lateral thinking, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk free rate, risk/return, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, transaction costs, urban planning, value at risk, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

These instruments are best valued using finite-difference methods because that takes into account the optimal conversion time quite easily. One must have a model for volatility and also risk of default. It is common to make risk of default depend on the asset value, so the lower the stock price the greater the probability of default. Credit Default Swap (CDS) is a contract used as insurance against a credit event. One party pays interest to another for a prescribed time or until default of the underlying instrument. In the event of default the counterparty then pays the principal in return. The CDS is the dominant credit derivative in the structured credit market.

The amount he has to pay and the dates on which he can exercise this right will be specified in the contract. Cap A fixed-income contract paying the holder when the underlying interest rate exceeds a specified level. See page 313. CDO A Collateralized Debt Obligation is a pool of debt instruments securitized into one financial instrument. See page 315. CDS A Credit Default Swap is a contract used as insurance against a credit event. One party pays interest to another for a prescribed time or until default of the underlying instrument. See page 317. CFA Chartered Financial Analyst. A professional designation offered by the CFA Institute for successfully completing three examinations.


pages: 302 words: 80,287

When the Wolves Bite: Two Billionaires, One Company, and an Epic Wall Street Battle by Scott Wapner

activist fund / activist shareholder / activist investor, AOL-Time Warner, asset allocation, Bear Stearns, Bernie Madoff, Carl Icahn, corporate governance, corporate raider, Credit Default Swap, deal flow, independent contractor, junk bonds, low interest rates, Mark Zuckerberg, Michael Milken, multilevel marketing, Pershing Square Capital Management, Ponzi scheme, price discrimination, Ronald Reagan, short selling, short squeeze, Silicon Valley, Tim Cook: Apple, unbiased observer

He’d battled with the company from 2002 to 2009, ultimately winning a $1.4 billion windfall, but not before a sprawling struggle in which he became the subject of investigations by both New York’s attorney general, Eliot Spitzer, and the Securities and Exchange Commission.1 It was a long and drawn-out affair that had begun when Ackman, a relative newcomer on the hedge-fund scene at his fledgling firm, Gotham Partners, went short on MBIA stock, betting its shares would plummet if the then white-hot housing market weakened. In addition, he’d bought something called credit default swaps—insurance policies, in effect, that would pay off even further if the company went bankrupt, as Ackman expected. Ackman had accompanied his investment with a fifty-page missive titled “Is MBIA Triple A?” that took aim at the company’s pristine credit rating—in essence, its lifeblood.2 Ackman systematically took the company apart, accusing MBIA of misrepresenting the value of its assets and listing several accounting shenanigans and other transgressions he claimed could lead to a liquidity event—the death knell for a business where confidence in the company’s credit means everything.

., 122 Chipotle chain, 209 Christodoro, Jonathan, 111, 112 Chung, Juliet, 100 Circa Pharmaceuticals, 28 Citron Research, 174 Clinton, Hillary, 172, 193 Clorox, 128 CNBC, 40, 55, 59, 60, 76, 77–78, 81, 85, 88, 154, 159, 176, 215 Delivering Alpha conferences, 147, 156–158, 208 Halftime Report, 101, 103–105, 109, 158 Squawk Box, 97, 170, 197, 206 Cohen, Steven A., 111 commodity prices, 183 Confidence Game: How a Hedge Fund Manager Called Wall Street’s Bluff (Richard), 12 consumer activists, 146 Cook, Tim, 184–188 corporate raiders, 121 Corvex Management LP, 113 Covington & Burling law firm, 32 Cozza, Keith, 207 Cramer, Jim, 55 credit default swaps, 10 credit ratings, 10, 11, 31 D.A. Davidson firm, 83, 132 Day, Andra, 211 debt, 3, 30, 64, 70, 124, 125, 170, 176, 209 Deep Value (Carlisle), 119 De La Merced, Michael, 60–61, 96 Denis, Mo, 145 derivatives market, 117, 149 DeSimone, John, 8, 57, 61, 66, 96, 159–160, 196, 207 Dewey Square Group, 145 Dietz, Dr.


pages: 302 words: 84,428

Mastering the Market Cycle: Getting the Odds on Your Side by Howard Marks

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, behavioural economics, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial engineering, financial innovation, fixed income, Glass-Steagall Act, if you build it, they will come, income inequality, Isaac Newton, job automation, junk bonds, Long Term Capital Management, low interest rates, margin call, Michael Milken, money market fund, moral hazard, new economy, profit motive, quantitative easing, race to the bottom, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, secular stagnation, short selling, South Sea Bubble, stocks for the long run, superstar cities, The Chicago School, The Great Moderation, transaction costs, uptick rule, VA Linux, Y2K, yield curve

Each bank failure, acquisition (at pennies on the dollar) or bailout brought losses to investors and further sapped confidence. In addition, the interlocking relationships among banks caused grave concern regarding the remaining ones’ ability to rely on amounts due from the others. “Counterparty risk” became the newest source of worry. Banks reported massive losses. The rising prices quoted for credit default swaps—derivatives used to bet against banks’ creditworthiness—implied increased odds of insolvency. Shareholders dumped bank stocks in response, forcing down their prices. Short sellers sold unremittingly, adding to the downward pressure, rendering their pessimistic predictions self-fulfilling, and further extending the vicious circle.

(Bernstein), 13 C capital market closed, 139–40, 157–58 conditions, 36, 145–46 definition of, 137 effect of close off of credit, 139–40, 154, 304 capitulation, 34, 194–95, 201, 236, 264, 300, 308 cartoons, 95, 96 central banks employment stimulation, 70 forecasting economic cycles, 70–71 inflation management, 68–70 See also Federal Reserve Bank Combs, Todd, 5 credit cycle, 167 auction for lowest yield, 143–44 boom bust, 145–48, 159 credit window, 138, 141–42, 144–45 definition of, 137 excess or easy money, 147–52 influence of, 138–40 short-term debt, 139–40 workings of, 141–42, 147, 157–60, 304–6 See also capital market; Global Financial Crisis of 2007–08; sub-prime mortgage crisis of 2007 credit default swaps. See Global Financial Crisis of 2007–08 Crutchley, John- Paul, 124 cycles, 3 causation and progression, 30–32, 283, 297–98 cessation of, 178, 180, 285–88, 290 cycle of success, 270–71 definitions of, 40–41 elements of, 18–19, 25–27, 208–10 excess and corrections, 29, 85–86, 293, 299, 307–9 interaction of, 32–33, 167, 186–89, 199–201 listening to, 3–5, 309 major cycles, 267 midpoint and aberrations, 24–29, 266, 296–97 regularity and irregularity, 40–42, 172, 217, 244–45 timing and extent, 24, 39, 145, 282, 295–96 understanding, 17, 22–24, 118, 239, 314–15 See also credit cycle “Death of Equities, The,” 49, 277–78 D Demosthenes, 222, 227, 284 Dimson, Elroy, 13–14, 239 distressed debt investments, 161–62 credit crunch and, 164–66 role of high yield bonds, 163–64 understanding opportunities, 163, 166–67, 241–42, 282 Dow 36,000 (Glassman & Hassett), 219 Dowd, Timothy, 255 Drexel Burnham, 165 Drunkard’s Walk, The (Mlodinow), 42 E economic cycles, 46–47, 64–66, 167 long and short term, 29–30 repetition and fluctuation, 24–25, 97, 135 short-term, 47, 58, 61 economic forecasts, 61–63, 208 Economics and Portfolio Strategy, 13 Economist, The, 141 Eichholtz, Piet, 182 Einstein, Albert, 36 Ellis, Charlie, 5 emotion/psychology, 3, 31, 34, 37, 167 “bubble” and “crash,” 196–98 contrarianism, 133, 135, 142, 234, 244, 301–4 credulousness and skepticism, 90–91, 133, 227 definition of insanity, 36 effect on economic cycles, 83–86, 97–99, 211, 228, 289–92, 298–299 emotionalism or objectivity, 95–96 euphoria and depression, 89, 94, 99, 125, 211, 222, 305, 312 extremes, 113–16, 265 fear, effect on consumption, 59 fear and/or greed, 87–89, 92–93, 114, 221–22, 233–35, 303 humility and confidence, 271–73 investment psychology, 40–42, 93–94, 186–88, 190–91, 214–15, 244 optimism and pessimism, 89–90, 133, 299–301, 302–3 “silver bullet,” 227 F falling knives, 8, 156, 202, 235–36 Federal Reserve Bank, 68, 119, 180, 231 Feynman, Richard, 289 Financial Times, 122, 124 Frank, Barney, 151 Friedman, Milton, 62 fundamentals, 185–87, 189, 209 valuation metrics, 211 future prediction macro prediction, 10 opinions and likelihood, 15, 102, 208, 263–65 qualitative awareness, 214–15 South Sea Bubble, 195–96 G Galbraith, John Kenneth, 5, 34, 63, 125, 178–79, 222 Geithner, Timothy, 155, 239, 287 Glass-Steagall Act, 120, 128 Global Financial Crisis of 2007–08, 36, 59, 119–22, 127–32, 147–57, 180, 233 bear market stages, 193–94 effect on real estate market, 177 lessons from, 239–40 Treasury guarantee of commercial paper, 139–40, 155, 233 Goldman, William, 43 Goldman Sachs, 155 government deficits and national debt, 71–73 economic management tools, 71–73 Graduate School of Business, University of Chicago, 103 Graham, Ben, 189 Greenblatt, Joel, 5 Greenspan, Alan, 217 gross domestic product (GDP) consumption, 59–60 definition of, 47 recession (negative growth), 48 See also productivity H high yield bonds, 44, 106, 108, 131–32, 157, 281–82 history and memory, 34, 42, 178 Arab oil embargo, 292 blue chips or small-capitalization, 274 brevity of, 222 convertible arbitrage, 275 growth and tech stocks, 274 mortgage defaults, 229 one house in Amsterdam, 181–82 permanent prosperity, 288–89 poor performance of stocks, 276–77 projections of the future, 286–87, 311–12 History of the Peloponnesian War (Thucydides), 37–38 Hoover, Herbert, 287 I intrinsic value, 11, 92, 133, 194, 200, 205 when to buy, 237 investing aggressive or defensive, 248, 250–53, 259–60, 295 asset selection, 248, 255–59 bargains or popularity, 273–78 capitulation, 34–35, 194–95 cycle positioning, 248, 250, 252, 254–55, 312–14 definition of, 101–2, 262 fluctuation in, 186–87 growth stocks, 197–98 long or short securities sales, 8 market cycle, return, 204–6 overpayment, 144, 169, 179 philosophy, 4–5, 197, 207 security analysis and value investing, 11 skill or luck, 249, 253–54, 258–59, 272–73 “weighing machine,” 189 See also fundamentals; psychology investment indices, 232t, 238t “it’s different this time,” 37, 197–99 J Jain, Ajit, 5, 276 Janjigian, Jahan, 280 junk bonds.


pages: 207 words: 86,639

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

Abraham Maslow, Alan Greenspan, Alvin Toffler, Apollo 11, Asian financial crisis, back-to-the-land, banking crisis, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, carbon footprint, carbon tax, clean water, collateralized debt obligation, colonial rule, Community Supported Agriculture, congestion charging, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Crossrail, delayed gratification, deskilling, digital divide, en.wikipedia.org, energy transition, financial deregulation, financial exclusion, financial innovation, full employment, garden city movement, Glass-Steagall Act, green new deal, happiness index / gross national happiness, if you build it, they will come, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, John Elkington, junk bonds, Kickstarter, land bank, land reform, light touch regulation, loss aversion, mega-rich, microcredit, Mikhail Gorbachev, Money creation, mortgage debt, neoliberal agenda, new economy, North Sea oil, Northern Rock, offshore financial centre, oil shock, peak oil, pension time bomb, pensions crisis, profit motive, purchasing power parity, quantitative easing, Ronald Reagan, seigniorage, Simon Kuznets, sovereign wealth fund, special drawing rights, systems thinking, the long tail, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trickle-down economics, Vilfredo Pareto, Washington Consensus, wealth creators, working-age population

The less fortunate mortgage payers found that huge unexplained fees had been added once they asked for help to delay payments, putting them even further in debt. By October 2008 – financial crashes usually take place in October for some reason – the real question was whether not the financial system could survive. One estimate puts the total value of credit default swaps in the system, most of which include risky sub-prime loans, at as much as $45 trillion: twice the total value of the THE ECONOMIC PROBLEM 7 US stock market and three times the GDP of the US.7 The veteran investor Warren Buffett has already described derivatives, and other investment vehicles used by hedge funds and others, as ‘financial weapons of mass destruction’, and he may well be proved right.8 Certainly the events of the autumn of 2008 implied that something more serious was happening, as a series of major names – HBOS, Lehman Brothers, Merrill Lynch and all the others – were wiped off the map, driven out of business as much by the hedge funds as by any other mistakes they might have made.

Arts Council (1946), First Annual Report, London. Intergovernmental Panel on Climate Change (2008) Climate Change 2007, Geneva. United Nations Development Programme (1998) Consumption for Human Development, Oxford University Press, New York. Daily Telegraph (2003) 16 April. Daily Mail (2008) 21 March. Richard R. Zabel (2008) ‘Credit Default Swaps’, Pratt’s Journal of Bankruptcy Law, Sept. The original $45 trillion figure came from the Bank for International Settlements. Fortune (2003) 3 March. International Financial Services (2006) Foreign Exchange, London, October. Robert Kuttner (1985) ‘The Poverty of Economics’, Atlantic Monthly, 1 September.


pages: 317 words: 84,400

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

23andMe, Ada Lovelace, airport security, Al Roth, algorithmic trading, Apollo 13, backtesting, Bear Stearns, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, call centre, Charles Babbage, cloud computing, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, Donald Trump, Douglas Hofstadter, dumpster diving, financial engineering, Flash crash, G4S, Gödel, Escher, Bach, Hacker News, High speed trading, Howard Rheingold, index fund, Isaac Newton, Jim Simons, John Markoff, John Maynard Keynes: technological unemployment, knowledge economy, late fees, machine translation, Marc Andreessen, Mark Zuckerberg, market bubble, Max Levchin, medical residency, money market fund, Myron Scholes, Narrative Science, PageRank, pattern recognition, Paul Graham, Pierre-Simon Laplace, prediction markets, proprietary trading, quantitative hedge fund, Renaissance Technologies, ride hailing / ride sharing, risk tolerance, Robert Mercer, Sergey Aleynikov, side project, Silicon Valley, Skype, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, upwardly mobile, Watson beat the top human players on Jeopardy!, Y Combinator

Li was searching for a way to measure the risk of one mortgage defaulting if another, seemingly unrelated mortgage defaulted. This is called correlative risk. Because Li didn’t have piles of historical default data on subprime mortgages (it simply didn’t exist), he built his copula on data that did exist: historical prices of credit default swaps, which result in a payment to the owner of the swap if the underlying securities (mortgages in this case) go into default. But the CDS market was, as we now well know, egregiously mispriced by the humans who traded the swaps and set the prices. Nevertheless, Wall Street embraced Li’s formula as stone-solid fact.

., 128, 130, 186, 190, 192, 198 algorithmic trading in, 40, 46, 49, 51 communication between markets in New York and, 42, 113–18, 123–24 options trading in, 27 Chicago, University of, 23, 140, 186, 191 Chicago Board Options Exchange, 27, 36, 38, 40, 114 Chicago Cubs, 142 Chicago Mercantile Exchange, 40, 51–52, 133 Chicago Research and Trading, 40, 46 Chicago Tribune, 8 chimpanzees, humans’ divergence from, 161 Cho, Rich, 142 Chopin, Frederic, 96, 98 chorales, 93 chords, musical, 82, 106–10 Cielo Networks, 124 Cincinnati Stock Exchange, 46 Citadel, 190 Citi Capital Markets, 200 Citigroup, 186, 192 Civil War, 122 classical music, algorithms and, 89–103 Clinton, Bill, 176 cloud computing, 120–21 Cloudera, 206, 216 Clue, 135 CNBC, Dow crash and, 2–3 CNN, 137 Codecademy, 9–10 cognitive science, 97 Cold War, 136, 168, 169 collateralized debt obligations (CDOs), 189, 209 Columbia Records, 87 Columbia University, 162 Combinet, 131 Come Away with Me, 82–83 Comes the Fiery Night (Cope), 100–101 commerce, personality types in, 163 commodities, golden mean and, 57 commodities options, 22 commodities trading, 20–25, 27, 51, 130 communication: human, 170–71 under stress, 145 voice, 195 communications networks, financial markets and, 120–25 communism, 136 competition, stock prices and, 27 computer code, 73 computer dating, algorithms for, 143–45 computer languages, 74 computers, 73 circuitry of, 74 early home, 28 early office use of, 19–20 handheld, 36–39, 41, 44–45 improvements in, 48 Peterffy’s early trading via, 12–16 computer science, 71, 157, 188, 200, 201, 213 Cope’s algorithmic music and, 91 congestive heart failure, 159 consumer data, 192–93 Conway, Kelly, 177, 180–83, 186–88, 190, 191–97, 198 coordinated algorithms, 5 Cope, David, 89–102 Emmy created by, 93–99 hostility toward the algorithmic music of, 90–91, 95, 96–99 on question of authorship, 95 Cornell University, 213 coronary bypass surgery, 158 correlative risk, 65 Correlator (algorithm), 42–45 Cosby, Bill, 34 cosines, 106 cowboy bets, 30 Cramer, Jim, 3, 4 creativity, by algorithms, 76–77 credit default swaps (CDSs), 65 Credit Suisse, 116, 186 Credit Suisse First Boston, 189 crude oil trades, 51 Cuba, 153 currency rates, fluctuations in, 54 customer service, 178 fraudulent calls by, 193 personality types in, 163, 164, 180–83, 195, 214 cytotechnologists, 153 Dalhousie University, 105 dark fiber, 114–20, 122 data: gathering of, 203–5 sifting of, 62, 206–7 data feeds, hacking of, 15, 17 data mines, 206 Da Vinci Code, The (Brown), 57 decision trees: algorithms as, 6 binary, 26, 171 declarative statements, 180 Deep Blue, 126–27, 129, 133, 141 Defense Department, U.S., 73 Office of Net Assessment at, 140 delta neutral trades, 33 Dennett, Daniel, 97 Deo, 81–82 derivatives, 60 values of, 41–42 Deutsche Bank, 190 deviations, 63 differential equations: in options trading, 22 partial, 23 digital files, 81 Disney studios, 76 disruptors, in music composition, 102–3 divisors, algorithm for, 55 “DJ Got Us Fallin’ in Love,” 89 DNA, 70, 159 algorithmic analysis of, 160–61 atomic structure of, 56 Dodge, Anne, 156–57 Donino, Tom, 4 dot-com crash, 188 Dow Jones, news service for trading bots by, 48 Dow Jones Industrial Average, 2–4, 191 driving, algorithms for, 214–16 Dropbox, 199 drought, 130 drugs: anesthetic, 160 in PDR, 146 Duke University, 189, 198 DuPont, 29–30 Durant, Kevin, 142 Eagles, the, 78 Eastern Europe, 193, 218 eBay, 188 economy: growth sectors in, 218–20 troubled recent, 189, 208, 210–11 Edison, Thomas, 123 education: in math and science, 218–19 personality types in, 195 in programming, 9–10 Education Department, New York City, 147–48 Egypt, 140 eHarmony, 144 Einhorn, David, 128 Eisen, Michael, 1 elections, of 1992, 176 electronic trading networks, 185 Elements (Euclid), 55 Elizabeth Wende Breast Clinic, 154 eLoyalty, 177, 180–83, 186–88, 191–97 e-mail, 195–96, 204 language patterns and social influence in, 212–14 EMI, 87 Emily Howell (algorithm), 99 Emmy (algorithm), 90, 94–99 recording contract for, 95–96 Emory University, 189 emotions-driven people, 172–73, 174, 175, 176, 180, 187, 194, 197 empathy, 176 engineering, financial, 209 engineers, 62 algorithms and, 6 career goals of, 189–90, 198, 200, 210–11, 218–20 at Facebook, 70 at Google, 47 in intelligence analysis, 139–40 music algorithms and, 78, 79 Peterffy as, 32, 48 in sports management, 142 on Wall Street, 13, 23, 24, 46, 47, 49, 119, 185, 202, 207, 211 England, 72 English-French translation software, 178–79 entrepreneurs, 208–11 online, 53 Epagogix, 75 Epstein, Theo, 142 equity exchanges, 38 Erasmus of Rotterdam, 69 Euclid, 55 Euclidean algorithm, 55 Euler, Leonhard, 64, 65, 68–71, 105, 111 Euler’s formula, 70–71 Euphrates Valley, 55 Europe: algorithmic trading in, 47, 49 pop charts in, 79 Evanston, Ill., 3, 218 “Explanation of Binary Arithmetic” (Leibniz), 58 ExxonMobil, 50 Facebook, 198–99, 204–6, 214 graph theory and, 70 face-reading algorithms, 129, 161 Falchuk, Myron, 157 Farmville, 206 fat tails, 63–64 FBI, 137 FedEx, 116 Ferguson, Lynne, 87 Fermat, Pierre, 66–67 fiber: dark, 114–20, 122 lit, 114 fiber optic cables, 117, 124, 192 Fibonacci, Leonardo, 56–57 Fibonacci sequence, 57 Fidelity, 50 finance, probability theory and, 66 financial markets, algorithms’ domination of, 24 financial sector, expansion of, 184, 191 see also Wall Street Finkel, Eli, 145 Finland, 130 First New York Securities, 4 Fisher, Helen, 144 Flash Crash of 2010, 2–5, 48–49, 64, 184 Forbes magazine, 8 foreign exchange, golden mean and, 57 Fortran, 12, 38 Fortune 500 companies, Kahler’s methods at, 176 Fourier, Joseph, 105–6 Fourier series, 105–7 Fourier transforms, 82 401K plans, 50 Fox News, 137 fractal geometry, 56 France, 61, 66, 80, 121, 147 Frankfurt, 121 fraud, eLoyalty bots and, 193 French-English translation software, 178–79 From Darkness, Light, 99 galaxies, orbital patterns of, 56 gambling: algorithms and, 127–35 probability theory and, 66, 67 game theory, 58 algorithms and, 129–31 and fall of Soviet Union, 136 in organ donor networks, 147–49 in politics, 136 sports betting and, 133–35 terrorism prevention by, 135–40 gastroenterology, 157 Gauss, Carl Friedrich, 61–65 Gaussian copula, 65, 189 Gaussian distributions, 63–64 Gaussian functions, 53 GE, 209, 213 Geffen, 87 General Mills, 130 General Motors, 201 genes, algorithmic scanning of, 159, 160 geometry, 55 of carbon, 70 fractal, 56 George IV, king of England, 62 Germany, 26, 61, 90 West, 19 Getco, 49, 116, 118 Glenn, John, 175 gluten, 157 Gmail, 71, 196 Gödel, Escher, Bach: An Eternal Golden Braid (Hofstadter), 97 gold, 21, 27 Gold and Stock Telegraph Company, 123 Goldberg, David, 219 golden mean, 56–57 Goldman Sachs, 116, 119, 204, 213 bailout of, 191 engineering and science talent hired by, 179, 186, 187, 189 Hull Trading bought by, 46 Peterffy’s buyout offer from, 46 Gomez, Dominic, 87 goodwill, 27 Google, 47, 71, 124, 192, 196, 207, 213, 219 algorithm-driven cars from, 215 PageRank algorithm of, 213–14 Gorbachev, Mikhail, 136 Göttingen, 122 Göttingen, University of, 59, 65 grain prices, hedging algorithm for, 130 grammar, algorithms for, 54 Grammy awards, 83 graph theory, 69–70 Great Depression, 123 Greatest Trade Ever, The (Zuckerman), 202 Greece, rioting in, 2–3 Greenlight Capital, 128 Greenwich, Conn., 47, 48 Griffin, Blake, 142 Griffin, Ken, 128, 190 Groopman, Jerome, 156 Groupon, 199 growth prospects, 27 Guido of Arezzo, 91 guitars: Harrison’s twelve–string Rickenbacker, 104–5, 107–9 Lennon’s six–string, 104, 107–8 hackers: as algorithm creators, 8, 9, 178 chat rooms for, 53, 124 as criminals, 7–8 for gambling, 135 Leibniz as, 60 Lovelace as, 73 online, 53 poker played by, 128 Silicon Valley, 8 on Wall Street, 17–18, 49, 124, 160, 179, 185, 201 Wall Street, dawn of hacker era on, 24–27 haiku, algorithm-composed, 100–101 Haise, Fred, 165–67 Hal 9000, 7 Hammerbacher, Jeffrey, 201–6, 209, 216 Handel, George Frideric, 68, 89, 91 Hanover, 62 Hanto, Ruthanne, 151 Hardaway, Penny, 143 “Hard Day’s Night, A,” opening chord of, 104–10 hardware: escalating war of, 119–25 Leibniz’s binary system and, 61 Harrah’s, 135 Harrison, George, 103–5, 107–10 on Yahoo!


pages: 269 words: 83,307

Young Money: Inside the Hidden World of Wall Street's Post-Crash Recruits by Kevin Roose

activist fund / activist shareholder / activist investor, Basel III, Bear Stearns, Carl Icahn, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, discounted cash flows, Donald Trump, East Village, eat what you kill, eurozone crisis, financial engineering, fixed income, forward guidance, glass ceiling, Goldman Sachs: Vampire Squid, hedonic treadmill, information security, Jane Street, jitney, junk bonds, Kevin Roose, knowledge worker, Michael Milken, new economy, Occupy movement, off-the-grid, plutocrats, proprietary trading, Robert Shiller, selection bias, shareholder value, side project, Silicon Valley, Skype, Steve Jobs, tail risk, The Predators' Ball, too big to fail, two and twenty, urban planning, We are the 99%, work culture , young professional

(Most of its U.S. operations were bought several weeks later by Barclays Capital, the investment banking arm of the large British firm.) The same day, Merrill Lynch, which had also been pummeled by the housing collapse, announced it was selling itself to Bank of America for $50 billion. AIG, an insurer weighed down by towering piles of credit default swaps, had to be given a massive $182 billion bailout, and Goldman Sachs and Morgan Stanley, the last freestanding American investment banks, turned themselves into bank holding companies in order to give themselves better access to the Federal Reserve’s emergency lending window. Congress passed a $700 billion bailout package that gave a lifeline to banks and kept the markets afloat, and the entire country sunk into a recession that would cost millions of jobs, engulf every sector of the economy, and…well, you can probably fill in the rest.

“It doesn’t make sense to brand us all with the same stroke. Like, if a person in the NHL got charged with rape tomorrow, would ESPN say that all hockey players are rapists?” There was some logic in this defense. After all, many back-office and support workers at Wall Street banks earn $40,000 or $50,000 a year, have no idea what a credit default swap is or how to construct a collateralized loan obligation, and can’t truly be lumped in with the foolhardy executives who ran their firms into the ground during the crisis. The analysts I was following were well within the 99 percent statistically, even if their colleagues weren’t. (The cutoff for the top 1 percent of American tax filers in 2010 was about $370,000 in adjusted gross income—well above what any first-year analyst makes.)


pages: 274 words: 81,008

The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything by Jason Kelly

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, antiwork, barriers to entry, Bear Stearns, Berlin Wall, call centre, Carl Icahn, carried interest, collective bargaining, company town, corporate governance, corporate raider, Credit Default Swap, diversification, eat what you kill, Fall of the Berlin Wall, family office, financial engineering, fixed income, Goldman Sachs: Vampire Squid, Gordon Gekko, housing crisis, income inequality, junk bonds, Kevin Roose, late capitalism, margin call, Menlo Park, Michael Milken, military-industrial complex, Occupy movement, place-making, proprietary trading, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Rubik’s Cube, San Francisco homelessness, Sand Hill Road, Savings and loan crisis, shareholder value, side project, Silicon Valley, sovereign wealth fund, two and twenty

Announced with fanfare in 2007, Energy Future was headed toward being a bad deal from an investment perspective within two years, and the biggest deal in history may in fact end up being among the most disappointing for investors. By early 2012, a debt default was seen as virtually certain. Credit-default swaps, a financial instrument investors use to bet on whether a company will meet its debt obligations, put the chances of default at 91 percent within three years.6 At issue were natural gas prices, which were central to the business case to buy TXU in the first place. The buyers believed prices for natural gas would continue to rise, driving the price for wholesale power, which the company provides, higher.

See also Carlyle Group about BDM as dealmaker educational background of Mathias and personal life of qualities and focus of Rubenstein vs. CoreTrust Coslet, Jonathan Coulter, Jim about Boyce and changing his path on J. Crew board of TPG TPG culture and TPG’s future and “Covenant lite” loans CPP. See Canada Pension Plan Investment Board (CPP) Credit crisis Credit-default swaps Credit Suisse Cuomo, Andrew Dade International D’Aniello, Daniel. See also Carlyle Group about BDM as administrator of Carlyle Bill Marriott, Sr. and educational background of One Carlyle program Dasburg, John Davis, Kelvin Davis, Steven J. Dear, Joseph Debt: during buyout boom dividend recap and private-equity money and use in LBO Dechert Default: debt by private-equity companies “The Denver Group” Deutsche Bank DIFC.


pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

accelerated depreciation, affirmative action, Albert Einstein, Bear Stearns, Bernie Madoff, book value, British Empire, business cycle, capital controls, clean tech, cloud computing, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, gentrification, George Gilder, Gunnar Myrdal, Home mortgage interest deduction, Howard Zinn, income inequality, independent contractor, inverted yield curve, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, junk bonds, knowledge economy, labor-force participation, longitudinal study, low interest rates, margin call, Mark Zuckerberg, means of production, medical malpractice, Michael Milken, minimum wage unemployment, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Paul Samuelson, plutocrats, Ponzi scheme, post-industrial society, power law, price stability, Ralph Nader, rent control, Robert Gordon, Robert Solow, Ronald Reagan, San Francisco homelessness, scientific management, Silicon Valley, Simon Kuznets, Skinner box, skunkworks, Solyndra, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve, zero-sum game

Banishing the company’s legendary owner-entrepreneur was presumably a big step forward in the annals of oversight, but it somehow did not suffice to get AIG’s management in order. Spitzer’s attention may have wandered. In any case, within the next three years, while no one was looking apparently, the AIG financial products division wrote some $2.7 trillion worth of credit default swaps. These were a form of insurance mandated by regulators, from the Federal Reserve in Washington to the G7 in Basel, Switzerland, to offset the risk of subprime mortgage based securities. Perhaps AIG’s financial products division had eluded Bernanke’s own regulatory eye at the Federal Reserve.

The problem was that the regulators, like most regulators, lacked relevant information. They were experts on the politics of the situation, but had no real command of the intricacies of the businesses within their purviews or any stake in their operations. They were not perhaps as abysmally ignorant about the implications of credit default swaps as regulator-in-chief Ben Bernanke was ignorant about the imperial reach of the U.S. regulatory state. But it was a formidable gap all the same. Regulation is an effort to replace knowledge with power. The government cannot be sure what complex corporations like AIG are doing. It does not know how to make AIG better at what it does, how to improve its efficiency and effectiveness as a global insurance company.

Only entrepreneurial owners take their cues from the subtle signals on the crests of creation. The lesson of the crash is that a hundred regulators and encyclopedic sets of rules could not replace one Hank Greenberg, the man who built AIG and was thrown out by the regulators before that firm ever wrote a single credit default swap contract on a single bogus AAA bond. That hundred-regulators-to-one-entrepreneur mismatch is the real meaning of the “one percent”—the tiny minority that gives capitalism its name. The discovery of the “one percent” by pols and pundits and their resurgent obsession with income inequality misunderstands both the source and the purpose of great wealth in a capitalist economy.


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

"World Economic Forum" Davos, accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, Anthropocene, anti-globalists, asset-backed security, banking crisis, banks create money, basic income, biodiversity loss, bond market vigilante , Boris Johnson, Bretton Woods, British Empire, Bullingdon Club, business cycle, call centre, capital controls, carbon footprint, carbon tax, 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, degrowth, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial engineering, financial innovation, financial intermediation, Fractional reserve banking, full employment, G4S, Goldman Sachs: Vampire Squid, green new deal, high net worth, high-speed rail, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", James Dyson, job automation, Julian Assange, junk bonds, Kickstarter, labour market flexibility, laissez-faire capitalism, land bank, land value tax, long term incentive plan, 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, popular capitalism, predatory finance, price stability, proprietary trading, pushing on a string, quantitative easing, race to the bottom, rent-seeking, retail therapy, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, tacit knowledge, TED Talk, The Nature of the Firm, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, 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, WikiLeaks, Winter of Discontent, working poor, Yom Kippur War, zero-sum game

It didn’t matter to them when the bubble burst in 2000 at their gullible clients’ cost, because they had already realised their capital gains. Investment banks can also play off different customers or clients against one another, and bet against them. They sold credit derivatives that they knew to be overvalued to their clients, while betting against them by buying credit default swaps that paid out when the derivatives crashed: a classic heads-we-win-tails-they-lose strategy. Like arms dealers profiting from arming both sides in a war, they can ‘help’ both sides in competitive struggles. Goldman Sachs now finds itself on so many sides of a deal simultaneously that the mind boggles.

Yes, it seems not just outrageous but scarcely credible, yet it is symptomatic of the unaccountable power of the sector. No doubt the buyers of the securities knew this but did nothing about it because they, or any others exposed to the risk, assumed they had covered themselves by buying ‘Credit Default Swaps’ (CDSs) to protect themselves. In effect, they paid a fee to banks to guarantee the securitised loans, should they fail – a kind of insurance, you could say. But this in turn encouraged the feeling that it was safe to buy still more CDOs. Worse, up to an estimated 80% of the market for CDSs involved clients who were not themselves exposed to the relevant credit risks (‘naked’ CDSs, as they’re known in the game)!

See Crotty, J. (2010) ‘The bonus-driven “rainmaker” financial firm: how these firms enrich top employees, destroy shareholder value and create systemic financial instability’, pp 74ff, http://people.umass.edu/crotty/RMFC%20paper%20-%20July%202010.pdf. 54 Münchau, W. (2010) ‘Time to outlaw naked credit default swaps’, Financial Times, 28 February. 55 Hildyard, N. (2010) ‘From US sub prime to London prime: shadow bankers in London’, The Corner House, http://www.thecornerhouse.org.uk/resource/us-subprime-london-prime. See also Münchau (2010). 56 Anrig, G. (2010,)‘“Strategic deficit” redux’, The American Prospect, 26 January, http://prospect.org/article/strategic-deficit-redux-0.


pages: 444 words: 151,136

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

Alan Greenspan, Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bond market vigilante , book value, Branko Milanovic, bread and circuses, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, carbon tax, 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, foreign exchange controls, Fractional reserve banking, full employment, German hyperinflation, Great Leap Forward, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land bank, land reform, liquidity trap, Long Term Capital Management, lost cosmonauts, low interest rates, McMansion, mega-rich, military-industrial complex, Money creation, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, proprietary trading, pushing on a string, quantitative easing, RAND corporation, rent control, rent stabilization, reserve currency, risk free rate, riskless arbitrage, Ronald Reagan, Savings and loan crisis, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, Tax Reform Act of 1986, The Great Moderation, the scientific method, time value of money, too big to fail, Two Sigma, upwardly mobile, War on Poverty, Yogi Berra, young professional

When it was called upon to put up additional collateral, it failed. However, the hedge fund had posted attractive returns of some 44 percent annually through the leverage on the fees while things were going well, making them an exquisite example of a legitimized producer of fake alpha that fed off the option premium collectible from the credit default swap gravy train.4 But this gross example trivializes the systemic practice. Goldman Sachs was willing to borrow 30 times its equity base because it could lay off its credit risk through default swaps with AIG, which took in fake alpha earnings from booking premiums from the sale of premiums to Goldman.

This phrase now is more often used to describe components of systemic financial system risk that have sprung up in the financial crisis that began in 2008. The odd marriage of Wall Street and government has produced two enormous moral hazards: the securitized mortgage, as well as its cousin, the credit default swap, which together brought down the financial system in 2008. It has begotten conflicted market structures, such as the government mortgage agencies that promote home ownership through weakening standards, but at the same time implicitly guarantee these loans. Large brokerage firms and banks fearlessly extended credit knowing they had the Federal Reserve standing by to slash the cost of funds and repair their balance sheets.

Throughout the crisis to that point, Goldman has been regarded as one of the financially strongest firms on Wall Street, but it has accepted TARP funds. However, like many other broker-dealers, its leverage ratio swelled to near 30-to-1, which means that failure of any large derivatives on (or off) its books could have wiped out its equity. Goldman purportedly had a large credit default swap it had entered into with the failed insurance giant AIG, which the government fulfilled as part of its bailout of that firm. In addition, Goldman has stated that it had hedged its exposure to AIG, perhaps through a short position in AIG equity or derivatives of the same, so it in essence may have collected twice on its loss.


pages: 486 words: 150,849

Evil Geniuses: The Unmaking of America: A Recent History by Kurt Andersen

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, affirmative action, Affordable Care Act / Obamacare, air traffic controllers' union, airline deregulation, airport security, Alan Greenspan, always be closing, American ideology, American Legislative Exchange Council, An Inconvenient Truth, anti-communist, Apple's 1984 Super Bowl advert, artificial general intelligence, autonomous vehicles, basic income, Bear Stearns, Bernie Sanders, blue-collar work, Bonfire of the Vanities, bonus culture, Burning Man, call centre, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Cass Sunstein, centre right, computer age, contact tracing, coronavirus, corporate governance, corporate raider, cotton gin, COVID-19, creative destruction, Credit Default Swap, cryptocurrency, deep learning, DeepMind, deindustrialization, Donald Trump, Dr. Strangelove, Elon Musk, ending welfare as we know it, Erik Brynjolfsson, feminist movement, financial deregulation, financial innovation, Francis Fukuyama: the end of history, future of work, Future Shock, game design, General Motors Futurama, George Floyd, George Gilder, Gordon Gekko, greed is good, Herbert Marcuse, Herman Kahn, High speed trading, hive mind, income inequality, industrial robot, interchangeable parts, invisible hand, Isaac Newton, It's morning again in America, James Watt: steam engine, Jane Jacobs, Jaron Lanier, Jeff Bezos, jitney, Joan Didion, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, junk bonds, Kevin Roose, knowledge worker, lockdown, low skilled workers, Lyft, Mark Zuckerberg, market bubble, mass immigration, mass incarceration, Menlo Park, Naomi Klein, new economy, Norbert Wiener, Norman Mailer, obamacare, Overton Window, Peter Thiel, Picturephone, plutocrats, post-industrial society, Powell Memorandum, pre–internet, public intellectual, Ralph Nader, Right to Buy, road to serfdom, Robert Bork, Robert Gordon, Robert Mercer, Ronald Reagan, Saturday Night Live, Seaside, Florida, Second Machine Age, shareholder value, Silicon Valley, social distancing, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, Stewart Brand, stock buybacks, strikebreaker, tech billionaire, The Death and Life of Great American Cities, The Future of Employment, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, trickle-down economics, Tyler Cowen, Tyler Cowen: Great Stagnation, Uber and Lyft, uber lyft, union organizing, universal basic income, Unsafe at Any Speed, urban planning, urban renewal, very high income, wage slave, Wall-E, War on Poverty, We are all Keynesians now, Whole Earth Catalog, winner-take-all economy, women in the workforce, working poor, young professional, éminence grise

The financial industry actually coined the astonishingly shameless term of art incognito leverage for invisible corporate debt, debt kept off balance sheets, hidden from the clueless chumps among the investors. The “large banks start[ed] acting more like traders” than trustworthy advisers, the journalist Nicholas Dunbar explains in The Devil’s Derivatives, his history of financial innovation. The result was an “innovation race between ways of transferring risk”—such as the credit default swap, a derivative bought by financial firms that was actually predicated on unpaid loans and financial disaster, an invention that “Goldman Sachs quickly moved to exploit and was richly rewarded for its ambition and ruthlessness.” It wasn’t just the more adrenalized loosey-goosey culture and going public that made Wall Street greedier to the point of recklessness.

The Clintonians rewrote the old rules and wrote new rules that built in excess and recklessness on behalf of the monied class. In 1998 Brooksley Born, the federal official who was running the agency overseeing financial derivatives, got worried about the accelerating flurry of trading in new sorts of derivatives, in particular one called credit default swaps—which the rest of us would learn about a decade later, during the crash of 2008. But she was only one member of the official presidential task force that oversees the financial markets. By law, the other three are the Federal Reserve chair, a job to which Clinton had just reappointed Alan Greenspan; the treasury secretary, who was Bob Rubin, previously cochairman of Goldman Sachs; and the SEC chair, who’d also spent his pregovernment career working on Wall Street.

For years, the financial industry had lobbied for that change, and the former Fed chair Paul Volcker had fought it, but in 1999 only seven of forty-five Democratic senators and a single Republican voted against it. The other Modernization Act explicitly outlawed proper regulation of derivatives such as credit default swaps. The House in 2000 passed that one 377 to 4, and the Senate didn’t even bother to take a roll call vote. In other words, Clinton’s Wall Street–bred economic brain trust helped encode into the system the increased recklessness that Wall Street demanded and that would keep feeding inequality and insecurity and soon lead to the financial meltdown and Wall Street bailout and Great Recession.


pages: 344 words: 93,858

The Post-American World: Release 2.0 by Fareed Zakaria

"World Economic Forum" Davos, affirmative action, agricultural Revolution, airport security, Alan Greenspan, anti-communist, Asian financial crisis, battle of ideas, Bear Stearns, Berlin Wall, Bretton Woods, BRICs, British Empire, call centre, capital controls, central bank independence, centre right, collapse of Lehman Brothers, conceptual framework, Credit Default Swap, currency manipulation / currency intervention, delayed gratification, Deng Xiaoping, double entry bookkeeping, failed state, Fall of the Berlin Wall, financial innovation, global reserve currency, global supply chain, Great Leap Forward, illegal immigration, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), knowledge economy, low interest rates, Mahatma Gandhi, Martin Wolf, mutually assured destruction, National Debt Clock, new economy, no-fly zone, oil shock, open economy, out of africa, Parag Khanna, postindustrial economy, purchasing power parity, race to the bottom, reserve currency, Ronald Reagan, Silicon Valley, Silicon Valley startup, South China Sea, Steven Pinker, Suez crisis 1956, The future is already here, The Great Moderation, Thomas L Friedman, Thomas Malthus, three-masted sailing ship, trade route, Washington Consensus, working-age population, young professional, zero-sum game

That led to arrogance, or more technically, the death of risk. The businessmen and financiers who cautiously prepared for political disruptions—unstable governments, terrorism—let their guard down when it came to economic risk. They assumed that the growth of complex financial products (remember the infamy of credit-default swaps, which brought down AIG?) actually reduced risk by spreading it around. They believed that levels of debt that were once considered dangerous were now manageable, given what they assumed were permanently changed conditions owing to the Great Moderation. As a result, investors piled into what would normally be considered dangerous investments, all for the promise of relatively little reward.

., 194 Clark, Gregory, 67 climate change, 33–34, 40, 85 Clinton, Bill, 245–46, 247, 249–50, 272, 283 clocks, 69, 71, 124n clothing, 88–90 CNN, 96 coal, 33–34, 65, 103–4 Coca-Cola, 58 Cold War, 4, 8–9, 20, 38, 141, 143, 144, 163–66, 199, 244–45, 247, 251, 254–56, 271, 274, 277, 284 collectivization, 117 colonialism, 36, 37, 57, 60, 65, 78–83, 129, 156, 161, 195 Columbus, Christopher, 62, 80 commodity prices, 30, 31 communism, 10, 12, 23–24, 38, 101, 102, 106–17, 119–20, 126–29, 135, 149–50, 157, 158, 167, 229, 251 Compagne des Indes, 80 competition, 212–13, 225–26, 243–50 computers, 92–93, 96, 112–13, 135, 142, 208, 215, 224–25 computer science, 208, 215 Confucianism, 73, 74, 97–98, 122–27, 137, 169 Congo, 9, 20, 80 Congressional Record, 204 Congress Party (India), 156, 178, 179–80 Conrad, Joseph, 85 conservatives, 74, 141–42, 247, 253 construction industry, 30, 104 consumer demand, 21, 151–52, 218–19 contracts, 125–26, 150 Convention on the Rights of the Child, 223 Cooper, Richard, 217, 218 Copernicus, Nicolaus, 68 corporations, 227–28 foreign investment by, 80, 202–3 multinational, 2–3, 57–61, 150, 258 regulation of, 221, 224 savings of, 217–18 taxation of, 223 see also specific corporations corruption, 110, 114, 130–32, 156–57, 229 Cortés, Hernán, 80 Coubertin, Pierre de, Baron, 187 Council on Foreign Relations, 48, 235, 279 Counter-Reformation, 187 Courage Matters (McCain), 276–77 credit, xii, 43, 140, 152–53, 228 credit cards, 46, 152, 217 credit-default swaps, 43 cricket, 154 crop yields, 32–33 Cultural Revolution, 117, 129 currency rates, 24, 26, 36, 105, 200, 222, 241–42, 267–68, 280–82 current-account deficits, 216, 217 Curry, Boykin, 45 czars, Russian, 73, 83–84, 191 Czechoslovakia, 252 Dalai Lama, 141 Darfur crisis, 31, 42, 131, 273 Darul Uloom Deoband movement, 15 Das, Gurcharan, 151 debt, national, 28, 46–49, 140, 217–19, 241–42, 272 Defense Department, U.S., 262 Dell, Michael, 147 Deming Prizes, 153 democracy, 40, 53, 57, 59, 91, 108, 109, 112–17, 120, 135, 141, 145, 150, 152, 154, 156–62, 167, 169, 172, 173, 176, 178–83, 232–38, 242, 264, 273–74 Democratic Party, 59, 235, 255, 278–79, 280, 282 Deng Xiaoping, 102, 117, 118, 129, 134 Depression, Great, 25 derivatives market, 222 Deshmukh, Vilasrao, 150 developing countries, 24, 26, 28, 30, 36, 49, 53, 55, 91, 97, 102, 106, 108, 111, 118–19, 151–53, 157–62, 169, 175, 177, 181–82, 209, 224 see also specific countries Diamond Jubilee (1897), 184–85, 186, 188, 191 dictatorship, 75, 112–17, 274 Diderot, Denis, 123 Diplomacy (Kissinger), 245 disease, 70, 80, 149 Dobbs, Lou, 282 Doha trade talks, 5 dollar, value of, 25, 36, 200, 241, 267–68, 281, 282 Dominican Republic, 157 Donilon, Thomas, 259 Dow Jones Industrial Average, xi “Dream Team,” 147 drug cartels, 5, 269 Dubai, 3, 8, 17, 32 Dutch East India Company, 80 East Asia, 20, 23, 29, 32, 36, 52, 64n, 65, 122, 133, 214, 241–42, 245 East Asian crisis (1997), 55, 133, 138, 241, 245 East Asian Summit, 133 East Germany, 24, 244 East Indies, 79 East Timor, 245 Eberstadt, Nicholas, 213, 214n economic risk, 43–44 Ecuador, 44 education, 48, 58, 82–83, 108–9, 134, 155, 157–58, 160, 161, 187, 204–12, 215, 218–19, 225, 233 efficiency, 32, 152, 212, 228, 283 Egypt, 8, 11, 12, 23, 84 Eisenhower, Dwight D., 199, 254 ElBaradei, Mohamed, 175 elections, U.S.: of 1984, 251 of 1992, 245 of 2008, 276 electricity, 33 Emory-Georgia Tech Nanotechnology Center for Personalized and Predictive Oncology, 201 energy resources, 30–34, 38, 128, 131, 176, 232, 233 Engels, Friedrich, 85 engineers, 204–8 English language, 81, 85, 92–93, 96, 151, 167, 168, 173, 186–87, 224 Enlightenment, 122–25 Enron Corp., 221 entitlements, government, 216, 219, 241 entrance exams, 205–6, 210–12 entrepreneurship, 108, 193, 199 environmental issues, 32–34, 40, 42, 85, 111 EP-3 plane incident (2001), 135 Epic of America, The (Adams), 237 equities, 202 Erickson, John, 37 Essai sur les moeurs (Voltaire), 123 Essay on the Principle of Population, An (Malthus), 70 Ethiopia, 130 “Eurabia,” 16 Europe: agriculture in, 70 balance of power in, 4, 257, 266–67 colonialism of, 36, 37, 57, 60, 65, 78–83, 129, 156, 162–63, 195 cultural influence of, 1–5, 16, 38–39, 41, 62–99, 126–27 Eastern, 222, 260 economies of, 32, 46–47, 212–13, 221, 222, 233, 245 education in, 207–8, 210 fertility rate of, 213, 215 foreign investment by, 80, 212 foreign trade of, 78, 212 geography of, 76, 77 global influence of, 52–53, 232–33, 245, 253 health care in, 212 immigration to, 16, 224, 280 industrialization of, 87, 104, 262 military forces of, 13, 173, 245, 247, 251, 267 Muslim communities of, 16, 280 Europe (continued) parliamentary system of, 234 Pershing missiles in, 251 population of, 66, 80 postwar, 20, 49–50 poverty in, 80 privatization in, 222 productivity of, 200, 212 religious attitudes in, 122–25 Roman rule of, 77 technology sector of, 68–70, 123, 200–202, 208 unemployment rate of, 212 U.S. relations with, 244–45, 251–85 see also specific countries European Union, 5, 52, 92–93, 105, 111, 131, 136, 141, 224, 240 euros, 267 “Eurozone,” 212–13, 221 Fallows, James, 202–3 Falun Gong, 113 family values, 92, 93 famine, 67, 70 fascism, 36, 195, 255, 275–76 fashion, 88 fatwas, 14, 15 Federal Reserve, 26 fengshui, 126 Ferguson, Niall, 81, 140, 190 Ferris wheel, 3 fertility rates, 148, 213, 214–15 feudalism, 99, 193 Figaro, 187 film industry, 90, 94, 147, 153–55 financial markets, 7, 17, 72, 109–10, 217, 219–22 Financial Times, 139 “five keys,” 194–95 “flat world” concept, 27 Flynn, Stephen, 279 follow-on equity offerings, 202 food prices, 21, 30, 67, 70 Forbidden City, 71, 103 Ford Motor Co., 104 Foreign Affairs, 114, 230, 235 foreign aid, 129–32, 133, 135, 155 foreign exchange, 105, 222, 241–42 foreign investment, 27, 80, 104–5, 108, 153, 202–3, 212, 219 foreign trade, 21, 24–25, 36, 57–58, 69, 78, 102, 104–5, 129–32, 133, 200, 212, 216, 217, 229, 280–83 Fortune, 204 Foster, Norman, 152 Foxconn, 229 France: colonies of, 79, 80 culture of, 91, 95 democracy in, 116–17 economy of, 24, 36, 116–17, 152, 191, 192 foreign policy of, 125, 130 global influence of, 117, 240 infrastructure of, 152 labor force of, 226 nuclear weapons of, 174 technology sector of, 201 U.S. relations with, 251, 252–53 Frederick II, King of Prussia, 124 French Revolution, 116, 123 Friedman, Thomas, 27, 50 Fuchs, Thomas, 123 Fukuzawa, Yukichi, 84, 86 “Future of European Universities, The,” 207–8 G-7 countries, 49, 55 G-8 countries, 40–41 G-20 summits, 26, 55 Galileo Galilei, 68 Gama, Vasco da, 62 Gandhi, Indira, 165, 167, 169, 180, 274 Gandhi, Mohandas K., 36, 89, 147, 163–64, 173–74 Gandhi, Rajiv, 158 Gandhi, Sonia, 159 Gates, Bill, 109, 155, 204 General Electric, 100, 104, 258 General Motors, 104, 149, 225, 230, 244 Genesis, Book of, 172 geography, 76 George III, King of England, 69 Georgia, 260 Gerges, Fawaz, 14 German Democratic Republic (East Germany), 24, 244 Germany: economy of, 20, 25, 38, 40, 118, 192 global influence of, 10, 38, 53, 117, 118, 121, 176, 256, 257, 261, 266–67 gross domestic product (GDP) of, 58, 191 Imperial, 186n, 192, 195, 257, 261, 266–67 industrialization of, 20, 193 labor force of, 226 military spending of, 241 navy of, 186n, 195 Nazi, 10, 25, 36–37, 143, 266, 275 reunification of, 244, 245 taxation in, 223 technology sector of, 201 U.S. relations with, 244, 245, 251 Gibraltar, 195 Gibraltar Strait, 239–43 Gilpin, Robert, 127 Gingrich, Newt, 276 Giuliani, Rudy, 276, 277 Glimpses of World History (Nehru), 163 global economic crisis (2008–2009), xi–xiii, 2, 21–22, 42–49, 51, 55 globalization, 6–61 agriculture and, 21, 30, 31, 32–33, 65–67, 70, 71–72, 100, 106, 112, 136, 151, 160 capital markets in, 21, 24–25, 48, 200, 219–22 competition in, 212–13, 225–26, 243–50 cultural impact of, 1–5, 38–39, 41, 62–99, 126–27 demographics of, 212–16 economic conditions of, 6–61, 93–94, 97, 197–99, 217, 241–43, 255 energy resources and, 30–34 environmental impact of, 33–34, 40, 85, 111 expansion of, 19–23, 29–34 free markets in, 23–29, 57–58, 59–60, 217, 242, 259 future trends of, 1–5, 94–99, 199–203, 204, 239–85 identity and, 41 impact of, on U.S. unemployment, xiii international organizations and, 5, 24, 40–41 labor markets in, 27–28, 206, 228–29 language of, 92–93 mass media in, 9, 16, 27, 95, 96, 209 military destabilization and, 6–10, 140, 142–43 modernization and, 16, 35, 39, 86–90, 94–95 multinational focus of, 1–5 nationalism and, 34 nuclear proliferation in, 174–78 political impact of, 19–20, 22–23, 29, 31–42, 52, 93–94, 99, 127–28, 137–44, 241–42 in post-American world, see post-American world poverty rate in, 3, 22 regional powers in, 257–63 technology in, xiii, 27, 200–202, 219, 224–25, 228–32 terrorism and, 10–19, 29, 34, 59, 264 U.S. as superpower in, 4, 49–61, 117, 120, 142–44, 182–83, 223–85 global warming, 33, 34, 40, 85 God, 122–25, 169 gold, 25, 188, 197 Goldman Sachs, xii, 40, 49, 148, 214 Goldsmith, Oliver, 93 gold standard, 25, 197 Good Earth, The (Buck), 100 Great Britain, 184–99 agriculture in, 70, 71–72 capitalism in, 187, 192–93 culture of, 187, 262 decline of, 184–99, 216, 237, 261–63, 266, 268 democracy in, 120 economy of, 24, 28, 97, 148, 186, 191–97, 198, 216, 237, 262 education in, 82–83, 187, 210 Empire of, 36, 37, 57, 60, 65, 79, 80–83, 84, 89, 94, 97–98, 151, 154, 156, 158–59, 161, 162–63, 164, 170, 173, 179, 184–99, 237, 261–63, 266, 268 financial markets of, 222, 223–24 foreign investment in, 153 foreign policy of, 125, 130, 194–97, 237, 261–63, 266 global influence of, 117, 184–289 gross domestic product (GDP) of, 66, 191, 193, 196, 197 home ownership in, 225 industrialization of, 65, 66, 104, 191, 192–93, 218, 262 infrastructure of, 152 manufacturing sector of, 28, 192–93 military forces of, 105n, 174, 185, 192, 195, 198, 241 military spending of, 105n, 241 navy of, 186, 192, 195, 198 nuclear weapons of, 174 political system of, 41, 120, 186, 194–97, 234 population of, 191 productivity in, 71–72 technology sector of, 201 terrorist attacks in, 17, 278, 280 U.S. relations with, 168, 189, 194–97, 241, 254, 261, 274 in World War II, 37, 195–97 Great Depression, 25, 42–43, 227 Great Exhibition (1851), 64 Great Leap Forward, 117, 129 Great Moderation, 44 Greece, 46–47, 48, 67, 151, 193 Greenspan, Alan, 24 gross domestic product (GDP), 18, 22, 49, 58, 66, 104, 109, 111, 118–19, 139, 145, 148, 151, 152, 157, 191, 193, 196, 198–99, 200, 207–8, 215, 217, 218, 219n, 249, 255 Grove, Andy, 49–50 “grow-the-denominator” strategy, 107 Gujarat earthquake (2001), 155 Gulf War, 244 Gurr, Ted Robert, 8 Haass, Richard, 268 Haiti, 272 Halloween, 92 Hamas, 6 Hapsburg Empire, 117–18 Har Hui Peng, 211 “harmonious society,” 111 Haussmann, Georges-Eugène, 103 Head & Shoulders shampoo, 105 health care, 108, 155, 157–58, 160, 161, 212, 225–26, 233n, 283 Heathrow Airport, 152 helium, 30 Henry, Prince of Prussia, 186n Heritage Foundation, 235 Hezbollah, 6, 7, 269 “hidden hand,” 166 Hinduism, 74, 75, 97–98, 146, 169–74, 180 Hinduism (Monier-Williams), 170 Hira, Ron, 205 Hitler, Adolf, 37, 103 HIV, 149, 161 Hodges, William, 71 Holbrooke, Richard, 246 Hollywood, 90, 94 Holman, Michael, 201 Homeland Security Department, U.S., 277 home ownership, 85, 152, 217, 225 Hong Kong, 26, 81, 153, 184, 209, 214, 222 household savings, 217–18 House of Representatives, U.S., 280–81 Huang, Philip, 71 Huang, Yasheng, 153 Hu Jintao, 111, 118, 119, 130, 134 human capital, 151, 218–19 human rights, 88–89, 93, 97, 121–27, 157–58, 173, 242, 256, 260, 274 Humphrey, Hubert, 283 Huntington, Samuel P., 53, 87 Hussein, Saddam, 189, 248n, 274 Hwa Chong Institution, 211 hyperinflation, 25 “hyperpower,” 246 IBM, 104 Ignatius, David, 270 Ikenberry, John, 256 Immelt, Jeffrey, 204, 258 immigration, 16, 61, 87, 167, 213–16, 224, 233, 272, 276, 278, 283 Imperial China, 62–74, 76, 77, 84, 86, 122–25 Imperial Germany, 186n, 192, 195, 257, 261, 266–67 imperialism, 42, 258–59, 261–63 Imperial Japan, 36–37, 38, 84, 134–35, 196 income levels, 23, 67, 113–14, 148, 206, 207, 212, 216, 217–18, 219, 282 independent regulatory agencies, 90 India, 31, 145–83, 281 agriculture in, 151, 160 ancient civilization of, 64, 65, 67, 70, 77, 82–83 as Asian country, 151–52, 173, 181 author as native of, 205, 210, 271, 283, 284–85 automobiles in, 110, 111, 149, 229–30 banking industry of, 153, 157 billionaires in, 149, 155 British rule of, 36, 37, 60, 81, 84, 89, 94, 97–98, 151, 154, 156, 158–59, 161, 162–63, 164, 170, 173, 179 capitalism in, 74, 113–15, 152–53, 157, 167 caste system of, 74, 180–81 China compared with, 64, 108–9, 110–11, 113, 146, 147–51, 152, 157, 159, 167, 169, 175–78, 181–82, 257 Chinese relations with, 133, 143, 165, 166, 169, 173, 257 coal power in, 34 Communist Party of, 158 Constituent Assembly of, 154 Constitution of, 150 consumerism in, 151–52 corruption in, 156–57 credit in, 152–53 culture of, 64, 67, 70, 77, 82–83, 88, 93, 94, 95, 99, 169–74 as democracy, 40, 108, 109, 113, 117, 145, 150, 152, 154, 156–62, 167, 169, 172, 173, 176, 178–83 demographics of, 148 as developing country, 151–53, 157–62, 169, 175, 177, 181 diversity of, 178–83 domestic market of, 48 economic reform in, 108, 159–62, 169, 178 economy of, xii, 2–3, 23, 40–41, 48, 55, 65, 74, 86, 108, 113–15, 117, 145–62, 166–67, 169, 175, 178, 181, 200, 226–27, 249 education in, 82–83, 109, 155, 157–58, 160, 161, 204–8, 210 Election Commission of, 157 as emerging market, 39, 53, 258 emigration from, 167 energy needs of, 30, 34, 176 engineers trained in, 204–8 female literacy in, 157 film industry of, 90, 94, 147, 153–55 foreign investment in, 153 foreign policy of, 162–78 free markets in, 23 global influence of, 53, 146–48, 164–78, 181, 256–57, 269 government of, 145, 150, 156–67, 177–83 gross domestic product (GDP) of, 49, 66, 145, 148, 151, 152, 157, 249 growth rate for, 2, 145–56, 158, 159–62, 166, 169, 178, 182, 249 health care in, 155, 157–58, 160, 161 Hinduism in, 74, 75, 97–98, 146, 169–74, 180 HIV rate in, 149, 161 human rights in, 88–89, 97, 157–58, 173 income levels of, 148, 207 independence of, 154, 159, 162 industrialization of, 151 inflation in, 145 infrastructure of, 149–53, 159 languages of, 93, 151, 168, 179, 180 legal system of, 150, 157 literacy rate in, 157–58 living standards in, 66–67 manufacturing sector of, 22, 148–49, 151, 153 mass media in, 154–55, 173 middle class of, 160 military forces of, 164, 167, 174–78, 249, 260 modernization of, 74, 145–49, 151 multinational corporations in, 60 Muslim minority in, 12, 158–59, 172, 180–81 nationalism in, 41, 145, 158–59, 180–83 nonalignment policy of, 163–66, 177 nuclear weapons of, 54, 167, 174–78, 249, 260 oil needs of, 30 Pakistan’s relations with, 145, 165, 172, 176 political parties in, 154, 156–62, 178, 179–80 population of, 23, 31, 66, 145, 147–48, 178–83 poverty in, 3, 146, 149, 150, 155–58, 169, 177 private sector of, 148–53, 160–61 regional governments in, 145, 161–62, 178–83 service sector of, 43, 148, 151, 229 socialism in, 157, 161, 173, 178 taxation in, 236 technology sector of, 28, 50, 148–49, 161, 204–8 as UN member, 165n urbanization of, 150, 153–55, 160, 166 U.S. compared with, 155–56, 200, 226–27 U.S. relations with, 54–55, 144, 160, 166–68, 173, 174–78, 182, 249–50, 263, 264, 266, 269, 271, 274, 283 wage levels in, 207 Western influence in, 88–91, 94, 99 women in, 88, 157, 160–61 Indian Institutes of Technology, 145, 161, 205–6 Indonesia, xii, 4, 11, 13, 14, 17, 23, 86, 99, 110, 132, 171, 278 industrialization, 2, 3, 20, 65, 66, 87, 104, 106–7, 110, 151, 191, 192–93, 200, 204, 217, 218, 262 industrial revolution, 104, 262 inflation, 25–26, 28, 43, 145, 217 information technology, 9, 215, 219 Infosys Technologies, 50, 148, 153, 155 infrastructure, 149–53 initial public offerings (IPOs), 202, 220–22 intellectual property, 125–26 interest rates, 21, 43, 75, 139, 222 Intergovernmental Panel on Climate Change, 33 intermediate business expenses, 218 International Atomic Energy Agency (IAEA), 54, 175, 176 International Herald Tribune, 96 International Monetary Fund (IMF), 24, 41, 48–49, 55, 241 Internet, 27, 93, 96, 112–13, 135, 142, 225 investment funds, 3, 32, 201 iPhone, 203 iPod, 147 Iran, 6, 8, 9, 16, 18, 31, 54–55, 96, 125, 141, 167, 190, 235–36, 259, 260, 273, 277, 284 Iranian hostage crisis, 284 Iran-Iraq War, 9 Iraq, xi, 6, 8, 9, 11–12, 13, 15, 52, 141, 162, 185, 189–90, 199, 244, 246, 247–48, 250 Iraq War, xi, 6, 8, 52, 141, 185, 189–90, 199, 247–48, 250, 251, 252, 260, 269, 273, 274 Ireland, 46–47, 48 iron, 131, 191 Islam, 10–17, 75, 89, 122, 125, 158–59, 172, 180–81, 213, 241, 263, 272, 276, 278 Islamic fundamentalism, 10–17, 75, 89, 172, 241, 263, 271, 272, 278 Israel, 6, 96, 168, 246, 260, 269, 274, 284 Italy, 24, 97, 148, 182, 195 It’s a Wonderful Life, 85 “Ivory Tower” nations, 201 Jakarta, 17 James, Lawrence, 189 Japan, 26, 282 Buddhism in, 171 China compared with, 104–5 Chinese relations of, 101, 120, 134–35, 143 culture of, 87, 89, 91–92, 98, 99, 122, 212 democracy in, 114, 116 economy of, 20, 22, 23, 28, 36–37, 38, 40, 86, 104–5, 118, 120, 233, 245 education in, 207–8, 209, 210, 211–12 family values in, 92, 93 fertility rate of, 214 Japan (continued) foreign aid by, 135 foreign trade of, 77, 81–82 global influence of, 22, 35, 37, 38, 40, 53, 118, 120, 121, 176, 233, 256 gross domestic product (GDP) of, 207–8 Imperial, 36–37, 38, 84, 134–35, 196 manufacturing sector of, 28 Meiji Reformation in, 84 military forces of, 134 population of, 51, 214 savings rate of, 104 technology sector of, 87, 201, 207–8, 233 trade balance of, 104 U.S. relations with, 245, 266 Western influence in, 81–82, 84, 98, 99 Jemaah Islamiah, 11 Jiang Zemin, 134 jihad, 10–17 Muslim views on, 14–15 Joffe, Josef, 53, 251, 266 Jones, Benjamin, 214–15 Jordan, 8, 14 Judaism, 11, 122, 172 Kagan, Robert, 253 Kant, Immanuel, 123 Karnataka, 180 Kennedy, Paul, 74, 193 Kent, Muhtar, 58, 236–37 Kenya, 4, 41 Keynes, John Maynard, 196–97 kimonos, 88 Kissinger, Henry, 245, 265 Kitchener, H.


pages: 324 words: 90,253

When the Money Runs Out: The End of Western Affluence by Stephen D. King

Alan Greenspan, Albert Einstein, Apollo 11, Asian financial crisis, asset-backed security, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Madoff, bond market vigilante , British Empire, business cycle, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, currency risk, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, Ford Model T, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, junk bonds, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, low interest rates, market clearing, mass immigration, Minsky moment, moral hazard, mortgage debt, Neil Armstrong, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, risk free rate, Savings and loan crisis, seminal paper, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Yet those foundations are in danger of collapsing. Central banks are now busily engaged in income and wealth redistribution as opposed to conventional pump-priming. Governments don't know whether to deliver stimulus or austerity. And markets of all kinds – from the humble vegetable stall through to the complex world of credit default swaps – are in serious trouble. Central banks, governments and markets thrive on trust. With the onset of the financial crisis, however, trust has fallen by the wayside. Without trust, it's difficult to see how Western economies can easily bounce back. Indeed, in the absence of trust, human interaction becomes increasingly corroded.

And the Norwegian savers had no reason to think their savings had been invested in the Arizonan real estate market, where some subprime borrowers never intended to repay their loans. This disconnect, however, supposedly didn't matter. Financial innovation had led to the growth of credit risk transfer instruments – including credit default swaps and structured credit products such as collateralized debt obligations – which allowed hitherto unmanageable risks to be spread ever more thinly. This, though, meant that the financial institutions that originated credits no longer had to hold them on their books. Instead, credits could be repackaged and sold off into the capital markets, allowing a distant but ultimately fragile link to be created between the subprime mortgage customer in Arizona and the contributor to a Norwegian pension fund.


The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

addicted to oil, air freight, airline deregulation, Alan Greenspan, Albert Einstein, asset-backed security, bank run, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, carbon tax, central bank independence, collateralized debt obligation, collective bargaining, compensation consultant, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, cotton gin, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, currency risk, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Glass-Steagall Act, Hernando de Soto, income inequality, income per capita, information security, invisible hand, Joseph Schumpeter, junk bonds, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, low interest rates, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, open immigration, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, Reminiscences of a Stock Operator, reserve currency, Right to Buy, risk tolerance, Robert Solow, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, special economic zone, stock buybacks, stocks for the long run, Suez crisis 1956, the payments system, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tipper Gore, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, We are all Keynesians now, working-age population, Y2K, zero-sum game

But it's indicative of the development of this sector, and of the financial system generally, that when another notable U.S. hedge fund, Amaranth, collapsed in 2006 with a loss of more than $6 billion, the world's financial system registered scarcely a tremor. A recent financial innovation of major importance has been the credit default swap. The CDS, as it is called, is a derivative that transfers the credit risk, usually of a debt instrument, to a third party, at a price. Being able to profit from the loan transaction but transfer credit risk is a boon to banks and other financial intermediaries, which, in order to make an adequate rate of return on equity, have to heavily leverage their balance sheets by accepting deposit obligations and/or incurring debt.

In response to this need, the CDS was invented and took the 371 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. T H E AGE OF T U R B U L E N C E market by storm. The Bank for International Settlements tabulated a worldwide notional value of more than $20 trillion equivalent in credit default swaps in mid-2006, up from $6 trillion at the end of 2004. The buffering power of these instruments was vividly demonstrated between 1998 and 2001, when CDSs were used to spread the risk of $1 trillion in loans to rapidly expanding telecommunications networks. Though a large proportion of these ventures defaulted in the tech bust, not a single major lending institution ran into trouble as a consequence.

I would not be able to judge from such reports whether concentrations of positions reflected markets in the process of doing what they are supposed to do—remove imbalances from the system—or whether some dangerous trading was emerging. I would truly be surprised if anyone could. To be sure, the "invisible hand" presupposes that market participants act in their self-interest, and there are occasions when they do take demonstrably stupid risks. For example, I was shaken by the recent revelation that dealers in credit default swaps were being dangerously lax in keeping detailed records of the legal commitments that stemmed from their over-thecounter transactions. In the event of a significant price change, disputes over contract language could produce a real but unnecessary crisis.* This episode was a problem not of market price risk but of operational risk— that is, the risks associated with a breakdown in the infrastructure that enables markets to function.


pages: 540 words: 168,921

The Relentless Revolution: A History of Capitalism by Joyce Appleby

1919 Motor Transport Corps convoy, agricultural Revolution, Alan Greenspan, An Inconvenient Truth, anti-communist, Asian financial crisis, asset-backed security, Bartolomé de las Casas, Bear Stearns, Bernie Madoff, Bretton Woods, BRICs, British Empire, call centre, Charles Lindbergh, classic study, collateralized debt obligation, collective bargaining, Columbian Exchange, commoditize, Cornelius Vanderbilt, corporate governance, cotton gin, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, Doha Development Round, double entry bookkeeping, epigenetics, equal pay for equal work, European colonialism, facts on the ground, failed state, Firefox, fixed income, Ford Model T, Ford paid five dollars a day, Francisco Pizarro, Frederick Winslow Taylor, full employment, General Magic , Glass-Steagall Act, Gordon Gekko, Great Leap Forward, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, hiring and firing, Ida Tarbell, illegal immigration, informal economy, interchangeable parts, interest rate swap, invention of movable type, invention of the printing press, invention of the steam engine, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, Jeff Bezos, John Bogle, joint-stock company, Joseph Schumpeter, junk bonds, knowledge economy, land bank, land reform, Livingstone, I presume, Long Term Capital Management, low interest rates, Mahatma Gandhi, Martin Wolf, military-industrial complex, moral hazard, Nixon triggered the end of the Bretton Woods system, PalmPilot, Parag Khanna, pneumatic tube, Ponzi scheme, profit maximization, profit motive, race to the bottom, Ralph Nader, refrigerator car, Ronald Reagan, scientific management, Scramble for Africa, Silicon Valley, Silicon Valley startup, South China Sea, South Sea Bubble, special economic zone, spice trade, spinning jenny, strikebreaker, Suez canal 1869, the built environment, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thorstein Veblen, total factor productivity, trade route, transatlantic slave trade, transcontinental railway, two and twenty, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, vertical integration, War on Poverty, working poor, Works Progress Administration, Yogi Berra, Yom Kippur War

A boon to banks, brokerage firms, insurance companies, and highfliers generally, the law permitted banks to merge with insurance companies and liberated investment banks from many of the restrictions that applied to regular commercial banks of deposits. The statute gave bank customers privacy protection. Far more important, it freed from oversight such esoteric investments as the multitrillion-dollar market for credit default swaps, a tricky instrument that investors used to hedge their bets on various securities. Perversely, these were developed to minimize and manage risk, when in fact they encouraged speculators to game the system. Credit default swaps were a form of insurance that people took out to balance a possible downside to their investments. But others could also contract for a CDS if they thought a certain enterprise would fail, even without having an investment.

Complacent administrative officials and legislators defended the relaxing of regulation on the ground that American bankers would have taken their money out of the country and built their securitized mortgage empires elsewhere. Competition, the elixir of capitalism, worked inexorably to promote risk taking. When more cautious bankers saw their rivals riding high, they wanted to do the same thing. Raining on a parade has never won popularity. Shorn of oversight, the banks’ trade in credit default swaps ballooned from $900 billion in 2001 to $62 trillion in 2007.8 Hedge funds grew in one decade from $375,000 to $2 trillion in 2008, plunging losses into the trillion-dollar column. The figures are hard to grasp, but not the dimension of the problem. Nor should consumers be let off the hook, if blame is to be assigned, for many Americans demanded easy credit and cheap mortgages.


pages: 831 words: 98,409

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

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Anthropocene, assortative mating, bank run, barriers to entry, Bear Stearns, 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, digital divide, diversification, Dunbar number, East Village, eat what you kill, Elon Musk, eurozone crisis, fake it until you make it, family office, financial engineering, financial repression, Gini coefficient, glass ceiling, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, Jim Simons, John Meriwether, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Roose, knowledge economy, London Whale, Long Term Capital Management, longitudinal study, Mark Zuckerberg, mass immigration, McMansion, mittelstand, Money creation, money market fund, Myron Scholes, NetJets, Network effects, no-fly zone, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, plutocrats, Ponzi scheme, power law, public intellectual, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, rolodex, Satyajit Das, search costs, shareholder value, Sheryl Sandberg, Silicon Valley, social intelligence, sovereign wealth fund, Stephen Hawking, Steve Jobs, subprime mortgage crisis, systems thinking, tech billionaire, The Future of Employment, The Predators' Ball, The Rise and Fall of American Growth, too big to fail, Tyler Cowen, women in the workforce, young professional

Some of the hedge fund managers received notices to save any trading records involving market bets on the euro for investigation into potential patterns of collusion. In addition, the European Commission announced that, in light of the Greek crisis, it would investigate trades in sovereign credit-default swaps, because hedge funds weren’t supposed to profit from the woes of the region’s ailing nations. It would be hard, though, if not impossible, for a few managers to cause a country’s bankruptcy by themselves, because the euro accounts for over $1 trillion of daily trading in global currency markets.3 In addition, an informative, conceptual exchange of opinions regarding currency trades is hardly illegal.

Treasury secretaries Paulson and Geithner had Goldman CEO Lloyd Blankfein on speed dial, who was more than willing to act as their eyes and ears on Wall Street. Within a year, they spoke dozens of times, mostly during the AIG incident. Both parties had reason to worry: AIG had written billions in credit default swaps for Goldman, and if AIG folded, Goldman would incur a huge loss. Paulson and Geithner feared that billions more were at risk at other firms who were counterparties of AIG, which would likely render them insolvent and wreak havoc on Wall Street. Following their discussions, the New York Fed authorized a loan of up to $85 billion to AIG in return for a 79.9 percent equity interest.


pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

Alan Greenspan, balance sheet recession, banking crisis, basic income, Bear Stearns, Bernie Sanders, Bretton Woods, business climate, business cycle, carbon tax, Carmen Reinhart, central bank independence, circular economy, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, degrowth, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, Ford Model T, forward guidance, full employment, G4S, general purpose technology, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low interest rates, low skilled workers, Martin Wolf, mass incarceration, military-industrial complex, Modern Monetary Theory, Money creation, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, ocean acidification, paradox of thrift, Paul Samuelson, planned obsolescence, Post-Keynesian economics, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Solyndra, Steve Jobs, stock buybacks, systems thinking, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, Tragedy of the Commons, transaction costs, trickle-down economics, universal basic income, vertical integration, very high income

What he did not foresee, however, was that in reality the banking system—indeed the entire private financial system—would find ways to make money simply from speculation rather than from financing the productive economy. That is, finance is financing itself—banks financing mortgage backed securities, which use credit default swaps, for example—rather than what Hyman Minsky called the ‘capital development’ of the economy.57 The speculative and short-term character of the financial system means that the banker is now more the problem than the solution Schumpeter assumed.58 Even when finance does pay attention to the real economy, the relationship is not always beneficial.

There are other reasons for the super-normal returns to the large banks and their bankers. In certain of the activities of the financial sector, there is far from perfect competition. Anti-competitive practices in debit and credit cards have amplified pre-existing market power to generate huge rents. Lack of transparency (e.g. in over-the-counter Credit Default Swaps (CDSs) and derivatives) too have generated large rents, with the market dominated by four players.31 It is not surprising that the rents enjoyed in this way by big banks translated into higher incomes for their managers and shareholders. In the financial sector even more than in other industries, executive compensation in the aftermath of the crisis provided convincing evidence against marginal productivity theory as an explanation of wages at the top: the bankers who had brought their firms and the global economy to the brink of ruin continued to receive high rates of pay—compensation which in no way could be related either to their social contribution or even their contribution to the firms for which they worked (both of which were negative).


pages: 319 words: 103,707

Against Everything: Essays by Mark Greif

1960s counterculture, back-to-the-land, Bernie Madoff, Black Lives Matter, bread and circuses, citizen journalism, collateralized debt obligation, crack epidemic, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Desert Island Discs, Donald Trump, fixed-gear, income inequality, informal economy, Joan Didion, managed futures, Norman Mailer, Ponzi scheme, postindustrial economy, Ronald Reagan, technoutopianism, telemarketer, trickle-down economics, upwardly mobile, white flight

Financiers were not held up to the mass public as news figures—with photographs and life histories, interviews with relatives and neighbors—whether as villains, or just as carriers of that dread disease overconfidence (and its partner, ineptitude). Who was it, by name, whose overleveraging, and chopped-up risk, and faulty mortgage-backed securities, and credit default swaps, froze the credit markets? Who terrified the government with half-truths and threats—until the surviving banks and insurers drained the Treasury of billions, to keep those businesses going, while their executives bathed in the gold coins of their 2007 incomes? If you remember Edward Liddy—the closest we ever came to seeing a visible individual in a position of responsibility on TV for more than one night’s broadcast—testifying to Congress as head of AIG in March 2009, you’ll remember that it was compulsory for the press to identify him as not the chief of the company in its bad old days.

Greenberg, now CEO of the AIG-linked insurer C. V. Starr & Co. (Starr founded AIG), and currently very active in lobbying Congress to adopt more favorable policies toward AIG (in which his firm still has a large financial stake), lives near Central Park. Joseph Cassano, responsible for the AIG Financial Products division whose credit-default swaps were at the center of the meltdown, lives happily and wealthily in London. Angelo Mozilo, founder of Countrywide, originator of a disproportionate quantity of troubled mortgages and responsible for massive foreclosures, lives in his mansion in Santa Monica and speculates in real estate for his own amusement.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

accounting loophole / creative accounting, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Madoff, book value, British Empire, buy and hold, central bank independence, collective bargaining, commodity trading advisor, compensation consultant, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, land bank, law of one price, light touch regulation, Long Term Capital Management, low interest rates, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, military-industrial complex, minimum wage unemployment, Money creation, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, Robert Solow, rolodex, Savings and loan crisis, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

Then they engineered passage of the Commodity Futures Modernization Act of 2000, which explicitly exempted OTC derivatives from government oversight. At the last minute, the bill was tucked onto an 11,000 page bill sampler and passed without serious consideration by lawmakers (Partnoy 1997/2009; Levine 2010). MONEY IS POWER 91 The derivatives that were allowed to remain in the shadows included the now infamous credit default swaps (CDS), which would later bring down the world’s largest insurer, AIG. CDS are a bet that a bond (loan) will hit some adverse credit event like an arrear, downgrade or default. Those who sell the CDS get a fee and those who buy it get a payment if the adverse event should occur. CDS are therefore somewhat like insurance policies, except that there is no need to own the underlying item being insured to buy the CDS.

D. 13 American Economic Association ix, 10, 17, 20, 26–7, 44 American Economic Review 8, 20, 26–7 American International Group (AIG) 70, 90–91 Anglo-Saxon economics ix Arrow, Kenneth 7, 23–4, 212; see also impossibility theorem (Arrow’s) asset bubble 104 asymmetric information: see information, asymmetric AT&T 147 authoritarianism 24, 210 average cost 148, 151 Bank of America 77, 86, 94 barriers to entry 54, 160 Basel III Accord 104–5 Bear Stearns 90, 96, 107, 111 Becker, Gary S. 186 Bemis, Edward 9–10 Bentham, Jeremy 11 Berlin, Isaiah 25 Bernays, Edward 15–17 Bill of Rights (US) 208 Bolsa Família program 41 Boskin Commission 36 Bourdieu, Pierre 25, 115, 160 Bridgestone (tire manufacturer) 163–4, 166–7 British Empire ix, 16, 100 Buchanan, James 23–4 Buffett, Warren 93, 107–9 Bullionists 2 Bureau of Labor Statistics 32–3, 35 capitalism vii–viii, ix, 2, 5–6, 10, 18–19, 21, 31, 46, 142, 153, 158, 165 central bank 43, 67, 79–88, 104–5 CEO: see chief executive officer (CEO) Chicago, University of 10, 17, 19, 26, 27, 44, 80, 84, 168, 186, 193 chief executive officer (CEO) xi, 16, 47, 61, 70, 93, 95–6, 103, 107–13, 115–27, 132, 138–9, 215, 217 Chrysler xi, 113 Citicorp (bank) 43 Citigroup (bank) xi, 61, 63, 96, 105, 112, 125 Clark, John Bates 6, 10–11, 155, 193 classical value theory 5 Cold War 2, 18, 21, 25–8, 46 collective bargaining 185 Commodity Futures Trading Commission (CTFC) 90, 92 Commons, John R. 8–10 communism xii, 2, 19, 21, 25, 139 comparative advantage 4 Condorcet, Marquis de 23 conflict 165 consumption viii, 11, 13, 32, 78, 158, 192, 203, 211 control fraud 94–5 convergence vii 242 ECONOMISTS AND THE POWERFUL cooperation 73–5, 165, 167, 170, 198 cooperative 102 Cornell University 10 corporate elite x, xii, 115, 117, 140 corporate governance 92, 119, 127, 135, 136 corporate government 135 corporate management 109 corporation tax 139 corruption 220 credit x, xi, 29, 48–50, 59–60, 62, 65, 71, 73, 75, 77–84, 90–91, 95–8, 100, 104, 110, 149, 183 credit default swap 91, 93 CTFC: see Commodity Futures Trading Commission (CTFC) Darwinism 167 Debreu, Gerard 7 demand curve 146 democracy 18, 207, 211–13, 220 depreciation 33, 147 derivatives 67, 90–93, 96–7 Deutsche Bank 105, 121 disability adjusted life expectancy vii discrimination 130, 186–7 earnings management 129–30 economic growth xi, 80 economic policy xi, 46, 66, 76, 152 economic utility 4–5, 13 economics, mainstream viii, x–xi, xiii, 1, 29, 47, 136, 145, 164, 170, 208, 211, 214 economics, neoclassical ix, xii, 6, 8, 10–11, 13, 21–2, 25, 30, 38, 42, 45, 141, 143–4, 153–5, 157–60, 163–4, 168, 170–71, 173, 180–82, 188, 191–2, 210, 213 economies of scale 3, 54, 152, 161 economies of scope 54 Edgeworth, Francis Y. 10 efficiency vii, x, xi, xii, 13, 19, 25, 39, 43, 48, 62, 73, 101, 108, 136–7, 143, 144, 146–7, 149, 156, 160, 170, 176, 179, 183, 190, 193, 197, 202–4, 216, 219 efficient markets x Ely, Richard T. 9–10 employment protection 188, 200–203, 205 Enron 52, 92, 98, 110, 128, 132, 217 entrenchment 126, 135 equality of opportunity vii–ix, xii, 37, 39–41, 45, 53, 114, 124, 172 equality of outcome vii equilibrium x, 6–7, 37, 47, 146, 159, 161, 181–2, 197, 208 euro ix, 67, 82, 102 European Central Bank 103, 189, 215 European Commission/Union 67, 152 executive compensation 120–21, 138 exploitation 6, 156, 209, 212 exports 2, 34, 180–81 fairness ix, 13, 37, 39–40, 160, 164–6, 169–70, 177, 220 Fannie Mae (US government subsidizer of mortgages) 217 fear, uncertainty, doubt (FUD) 145 Federal Reserve (US) 43–4, 69–70, 85, 87–92, 143, 215 feedback loop 40, 216, 220 fiat money 75, 81 filibuster (US antilegislative maneuver) 218 financial industry xi, 44, 46–8, 51, 54–6, 64, 70, 89, 91–2, 121, 129, 217 financial markets xi, 47, 92, 108, 110, 128 financial rating agencies: see rating agencies financial sector xi, 43–4, 47–8, 53–4, 60, 64, 69, 79, 81, 83, 88–9, 100–101, 103, 105 Financial Stability Board 103 First (Workingmen’s) International 5 first mover advantage 132 Fisher, Irving 10, 13, 60, 75, 81, 83–4, 214 Fitch (ratings agency) 97 fixed costs 143 INDEX Fortune (magazine) 128 Fortune 500 (index) 49, 139 forwards (financial instrument) 67 founding fathers (of the United States) 207, 218 Freddie Mac (US government subsidizer of mortgages) 217 free market 6–7, 24, 46, 84, 147, 188, 193, 209 free riding 24, 37, 164 free trade 3–4, 16, 46, 209 freedom viii, 10, 18, 21, 25, 80, 94, 188, 191, 218 Freud, Sigmund 15 Friedman, Milton 44, 57, 81 front running (trading strategy) 65–6 FUD: see fear, uncertainty, doubt (FUD) fund managers 56–8, 63–4, 68, 134 futures (financial instrument) 67 Galbraith, John Kenneth 11, 74 GDP: see gross domestic product (GDP) General Motors xi, 16, 184–5 global financial crisis ix, 90; see also Great Financial Crisis God 24 gold 2, 72–7, 79–80, 86–7, 89 golden parachutes 112 Goldman Sachs 47, 49, 54, 56, 63, 66, 69, 88, 93, 105, 121, 215 goodwill 131 Great Depression 11, 70, 80, 138–9, 181, 204 Great Financial Crisis 79, 100, 111, 136; see also global financial crisis gross domestic product (GDP) vii–ix, xi, 28–31, 143 growth 27–8, 31, 33, 35, 39, 71, 90, 102, 108, 128, 132, 135, 151, 195, 203–4 Hadley, Arthur 10 happiness 202 Harvard Business Review 17–18 Harvard University 17–18, 26, 109, 208 243 hedge fund 29, 43, 46, 53, 58, 64–8, 92, 96, 101, 107 hedonic method 33–6 Hicks, John 13–14, 21 Homo economicus 164–6, 173 hostile takeovers 126 human capital 128 imports 2, 12, 34, 35 impossibility theorem (Arrow’s) 23–4, 212–13 incentives 39–40, 42–5, 52, 91, 93, 109, 114–15, 129, 132, 140, 172–4, 177, 182, 214 income guarantee 41 incompleteness viii, 12, 49, 145, 169, 184 incumbency 121, 134, 149 index tracking fund 55, 58 indifference 141, 168 industrial goods 2–3, 142 industrial production 2, 179 Industrial Revolution 5, 143, 181 inequality vii, 40, 138, 140 inflation 32–3, 36, 50, 78, 81, 104, 109, 120 information advantage 48, 131 information, asymmetric x, 191 information costs 144 information goods 143 information, imperfect x, xii, 142, 145, 149, 220 information technology 34, 218 innovation 34, 43, 147, 150–52, 160, 208 insider information 53–4, 62–3, 131 insider knowledge 131 insider trading 63–4, 131 institutionalism 8, 21 insurance xi, 39, 69, 82, 89–91,152, 189, 198, 204, 210 interest rate, real 50, 159 International Monetary Fund 27, 31, 48, 69, 74 International Workingmen’s Association 5 244 ECONOMISTS AND THE POWERFUL investment 32–3, 37, 41, 51, 56–7, 68, 78, 96–100, 103–4, 128–30, 133, 135, 140, 157, 184, 217 advice 51, 54, 56, 129 banking 29, 43, 47, 51, 52, 54, 55, 60–62, 64, 70–71, 89–90, 93, 94, 96, 97, 101, 107, 111–12, 125, 132 personal viii irrationality vii, 1, 13, 16, 38, 40, 151, 205, 211–12 Ivy League 27 Jevons, William Stanley 5, 16 job security viii, 108, 199–200, 202–4 J.P.


pages: 323 words: 95,939

Present Shock: When Everything Happens Now by Douglas Rushkoff

"Hurricane Katrina" Superdome, algorithmic trading, Alvin Toffler, Andrew Keen, bank run, behavioural economics, Benoit Mandelbrot, big-box store, Black Swan, British Empire, Buckminster Fuller, business cycle, 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, Future Shock, game design, global pandemic, global supply chain, global village, Howard Rheingold, hypertext link, Inbox Zero, invention of agriculture, invention of hypertext, invisible hand, iterative process, James Bridle, John Nash: game theory, Kevin Kelly, laissez-faire capitalism, lateral thinking, Law of Accelerating Returns, Lewis Mumford, loss aversion, mandelbrot fractal, Marshall McLuhan, Merlin Mann, messenger bag, Milgram experiment, mirror neurons, mutually assured destruction, negative equity, Network effects, New Urbanism, Nicholas Carr, Norbert Wiener, Occupy movement, off-the-grid, passive investing, pattern recognition, peak oil, Peter Pan Syndrome, price mechanism, prisoner's dilemma, Ralph Nelson Elliott, RAND corporation, Ray Kurzweil, recommendation engine, scientific management, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, SimCity, Skype, social graph, South Sea Bubble, Steve Jobs, Steve Wozniak, Steven Pinker, Stewart Brand, supply-chain management, technological determinism, the medium is the message, The Wisdom of Crowds, theory of mind, Tragedy of the Commons, Turing test, upwardly mobile, Whole Earth Catalog, WikiLeaks, Y2K, zero-sum game

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. When it came time for the company on the other side of those default swaps, AIG, to pay up, only the US government could print enough money to bail them out.27 By today’s standards, however, Goldman’s successively derivative bets seem almost quaint. Their investing decisions were still based in what they saw as the likely future of an unsustainable system.

conversations, fractalnoia and, 211 cooperation/collaboration, 193–94, 203–5, 221, 222, 226–27, 263. See also share/sharing copies, 71–72, 114 COPS (TV show), 35 corporations. See business/corporations crashes: in financial markets, 181, 230; flash, 181, 182 credit cards, 5, 161, 174, 175 credit default swaps, 178 crisis: chronobiological, 93; narrative collapse and mentality of, 55; real-time news and, 47, 48–49 Cronkite, Walter, 44 crowdsourcing, 213, 238–39 Crystal Palace, Great Exhibition (1851) in, 164–65 cubism, 155 culture: and compression of multitude of eras, 30; digiphrenia and, 72, 100; future-focused, 12; mashup and, 154–55; narrative collapse and, 12, 13, 30; new “now” and, 6; oral, 77; overwinding and, 141, 153–54; storytelling and, 12, 13; temporal diversity and, 133.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, business cycle, buy and hold, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, Future Shock, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, junk bonds, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Michael Milken, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, Phillips curve, plutocrats, Post-Keynesian economics, price stability, profit maximization, public intellectual, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, seminal paper, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, W. E. B. Du Bois, We are all Keynesians now, working-age population, Y2K, Yom Kippur War

In terms of our animal spirits, confidence disappeared. People became suspicious of transactions that they had previously undertaken to the tune of trillions of dollars. And the story changed. It was now about snake oil. There was no going back. Yet the sophisticated financing involving securitized debt and the derivatives (like credit default swaps and other financial futures) that seemed to be insurance for those debt packages had been serving a purpose. Over the years it had replaced a great deal of the old system of (more or less) direct lending. The public now looks to the still-existing financial structure of depository banks, bank holding companies, insurance companies, retirement funds, hedge funds, investment banks, and others to fill in the void that has been left by Humpty Dumpty’s sudden fall.

See Central Park East Secondary School CPF. See Central Provident Fund credit cards, 86, 128–29, 193n25 credit crunch, 86–96; confidence and, 12, 17–18; confidence multiplier and, 89–90; policy response, 90–93; pros and cons of solutions, 94–95; three reasons for, 88. See also financial crisis of 2007–8 credit default swaps, 90 credit lines, 88 credit target, 88–90, 95, 96, 187n7 crime, 158 Crow, John, 114–15 Crystal, Graef, 32, 181n12 Cummins, James G., 195n37 Cuomo, Andrew, 155 Cusumano, Michael A., 193n17, 194n22 Dabhol, India, 34 Dash, Eric, 186n13 Davis, E. Philip, 180n10 Deaton, Angus, 191n9,11 debt contracts, 48–49 deficit spending, xxi–xxii, 95 deflation, 68, 69, 73, 171, 186n40 Degler, Carl, 63, 184n13 Delicious Apple metaphor, 133–34 De Long, J.


pages: 109 words: 33,946

Tribe: On Homecoming and Belonging by Sebastian Junger

banking crisis, Credit Default Swap, Ferguson, Missouri, financial independence, income inequality, Paul Samuelson, RAND corporation, traumatic brain injury, Yom Kippur War

And yet they didn’t provoke nearly the kind of outcry that Bergdahl did. Not a single high-level CEO has even been charged in connection with the financial collapse, much less been convicted and sent to prison, and most of them went on to receive huge year-end bonuses. Joseph Cassano of AIG Financial Products—known as “Mr. Credit-Default Swap”—led a unit that required a $99 billion bailout while simultaneously distributing $1.5 billion in year-end bonuses to his employees—including $34 million to himself. Robert Rubin of Citibank received a $10 million bonus in 2008 while serving on the board of directors of a company that required $63 billion in federal funds to keep from failing.


Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies by Nik Bhatia

Alan Greenspan, bank run, basic income, Bear Stearns, bitcoin, blockchain, Bretton Woods, British Empire, central bank independence, Cornelius Vanderbilt, Credit Default Swap, cryptocurrency, distributed ledger, fiat currency, fixed income, Fractional reserve banking, interest rate derivative, interest rate swap, Isaac Newton, joint-stock company, Kickstarter, Long Term Capital Management, margin call, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, offshore financial centre, quantitative easing, reserve currency, risk free rate, Satoshi Nakamoto, slashdot, smart contracts, time value of money, tulip mania, universal basic income

An enormous margin call from the investment bank and major LTCM counterparty Bear Stearns in September 1998 triggered a collective realization that derivatives held by the hedge fund had the power to bring down the entire house of flimsy interbank risk. At the time of the LTCM bailout, the total market value of all the world’s derivatives including interest rate swaps, credit default swaps, and foreign exchange currency swaps was $3 trillion. To compare, the total supply of U.S. Treasuries was also about $3 trillion. By 2007, the total supply of U.S. Treasuries increased to $4 trillion but the market value of derivatives outstanding increased to $11 trillion. While the $4 trillion in Treasuries stood upon a bicentennial tradition of creditworthiness, conversely, the $11 trillion unsustainably teetered on the thin and fraying wires of interbank trust.16 Falling into Disrepair Despite cracks in the dollar pyramid’s foundation that surfaced after the LTCM bailout, money market interest rates portrayed a sturdier facade.


pages: 367 words: 108,689

Broke: How to Survive the Middle Class Crisis by David Boyle

anti-communist, AOL-Time Warner, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, call centre, collateralized debt obligation, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, delayed gratification, Desert Island Discs, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial deregulation, financial independence, financial innovation, financial intermediation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, gentrification, Goodhart's law, housing crisis, income inequality, Jane Jacobs, job satisfaction, John Bogle, junk bonds, Kickstarter, knowledge economy, knowledge worker, low interest rates, market fundamentalism, Martin Wolf, Mary Meeker, mega-rich, Money creation, mortgage debt, Neil Kinnock, Nelson Mandela, new economy, Nick Leeson, North Sea oil, Northern Rock, Ocado, Occupy movement, off grid, offshore financial centre, pension reform, pensions crisis, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, positional goods, precariat, quantitative easing, school choice, scientific management, Slavoj Žižek, social intelligence, subprime mortgage crisis, too big to fail, trickle-down economics, Vanguard fund, Walter Mischel, wealth creators, Winter of Discontent, work culture , working poor

The new exchanges are catering mostly to a new market, the high-frequency traders who can use algorithms to change orders and strategies within seconds, using computer programs to speed-read news reports and Twitter messages, interpret them automatically and apply them to shift trading patterns. It is the logical extension of what Paul Woolley was pioneering decades ago. Derivatives are not useless. They can help companies smooth out the bumpy cost of key inputs like fuel, or soften the impact of bad harvests. But most derivatives are sophisticated forms of gambling. Credit Default Swaps, which were instrumental in the bank crash of 2008, are usually used to bet that a bond will default. By the time of the crisis, there were $60 trillion in outstanding swaps, four times the GDP of the USA, and no real economic value had been created at all. Worse, many of them were bets taken out by banks against their own clients.

Thomas, 48 Chamberlain, Joseph, 304 Chamberlain, Neville, 91 Champy, James, 174, 255 Channel Tunnel, 202 Charter Consolidated, 146 Chase Manhattan, 149 Chatfield, Admiral Lord, 233 Cheltenham & Gloucester Building Society, 109–10, 118 Chevalier, Albert, 172 childcare, 13, 15, 18–19, 76, 81 see also nurseries Cisco, 114 Citibank, 96, 100 Citigroup (Citicorp), 146 secret reports, 24–6, 152, 159 Citizens’ Charter, 222–3, 258 City of London, 129–31 deregulation, 134–40, 147–51, 285 hostility to industry, 152 and occupational pensions, 190 pay and bonuses, 142–4, 149–50, 160–1 Clarke, Kenneth, 177 Cobbett, William, 282–3, 290–2 Cobden, Richard, 106 Coles, Adrian, 109–13, 117–19 collateralized debt obligations (CDOs), 154, 156 Columbus, Christopher, 277–8 Community Development Finance Institutions, 96 comparative advantage, 298 Comprehensive Performance Assessments, 265 Conrad, Joseph, 286 Conservative Party, 58–9, 63, 137, 188, 222, 227 and pension reforms, 176–85, 194 conveyancing, 101 Cooke, Sue, 252 Co-operative Bank, 118 co-operatives, 299 corporate re-engineering, 174, 255–6, 261 ‘Corset’, the, 57, 60–1, 65–8, 70, 72, 97, 99, 285 Cotton, Kathleen, 328 council houses, sale of, 63, 67, 100 County NatWest, 145, 148 courts, closure of, 252 Crabtree, Tim, 292–6 credit cards, 18, 80–1, 168, 300 credit default swaps, 156 Credit Suisse First Boston, 114, 151 credit unions, 96 Cresswell-Turner, Sebastian, 65 Crunchies, 44, 49, 83 Crystal Palace station, 52–4 D Dad’s Army, 93–4 Daily Express, 183, 185 Daily Mail, 9–10, 38, 189, 271 Daily Mirror, 190–1 Daily News, 38 Daily Telegraph, 15, 83, 130, 139, 181, 288 Darling, Alistair, 118 Dartford Grammar School, 216–17 Davies, Brian, 113 Davis, Brooklyn, 16 Dearing, Ron, 227 debt advice, 17 ‘deliverology’, 262, 266–7 democracy, 26 ‘property-owning’, 63 shareholder, 107 Demos, 257 Denmark, 77, 286 Department of Education, 218, 224, 227 Department of Health and Social Security (DHSS), 177, 184 Department of Trade and Industry, 188 Department of Work and Pensions, 17 derivatives, 141–2, 155–6, 158–9 Direct Edge, 155 Disney, 142–3 divorce, 79–80 Dluglash, Alan, 20 Dorset, 18, 292–6 dot.com boom, 114–15, 132–3, 140–1, 154, 169 downshifting, 12, 44, 52, 73, 83, 292 Drexel Burnham Lambert, 148 Dulwich, 287 Dulwich Preparatory School, 204–6 Dunkley Marshall, 138 Dunn, Robert, 225 dyslexia, 230 E Edinburgh, 18 education, 19–20, 207–41 and character, 233–4 and choice, 207–11, 213, 216, 221–3, 238 comprehensive, 220, 234, 237 and globalization, 212, 239 national curriculum, 220, 227 ‘open admission’ policy, 220–1 private, 5, 10–13, 19–20, 36, 143, 169, 211–12, 236, 238–9, 242 SATs, 226–7 ‘Three Wise Men’ report, 226 see also Black Papers on Education; schools Efficient Market Hypothesis, 128–9, 131, 133, 140, 157 Eisner, Michael, 142 Eleven-Plus, 217–18 Eliot, T.


pages: 407 words: 104,622

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, Andrew Wiles, automated trading system, backtesting, Bayesian statistics, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, blockchain, book value, Brownian motion, butter production in bangladesh, buy and hold, buy low sell high, Cambridge Analytica, Carl Icahn, Claude Shannon: information theory, computer age, computerized trading, Credit Default Swap, Daniel Kahneman / Amos Tversky, data science, diversified portfolio, Donald Trump, Edward Thorp, Elon Musk, Emanuel Derman, endowment effect, financial engineering, Flash crash, George Gilder, Gordon Gekko, illegal immigration, index card, index fund, Isaac Newton, Jim Simons, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Loma Prieta earthquake, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, Mark Zuckerberg, Michael Milken, Monty Hall problem, More Guns, Less Crime, Myron Scholes, Naomi Klein, natural language processing, Neil Armstrong, obamacare, off-the-grid, p-value, pattern recognition, Peter Thiel, Ponzi scheme, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, Robert Mercer, Ronald Reagan, self-driving car, Sharpe ratio, Silicon Valley, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, Steve Bannon, Steve Jobs, stochastic process, the scientific method, Thomas Bayes, transaction costs, Turing machine, Two Sigma

Paulson had first grown concerned about the runaway housing market in 2005, when a colleague named Paolo Pellegrini developed a price chart indicating that the housing market was 40 percent overpriced. Paulson knew opportunity was at hand. “This is our bubble!” Paulson told Pellegrini. “This is proof.” Paulson and Pellegrini purchased protection for the riskiest mortgages in the form of credit default swaps, resulting in a $20 billion windfall over 2007 and 2008. George Soros, the veteran hedge-fund investor, placed his own CDS bets, scoring over a billion dollars in profits.3 Baby-faced, thirty-nine-year-old David Einhorn won his own acclaim at a May 2008 industry conference when he accused investment bank Lehman Brothers of using accounting tricks to avoid billions of dollars of real-estate-related losses.

(Sowell), 293 Civil Rights Act of 1964, 292–93 Clayton, Jay, 290 climate change, 231, 275–76, 283, 291, 303 Clinton, Bill, 207–8, 212, 276 Clinton, Hillary, 276, 281, 287, 302 Coca-Cola, 129–30, 272 coding, 93–94, 171, 173–74, 178–79 cognitive biases, 152–53 Cohen, Steve, xvi, 333 Cold War, 23–24, 148 Cole Prize, 34, 70 Columbia University, 126, 129, 131, 137, 211, 268 combination effects, 144 combinatorial game theory, 93 Commodities Corporation, 140 commodities trading, 19–20, 39, 44, 94 Commodity Futures Trading Commission (CFTC), 58 computer programming, 24, 170–71, 173–74, 178–79 Conrad, Joseph, 50–51 convergence trading, 209 convertible bonds, 33, 137 Conway, Kellyanne, xviii, 281–82, 284–85, 288–90, 293, 304–5 Cooper, Tim, 275–76 Cornell University, 34, 69, 70–71 cosmic inflation, 324–25 creationism, 232 credit default swaps, 263–64 Crohn’s disease, 68, 260 Cruz, Ted, 281 currency trading, 40, 45, 49–59, 79–80, 110–11, 113–14 Cusack, Joan, 277 Dalio, Ray, xvi, 310, 333 “data analysts,” 311–12 data cleansing, 3 “data hunters,” 311–12 data overfitting, 204–5 D. E. Shaw, 133–35, 138, 139, 145, 209, 211–12, 233 Deep Blue, 178 Deep Throat (movie), 178 DeFazio, Peter, 276 Defense, U.S.


pages: 829 words: 187,394

The Price of Time: The Real Story of Interest by Edward Chancellor

"World Economic Forum" Davos, 3D printing, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, asset allocation, asset-backed security, assortative mating, autonomous vehicles, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Bernie Sanders, Big Tech, bitcoin, blockchain, bond market vigilante , bonus culture, book value, Bretton Woods, BRICs, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cashless society, cloud computing, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, commodity super cycle, computer age, coronavirus, corporate governance, COVID-19, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cryptocurrency, currency peg, currency risk, David Graeber, debt deflation, deglobalization, delayed gratification, Deng Xiaoping, Detroit bankruptcy, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, double entry bookkeeping, Elon Musk, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, everywhere but in the productivity statistics, Extinction Rebellion, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global reserve currency, global supply chain, Goodhart's law, Great Leap Forward, green new deal, Greenspan put, high net worth, high-speed rail, housing crisis, Hyman Minsky, implied volatility, income inequality, income per capita, inflation targeting, initial coin offering, intangible asset, Internet of things, inventory management, invisible hand, Japanese asset price bubble, Jean Tirole, Jeff Bezos, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, land bank, large denomination, Les Trente Glorieuses, liquidity trap, lockdown, Long Term Capital Management, low interest rates, Lyft, manufacturing employment, margin call, Mark Spitznagel, market bubble, market clearing, market fundamentalism, Martin Wolf, mega-rich, megaproject, meme stock, Michael Milken, Minsky moment, Modern Monetary Theory, Mohammed Bouazizi, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, Northern Rock, offshore financial centre, operational security, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, peer-to-peer lending, pensions crisis, Peter Thiel, Philip Mirowski, plutocrats, Ponzi scheme, price mechanism, price stability, quantitative easing, railway mania, reality distortion field, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk free rate, risk tolerance, risk/return, road to serfdom, Robert Gordon, Robinhood: mobile stock trading app, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, Second Machine Age, secular stagnation, self-driving car, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, stock buybacks, subprime mortgage crisis, Suez canal 1869, tech billionaire, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tim Haywood, time value of money, too big to fail, total factor productivity, trickle-down economics, tulip mania, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, Walter Mischel, WeWork, When a measure becomes a target, yield curve

Fixed-income bonds are exposed to future changes in interest rates (known as ‘duration risk’). A bank acts much like an insurance company. The spread between what the bank charges for its loans and pays on deposits is akin to an insurance premium.fn2 In fact, bonds can be replicated with insurance contracts, known as credit default swaps (CDS). The yields on CDS vary with the probability of default, as Galiani thought should be the case. Insurers employ actuaries to calculate loss probabilities. The types of risk they insure – homes, cars, business, lives, and so forth – are normally independent of each other. But badly underwritten insurance policies change people’s behaviour.

Banks, hedge funds and investment banks that had acquired mortgage securities with short-term loans went to the wall. Specialist carry vehicles or ‘shadow banks’ – mortgage real estate investment trusts, structured investment vehicles, bank conduits, and the like – collapsed in droves. Sellers of subprime credit default swaps, including the insurance giant AIG, discovered they had sold insurance too cheaply. In the complex and interconnected modern financial system, calculating the probability of loss had turned out not to be as easy as Galiani believed. DÉJÀ VU ALL OVER AGAIN Amid all the heated commentary about greedy bankers and their ‘toxic’ securities, it is easy to overlook the fact that subprime securities originally attracted investors because they enhanced income at a time when US interest rates had fallen to historically low levels.

(ketchup-maker), 161, 169 helicopter money, 112, 131 Hilferding, Rudolf, Finance Capital (1910), 158 Hilton, Paris, 178 Hirst, Damian, ‘Golden Calf’, 208 Hoag, David, 246 Hoenig, Thomas, 116 Holland, Henry Lancelot, 75 Holmes, Elizabeth, 149 Homer, Sydney, 4, 11, 68, 109 Hong Kong, 175 Hoover, Herbert, 92, 100, 141–2 Horan, Hubert, 149 d’Horn, Antoine-Joseph, Count, 51 Houellebecq, Michel, 309 Hudson, Michael, 9* Hume, David, 12, 27, 41, 45, 85*, 130–31, 132–3 Hungary, 253 IBM, 166 Iceland, 252, 253, 253*, 262, 300–301 Icelandic Central Bank (ICB), 300 Immelt, Jeff, 170–71 India, 254–5, 258 Indonesia, 258 industrial sector: canal construction mania (1790s), 69, 74; Chinese dumping of surpluses, 277, 280–81; electrification, 89; expansion from 1750s in Britain, 62–3; extended supply chains, 261; high demand in developing world, 128; impact of Great Depression on, 142–3; mining stocks, 79; new technologies in 1920s, 89, 90, 96, 100; production gluts in China, 276–7, 280–81; time in production, 14–15, 22, 95, 95† inequality: Bastiat’s view, xviii–xix; central bankers and responsibility for, 214–17; in China, 287–8, 287†; and Covid-19 pandemic, 309–10; and elite displays of wealth, 209–10, 212; and ‘financial repression’, 287–8; and financialization, 203–8; good and bad types of, 299; and Hayek, 296, 299; impact of crisis on the 99 per cent, 210–13, 215–17, 237; and inflation targeting, 123; interest as always about justice, 202; Marshall on deflation, 99–100; moral arguments over interest, 17, 201–2; multi-decade decline in from Great Depression, 203; multi-decade increase from early 1980s, 203–17, 204*; Piketty’s theory on, 216–17; in post-crisis Iceland, 301; rich as benefitting from easy money, 12*, 44, 202–5, 205, 206–10, 211, 214–17, 237; as rising in post-crisis decade, 44, 206–17, and secular stagnation argument, 205–6; seventeenth century writers on, 34, 36; stress levels after 2008 crisis, 210–11; trickle-down effect, 55; unequal access to credit, xxii, xxv, 14, 15, 215; in USA of 1920s, 203 inflation, xxiii, xxv; and asset price bubbles, xxiii, 134, 135; ‘Cantillon effect’, 60*; case against, 108*; and Covid-19 pandemic, 310; global aspect of, 122; Greenspan’s focus on, 110–14; Hayek on, 302; inflation targeting, 119–20, 121–3, 241; and Law’s ‘System’, 56–7, 58, 59–61; and low rates of interest, 42, 43, 56–7, 58, 59–61; and ‘natural rate’ of interest, 133–5; in post-Great War period, 84; purged by high interest rates, 84; return of in 1960s, 302; after Second World War, 311; in USA during 1970s, 108–9; Volcker’s ‘practical monetarism’, 109–10; and Wicksell’s view of interest, 42 insurance: ‘catastrophe bonds’, 222; credit default swaps (CDS), 219, 221; ever-escalating life premiums, 198–9, 199*; and low-interest regimes, xxi, 193, 195, 196*, 245; and moral hazard, 220, 233; underwriting, 219–20, 219†, 233 interest: ancient connection with rent, 7; Austrian school’s view, 95–6, 100, 101, 105, 108; calculating of how much due, 6, 14; central banks’ influence on long-term rates, 133, 134–5; concealed in bills of exchange, 24; and ‘creative destruction’ idea, 140–43, 143*; determining of rate level, 10–13; feedback loop with globalization, 260–61, 311; as hard to predict, 310–11; Hazlitt on price system, xx; as at heart of capitalism, xxii, xxv, 16, 28, 141, 297; high levels under Volcker at Fed, 109; and inequality in modern capitalism, 17; inversely related to capital value, 31, 43, 44, 52–61, 88, 116*, 158, 172–5; and length of ‘time in production’, xxiv, 14–15, 16, 22, 95, 95†; loans related to consumption, 6, 9*, 25, 28–9, 30; long-term rates in US (1945–2021), 134; lucrum cessans (foregone profit) concept, 25; moral arguments over inequality, 17, 201–2; paid by taking possession of collateral, 6–7; politicization of rate setting, 85–6; rate of and cultural level of a nation, 13, 29; rates set by custom and law, 11, 12; ‘real’ and ‘monetary’ factors, xxiv, 10, 12–13, 41, 131, 132–3, 133*, 138–9; as the ‘time value of money’, xxiv, xxv–xxvi, 10, 14–15, 16, 20, 22, 26–7, 28–32; variety of different rates, xxv, 12, 13, 14; Thomas Wilson’s definition, 26–7, 28, 30 see also ‘natural rate’ of interest; usury interest, functions of, xxiii–xxvi; allocation of capital, xxi, xxiv, xxv, 11, 15–16, 32, 139, 141–50, 151–5, 264, 266; capitalization of wealth, 139, 173–87; discounted value of asset’s future income, 28, 90–91, 173, 297; distribution of wealth, xxv, 139, 201–17, 237; financing of companies, 139, 157–71; level of savings, xxiv, xxv, 139, 188–93, 194–9; measurement of risk, xxv, 139, 176–7, 218–19, 220–34; as the ‘price of leverage’, xxiv, xxv, 135; regulation of international capital flows, xxv, 139; Schumpeter’s view, 141; valuing of long-lasting assets, 15 interest, history of, xxii–xxiii; 1825 banking crisis, 64–7, 75; anticretic interest, 6; attitudes to usury, 17–24, 25–6, 200–201, 219; Babylonian origins, 3–4, 14–15; barter-to-money myth, 14; Child’s abatement of interest proposals, 33–4, 35, 36–7, 38–40, 41, 43, 44; consumer and commercial lending distinction, 6, 9*, 25–6; decline of rates in late Middle Ages, 35, 36; defence of interest in seventeenth century, 37, 38–41, 42–4, 236†; emergence of modern credit cycle, 62–4; etymologies of interest, xvii–xviii, 4–5, 7, 11, 17, 18, 25, 26, 200; European rates (1200–1800), 36; Fed’s tightening (1928), 108, 261; ‘forgotten depression’ (1921), 84, 86, 100, 143; gradual rate decline in early modern Europe, 49; interest as much older than coined money, 3–4, 14; invention of compound interest, 8–9; low rates in Amsterdam, 35–6, 39; low rates in late-nineteenth century USA, 157, 158–9; new concept of at start of modern era, 27–8; post-1571 debates on excessively high rates, 34–40; post-Great War period, 84, 85–6; Proudhon-Bastiat debate, xvii–xix, xxi, xxii, xxv, 9; speculative manias (1630s-1890s), 64–6, 67–72, 73, 74, 75–6, 77–8, 79–80; stability of rates in ancient world, 10–12 see also Mesopotamia, ancient; Middle Ages; Mississippi bubble; Near East, Ancient; price-stabilization policy of 1920s interest, ultra-low/excessively low rates: and 1825 banking crisis, 64–7, 75; in 1980s/1990s Japan, 105–7, 106; Bagehot’s views, 64, 66, 67, 68, 69, 72, 73, 80–81, 220, 233; under Bernanke after 2008 crisis, 124, 131, 133, 137–8, 153, 155, 181–3, 207, 215, 230, 238–9, 240, 243–4, 262; under Bernanke before 2008 crisis, 111–12, 113, 115–17, 115†, 118–19; and British government debt conversions, 65, 65*, 69, 79; Buffett on, 308*; buyout barons as beneficiaries of, 160–63, 161*, 183†, 204, 207, 222, 237; Cantillon’s warning over, 58, 60–61; and capital-intensive industries, 62–3; as common feature of asset bubbles, xxiii, 116*, 123, 135, 172–87, 180, 220; consumer behaviour affected by, 32; and ‘financial repression’ in China, 266–81, 268*, 277*, 283, 292; ‘financial repression’ term, 191; under Alan Greenspan, 111, 112, 113, 114, 115, 117, 134–5, 162, 186, 190–91, 204, 226–7, 238, 252–3, 267; Icelandic Counterfactual, 300–301; impact on emerging markets, xxiii, 253–60, 262–3; impact on stock market/bond investors, 193–4; and inequality, 205–17, 299; in late nineteenth century, 78–80; and Law, 49, 52–4, 56*, 58–61; ‘low rates beget lower rates’ thesis, 44, 135, 136, 139, 206, 231, 234; low real rates in 1920s USA, 87–91, 89, 92–4, 96–8, 203; misallocation of capital by, xxi, 32, 43, 114, 136, 141–50, 151–5, 266–81, 289; during Napoleonic Wars, 69–70; productivity collapse in post-crisis decade, 150–51, 152–3; ‘reversal interest rate’, 236; rich as benefitting from, 44, 202–10, 211, 214–17, 237; and rising profits in post-crisis USA, 183, 185, 211; and risk taking, xxi, 52–61, 64–73, 77–81, 121–2, 135–9, 145, 149, 176–9, 220–34, 283, 285, 291–2; robber baron era in USA, 156–9, 203; and saving, 44, 77, 190–93, 194–9, 205–6; and secular stagnation narratives, 126–7, 129, 131, 132–9; seventeenth-century debates on, 34–44, 236†; trouble exiting from policy, xxi–xxii, 57–9, 60–61; ‘unicorns’ feed on, 148–50, 153, 155, 173, 176–7; unintended consequences, xxi–xxii, 32, 44, 137–9, 238, 297–8; Paul Volcker’s view of, 108–9; as warning sign, 13, 114; warnings from economists at BIS, 113–14, 131–4, 135–9, 153; William White on, 114; and ‘yield-chasing’, 65–6, 67–9, 114, 116, 136, 221–6, 230–31, 230*, 233–4, 237–8, 256, 305; zero interest rate policy (ZIRP), xxi, 123, 131, 137–8, 141, 146, 172–3, 191, 192; and zombification, 146–8, 153, 155, 237, 240, 277, 289 see also Mississippi bubble; negative interest rates International Dynamite Trust, 159 International Monetary Fund, 119, 144, 147, 168 investment: and China’s rapid expansion, 266–7, 269–70, 271–81; Chinese stimulus plan (2008/9), 270, 271–81, 282, 289, 292; collapse of in post-crisis decade, 152; easy money as incentive for undue risks, xxi, 136, 149, 220, 221–4, 230–31, 283, 285, 291–2; ‘equity risk premium’, 176*; in listed ‘yieldcos, 222; long-term bonds, 69, 131*, 193, 224–6; ‘malinvestment’ term, 32, 95, 148; meme stocks, 307; and production gluts in China, 276–7, 280–81; with returns in distant future, 148–50, 158, 176–7; Terborgh on, 125*; ‘unicorn’ start-up companies, 148–50, 153, 155, 173, 176–7; valuation of by interest, xxiv, xxv, 30–31, 173; White on impact of low interest rates, xxi see also asset price bubbles Ireland, 144–5, 225, 253, 279 Irving, Washington, 55† Israel, ancient, 9, 17, 200 Istel, Yves-André, 214 Italy, 21–3, 23, 35, 144–5, 147–8, 225, 293, 304 Japan: ageing population in, xxiv, 29, 198; deflation since the early 1990s, 100–101, 107–8, 114, 119, 135, 136, 145–6, 147, 148, 182, 191, 193; falling savings levels in, 192; first foreign loan (1870), 78; great bubble economy (1980s), xxiii, 105–8, 145, 182, 184, 271, 273, 279, 285–6; inflation targeting in, 119, 122, 241; negative interest rates in, xxi, 29, 122, 224, 225, 242, 244–5; public debt in, 291*; quantitative easing in, 241, 242, 294; ‘retirement gap’ in, 198; zaitech practitioners, 106, 182, 185; zombification of economy, 145–6, 147 Jevons, W.


pages: 124 words: 39,011

Beyond Outrage: Expanded Edition: What Has Gone Wrong With Our Economy and Our Democracy, and How to Fix It by Robert B. Reich

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, Alan Greenspan, banking crisis, benefit corporation, business cycle, carried interest, collateralized debt obligation, collective bargaining, Cornelius Vanderbilt, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, electricity market, Ford Model T, full employment, Glass-Steagall Act, Home mortgage interest deduction, job automation, low interest rates, Mahatma Gandhi, minimum wage unemployment, money market fund, Nelson Mandela, new economy, Occupy movement, offshore financial centre, plutocrats, Ponzi scheme, race to the bottom, Ronald Reagan, Savings and loan crisis, single-payer health, special drawing rights, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, trickle-down economics, women in the workforce, working poor, zero-sum game

The Street has also bet on or insured all sorts of derivatives—in effect, bets placed on the outcomes of other trades—emanating from Europe, on energy, currency, interest rates, and foreign exchange swaps. If a German or French bank goes down, the ripple effects are incalculable. The oracles of Wall Street said they weren’t worried, because most of the Street’s exposure to European banks was insured through “credit-default swaps” that would offset any losses. Wall Street’s amnesia was breathtaking. Just four years before, AIG nearly collapsed because it couldn’t make payments on its swap contracts that were supposed to insure big Wall Street banks against losses on their bets. American taxpayers had to bail out AIG as well as the big banks.


pages: 412 words: 113,782

Business Lessons From a Radical Industrialist by Ray C. Anderson

"Friedman doctrine" OR "shareholder theory", addicted to oil, Alan Greenspan, Albert Einstein, An Inconvenient Truth, banking crisis, Bear Stearns, biodiversity loss, business cycle, carbon credits, carbon footprint, carbon tax, centralized clearinghouse, clean tech, clean water, corporate social responsibility, Credit Default Swap, dematerialisation, distributed generation, do well by doing good, Easter island, energy security, Exxon Valdez, fear of failure, Gordon Gekko, greed is good, Indoor air pollution, Intergovernmental Panel on Climate Change (IPCC), intermodal, invisible hand, junk bonds, late fees, Mahatma Gandhi, market bubble, music of the spheres, Negawatt, Neil Armstrong, new economy, off-the-grid, oil shale / tar sands, oil shock, old-boy network, peak oil, precautionary principle, renewable energy credits, retail therapy, shareholder value, Silicon Valley, six sigma, subprime mortgage crisis, supply-chain management, urban renewal, Y2K

If you have better ideas, I hope you will share them with me; for as long as I live, I will be looking for a better way. That’s what sent me and my company on a quest to achieve the very sustainability that some really knowledgeable people said was just plain impossible. Of course, many of those same people were the ones who brought us subprime mortgages, overleveraged hedge funds, and credit default swaps, and a traditional framework of financial “values” that appears to be collapsing before our eyes. Meanwhile, the value of nature’s services to all of humanity—clean air, fresh water, arable land, pollination, seed dispersal, and climate regulation, just to name a few—has not lost a cent. They are, they will be, and always were the real gold standard.

Looking at the smoking ruins of once mighty banks, the threatened devaluation of national currencies, the epidemic of foreclosures and bankruptcies, and the way those are spilling over into the rest of the real economy, can any of us say that our lives have not been materially harmed by an unhealthy infatuation with stuff? Now that America has become the biggest debtor on earth, can we say this has truly served us well? Or that flipping houses (or derivatives, or credit default swaps) is the same thing as earning money by actually making or improving something? The United States maintained a healthy trade balance with the world right up through the mid-1960s. We built things that many other countries bought. Life was far from perfect back then, but has abandoning so much of our manufacturing sector been anything like an improvement (other than on Wall Street)?


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bike sharing, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, export processing zone, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, general purpose technology, Gini coefficient, Glass-Steagall Act, global supply chain, Great Leap Forward, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low interest rates, manufacturing employment, market bubble, means of production, middle-income trap, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, technological determinism, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Despite this, the banking sector had, or so it thought, found a way to mitigate the increased riskiness of lending. Riskier mortgages could be repackaged with others into mortgage-backed securities (MBS) and given the highest (AAA) credit ratings for the creditworthiness of the debt, while still offering a higher rate of return than other safe assets such as Treasury bills. Credit default swaps (CDS) could be purchased to provide insurance against any losses should there be a default. Bankers created funds, such as special purpose vehicles (SPVs) and structured investment vehicles (SIVs), to hoover up these financially engineered securities offering better returns than safe assets like government debt, and sell the SPVs and SIVs to clients.

Bernanke was later to argue in a 2012 speech that because Lehman was insolvent and posed less of a systemic risk than Bear Stearns, the Federal Reserve had no legal standing to make a bailout using public funds. The next day, however, the giant insurance firm AIG was rescued as the Fed was concerned about the impact on the credit default swap market if it were allowed to fail. In the global financial crisis, the Federal Reserve provided direct credit to specific markets and businesses in need of liquidity. Friedman’s recommended approach in the Great Depression was simply to flood the economy with general liquidity and allow solvency issues to sort themselves out.


pages: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, bank run, banks create money, Basel III, behavioural economics, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, carried interest, clean tech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, Evgeny Morozov, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Glass-Steagall Act, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, independent contractor, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, John Bogle, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, low interest rates, margin call, Mark Zuckerberg, market bubble, means of production, military-industrial complex, Minsky moment, Money creation, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, Post-Keynesian economics, profit maximization, proprietary trading, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Robert Solow, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, Solyndra, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two and twenty, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, you are the product, zero-sum game

Banks felt they needed to take more risks because, with governments trying to balance budgets and reduce public borrowing requirements, the yields on low-risk assets (such as US and European government debt) had fallen very low. Banks also believed that they had become much better at handling risk: by configuring the right portfolio, insuring themselves against it (especially through credit default swaps -CDSs - that would pay out if a borrower didn't pay back), or selling it on to other investors with a greater risk appetite. Investment banks lent to hedge funds and private equity firms and developed and traded exotic instruments based on assets like subprime mortgages, because the returns were higher than lending to industry or government.

Around the world, holders of these US MBSs took huge losses, leading to a cascade of financial crises in other countries as borrowers who held them as collateral proved unable to repay their debt. Banks had extracted revenue for ‘managing' and ‘laying off' risk - but their own activities had actually increased risk in the process. Credit default swaps (CDSs) are another example. Originally an insurance against a borrower defaulting on their loan, CDSs have largely become a way to bet on someone else being unable to repay their debts. CDSs may have their uses for people whose own solvency might depend on the debtor's ability to repay. But their speculative use was literally stripped bare in the case of ‘naked' CDSs, which played a major role in promoting sovereign and corporate debt defaults on both sides of the Atlantic.


pages: 1,544 words: 391,691

Corporate Finance: Theory and Practice by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann le Fur, Antonio Salvi

"Friedman doctrine" OR "shareholder theory", accelerated depreciation, accounting loophole / creative accounting, active measures, activist fund / activist shareholder / activist investor, AOL-Time Warner, ASML, asset light, bank run, barriers to entry, Basel III, Bear Stearns, Benoit Mandelbrot, bitcoin, Black Swan, Black-Scholes formula, blockchain, book value, business climate, business cycle, buy and hold, buy low sell high, capital asset pricing model, carried interest, collective bargaining, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, delta neutral, dematerialisation, discounted cash flows, discrete time, disintermediation, diversification, diversified portfolio, Dutch auction, electricity market, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, German hyperinflation, Glass-Steagall Act, high net worth, impact investing, implied volatility, information asymmetry, intangible asset, interest rate swap, Internet of things, inventory management, invisible hand, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, lateral thinking, London Interbank Offered Rate, low interest rates, mandelbrot fractal, margin call, means of production, money market fund, moral hazard, Myron Scholes, new economy, New Journalism, Northern Rock, performance metric, Potemkin village, quantitative trading / quantitative finance, random walk, Right to Buy, risk free rate, risk/return, shareholder value, short selling, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stocks for the long run, supply-chain management, survivorship bias, The Myth of the Rational Market, time value of money, too big to fail, transaction costs, value at risk, vertical integration, volatility arbitrage, volatility smile, yield curve, zero-coupon bond, zero-sum game

Kopprasch, Duration: A practitioner’s view, Journal of Applied Finance, 16(2), 138–149, February 2006. H. Langohr, P. Langohr, The Rating Agencies and Their Credit Ratings: What They Are, How They Work, and Why They Are Relevant, John Wiley & Sons Ltd, 2009. F. Longstaff, S. Mithal, E. Neis, Corporate yield spreads: Default risk or liquidity? New evidence from the credit default swap market, Journal of Finance, 60(5), 2213–2247, October 2005. P. Veronesi, Fixed Income Securities: Valuation, Risk, and Risk Management, John Wiley & Sons, Inc., 2010. And also: www.fitchratings.com www.moodys.com www.standardandpoors.com www.spreadresearch.com www.spratings.com/en_US/understanding-ratings Chapter 21 Other debt products What a choice!

In particular, the consulting company KMV has developed well-known models from the work of Merton, Black and Scholes. Such models have been greatly developed by banks. Hedge funds have developed arbitrage strategies between debt and equity markets (capital structure arbitrage) based on this approach. These techniques use mainly credit default swaps (CDSs). Lastly, some borrowers hedge their credit risk by selling shares of the firm short. In doing so, they earn on one side what they may lose on the drop in value of their loan. Section 34.4 Resolving conflicts between shareholders and creditors Creditors have a number of means at their disposal to protect themselves and overcome the asymmetry from which they suffer.

Companies are marginal players on this market (less than 10% of volume). Credit derivatives work very much like interest rate or currency options. Only the nature of the risk covered is different – the risk of default or rating downgrade instead of interest rate or currency risk. The most conventional form of credit derivative is the credit default swap (or CDS). In these agreements, one side buys protection against the default of its counterparty by paying a third party regularly and receiving from it the predetermined amount in the event of default. The credit risk is thus transferred from the buyer of protection (a company, an investor, a bank) to a third party (an investor, an insurance company, etc.) in exchange for some compensation.


pages: 602 words: 120,848

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class by Paul Pierson, Jacob S. Hacker

accounting loophole / creative accounting, active measures, affirmative action, air traffic controllers' union, Alan Greenspan, asset allocation, barriers to entry, Bear Stearns, Bonfire of the Vanities, business climate, business cycle, carried interest, Cass Sunstein, clean water, collective bargaining, corporate governance, Credit Default Swap, David Brooks, desegregation, employer provided health coverage, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, Glass-Steagall Act, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, John Bogle, knowledge economy, laissez-faire capitalism, Martin Wolf, medical bankruptcy, moral hazard, Nate Silver, new economy, night-watchman state, offshore financial centre, oil shock, Paul Volcker talking about ATMs, Powell Memorandum, Ralph Nader, Ronald Reagan, Savings and loan crisis, shareholder value, Silicon Valley, Tax Reform Act of 1986, The Wealth of Nations by Adam Smith, three-martini lunch, too big to fail, trickle-down economics, union organizing, very high income, War on Poverty, winner-take-all economy, women in the workforce

Making government more responsive to the middle class would not be just a political achievement; it would reshape the economy. Until we see clearly how the economy is constructed by government inaction as well as action, many of the most effective reforms will evade our sight. Maintaining regulation-free zones in which traders and investors design and unleash weapons of mass financial destruction (credit-default swaps, exotic subprime loans, mortgage-backed securities) is as much a political choice as passing tax cuts that enrich those who have already amassed the most. A vibrant, dynamic capitalism requires the guidance that only a vibrant, dynamic democracy can provide. In 2006 and 2008, palpable evidence that American governance had failed to provide such guidance helped give Democrats large majorities in Congress, control of the White House, and a rare opportunity to launch the politics of renewal.

., 75–76, 84, 85, 86, 89, 201, 237, 241, 266, 294, 297, 339n Constitutional Convention (1787), 84 Consumer Expenditure Survey, 31–32, 314n consumer prices, 32, 52–53, 63, 100, 119 Consumer Product Safety Commission, 97, 99 consumers rights, 31–33, 55, 69, 71, 79, 96, 99, 117, 125–27, 135, 147, 179, 197, 205, 220, 256, 257, 275, 277 consumption, 31–33, 49, 187, 191, 208, 217, 233, 267 Cook, Philip, 45 Coors, Joseph, 122–23 Corker, Bob, 282 corporations: accounting for, 48, 63, 65, 66, 119–20, 197, 219, 221, 246–47 boards of directors of, 63–64, 65 campaign contributions by, 66, 118, 121–22, 150–51, 169, 197–98, 207, 242–43, 271–75, 304 CEOs of, see chief executive officers governance of, 44, 62, 63–66, 119–20, 219–21, 240, 279, 292–93, 295 hierarchical structures of, 118 investment in, 32, 57, 63, 65, 120–21, 182, 228–29, 274 legal issues for, 55, 64–66 lobbyists for, 66, 118, 207 management of, 5, 16, 62, 63, 65–66, 67, 70, 129, 219–21, 246–47 mergers and acquisitions of, 69, 249–50 PACs organized by, 118, 121–22, 171–72, 173, 177–78 political influence of, 65–66, 107, 116–36, 150–51, 169, 197–98, 207, 230–31, 242–43, 271–75, 282, 292–93, 304 profits of, 66–67, 70 regulation of, 55–56, 219–21, 246–47 restructuring of, 63, 65–66 shared interests of, 118–21 shareholders of, 57, 63, 65, 120–21, 219, 221, 229, 293 taxation of, 47, 49, 50, 64, 106–7, 124–25, 132–34, 177, 179–80, 187, 312n transparency of, 63–64, 67, 246–47 Council of Economic Advisers, 125 Cox, Chris, 219 credit-default swaps, 301 credit-ratings agencies, 228 crime rate, 95, 181 Current Population Survey, 13, 312n Dahl, Robert, 84 Daley, Richard, 251 Daley, William M., 272–73 Dean, Howard, 250, 259 debt, personal, 4, 13, 31–33, 55, 77 debt financing, 174–75, 176 deductions, tax, 133, 214, 216 deficits, budget, 105, 182, 184, 187, 192, 212, 213, 214, 215, 231, 232, 233, 235, 302 defined-benefit pensions, 29, 64 DeLay, Tom, 178, 190, 199, 201, 205, 207, 210, 212, 231, 250, 272, 273 DeLong, Brad, 43 DeMint, Jim, 266, 267, 302; see also “ American Option” Democracy in America (Tocqueville), 77 Democratic Business Council, 176–77 Democratic Congressional Campaign Committee (DCCC), 177–78, 230–31, 251–52 Democratic Leadership Council (DLC), 180–82, 183, 231 Democratic National Committee (DNC), 166, 174, 176–77, 223, 225, 250–51, 259 Democratic Party, 163–93 agenda of, 168–70, 176–77, 295–97, 301–2 business support for, 53, 86, 127, 129–32, 140, 174–88, 220–21, 223–52 campaign spending by, 164, 166, 167, 170–84, 207, 219, 223–52, 258–59, 275 congressional majority of, 53, 89–90, 98, 99, 117, 130–32, 134, 137–38, 141, 157–58, 164, 165–67, 177, 185, 187, 188, 189–93, 199, 243–44, 255, 257, 258–73, 286, 301 conservative wing of, 134, 137, 165–66, 179–82, 184, 186–88, 239–41 debt financing by, 174–75, 176 deregulation supported by, 184–86, 224–30, 232, 240–41, 247–50, 261 economic policies of, 17, 98–100, 231–33, 235, 236–37, 244–52, 255, 258–73, 291–92 incumbent members of, 166, 175, 177–78, 179, 190–91, 200–201, 236, 258 labor support for, 58, 89, 99, 121–24, 126, 129–32, 141, 164, 172, 178, 248, 278–79 leadership of, 130, 166, 174, 176–77, 223–30, 250–51, 259 liberal wing of, 95, 99–100, 115, 116–18, 137, 145–48, 159–60, 178, 179, 181, 225, 239 lower class support for, 95, 111–12, 129–32, 141, 147–48, 150, 186, 235 middle class support for, 111–12, 147–48, 150, 225, 232, 237, 244 moderates in, 99, 179, 180–82, 231–32, 239–41, 261, 280 organizational basis of, 168, 174–84, 258–59, 271–73 presidency controlled by, 98–100, 130, 131, 132–33, 137–38, 164, 175, 200 Republican cooperation with, 186–93, 199–200, 210–15, 230–31, 233–34, 236–44, 247–48, 262–73, 278–88, 294–95, 302, 303 Southern wing of, 58, 88, 95–96, 138, 180, 186, 190–91, 196–97, 200–201, 255, 264 winner-take-all politics supported by, 8, 182, 185–86, 194–95, 221–22, 224–25, 228–30, 235, 236–37, 255, 257, 261, 268, 278, 289–306 women as supporters of, 145–46, 179 Democratic Senatorial Campaign Committee (DSCC), 227, 251, 272 depreciation allowances, 134 derivatives, financial, 69, 197, 249 DiMartino, David, 272 Diminished Democracy (Skocpol), 143 Dimon, Jamie, 226, 275 direct-mail campaigns, 173, 176, 178, 251, 303–4 dividends, 151, 214, 312n Dodd, Christopher, 226, 282 Dole, Bob, 192, 193, 200, 211, 217, 243 Donaldson, William, 221, 256, 279 Donohue, Thomas, 267, 276, 277, 303 dot-com bubble, 213, 219 Douthat, Ross, 149 Downie, Leonard, Jr., 156 Drift and Mastery (Lippmann), 83 Dunlop, John, 141 Dwight, Nancy Sinnott, 165 Earned Income Tax Credit, 50, 52, 71 Economic Recovery and Tax Act (ERTA) (1981), 134 economics, 49, 52, 125, 185, 187, 191, 208, 217, 233, 267 economy: agricultural, 84, 85, 108, 189, 246, 280 capitalist, 4, 6, 29, 90–91, 194, 248–49, 297–98, 301 competition in, 4, 37–40, 79, 118–19, 184–85 conservative approach to, 5, 19–24, 49, 122–23, 187, 191, 208, 217, 233, 267 consumption in, 13, 31–33, 49, 79, 89, 187, 191, 208, 217, 233, 240–41, 258–71, 280–88, 291–97, 301–2 Democratic policies on, 17, 98–100, 231–33, 235, 236–37, 244–52, 255, 258–73, 291–92 equality in, 2–3, 41–42, 74, 77–79, 87, 100, 134, 253–55 European, 26–27, 29, 52, 57–58, 76 financial crisis of (2008), 1–2, 3, 11–13, 79–89, 185, 196, 198, 240–41, 248, 253–55, 258–73, 278, 280–88, 291–97, 301–2 global, 4, 5, 34–35, 51, 182, 289, 290 government’s role in, 33, 38, 40, 41, 42–47, 51–56, 73–91, 96–100, 116–36, 152–53, 186–87, 297–98 growth of, 11–15, 17–20, 26–28, 29, 52–53, 78, 83, 91, 118–19, 131–32, 194, 232, 253 industrial, 55–56, 57, 83, 84, 85, 118–19, 122–23, 182 knowledge, 34–40, 45, 182, 303–4 liberal approach to, 53, 55–56, 62, 68, 69, 88–90, 91, 95, 96, 98, 110, 116–19, 138, 140, 163, 186, 187–88, 189, 200, 234, 305 mixed, 3–4, 184, 189 national comparisons of, 26–27, 29, 31, 37–38, 52, 57–58, 76 recessions in, 3, 12–13, 101, 127–28, 133, 165, 195, 212, 292 reform and restructuring of, 13, 53, 55–56, 62, 68, 69, 79–90, 91, 95, 96, 98, 130–32, 138, 140, 163, 186, 187–88, 189, 200, 234, 240–41, 258–73, 280–88, 291–97, 301–2, 305 Republican policies on, 17, 34, 41–42, 49, 65, 95–100, 109, 157, 207–15, 235, 240–41, 244–48, 255, 262–73 stimulus packages for, 262–73, 280–81, 296, 301–2 “trickle-down,” 5, 19–24 Edsall, Thomas, 191 education, public, 2, 56, 74, 98, 137–38, 142, 214, 232, 280, 298, 301 Edwards, Edwin, 183 Eisenhower, Dwight D., 140, 189, 232, 244 Eisenhower, Edgar, 189 elections, U.S.: campaign spending in, 66, 118, 121–22, 150–51, 163–64, 166, 167, 169, 170–84, 197–98, 203, 207, 209–10, 219, 223–52, 258–59, 271–75, 276, 304 cycles of, 167, 173, 226, 227, 230, 264 direct, 86, 194, 306 as entertainment, 100–106, 156–57, 167–68, 171, 174 media coverage of, 101–6, 156–58 midterm, 217, 231, 287, 295 organization in, 100–107, 113–15, 174 popular vote in, 256 primaries for, 209–10, 256, 284 redistricting in, 175, 258 state and local, 172–73, 175, 210 voters in, see voters of 1932, 87 of 1936, 87 of 1954, 176 of 1960, 202 of 1964, 269 of 1968, 91, 100, 156–57, 167, 174 of 1972, 117 of 1974, 98, 117, 127, 165, 200 of 1976, 98–99, 127, 152, 174 of 1978, 96, 122, 164 of 1980, 175, 186, 200 of 1982, 165–67, 173, 226, 258 of 1984, 165, 180, 202 of 1986, 174 of 1988, 191–93 of 1992, 167, 181, 193, 231, 232, 238 of 1994, 165, 201, 203, 207, 210, 230–31 of 1996, 167, 232, 238 of 2000, 105, 148, 167, 201, 213, 272 of 2002, 65–66, 209, 220, 221, 272 of 2004, 152, 227, 237–38, 250, 304 of 2006, 210, 251–52, 255, 258, 264, 265, 272, 273, 293, 301 of 2008, 54, 148, 196, 233, 234–35, 253, 255–57, 258–59, 263, 264, 265, 285, 288, 293, 301, 304, 337n of 2010, 277, 282, 286, 287, 295 Emanuel, Rahm, 251–52, 260–61, 269, 273, 304–5 Emerging Republican Majority, The (Phillips), 97–98 EMILY’s List, 145–46, 179 employee benefits, 3, 29–31, 57, 60, 97, 120–21, 140, 200, 206, 278–79, 301 Employee Free Choice Act, 60, 270, 278–79 Employee Retirement Income Security Act (1974), 97 energy futures contracts, 198 energy industry, 63, 100, 104, 119, 144, 189, 198, 227, 229, 232, 280 Enron Corp., 64, 197, 198, 220, 295 Ensign, John, 159 environmental issues, 74, 79, 96, 97, 116–17, 119, 144–45, 146, 169, 179, 192, 205, 257, 270, 274, 277, 279–80, 296, 298, 299 Environmental Protection Agency (EPA), 97, 205 Enzi, Mike, 267–68 equity funds, 50–51 Europe, 26–27, 29, 52, 57–58, 76 European Union (EU), 57–58 executive compensation, 2, 57, 61–66, 70, 219–21, 246–47, 279, 319n, 320n, 335n expensing, of stock options, 246–47, 320n, 335n Fallows, James, 300 Falwell, Jerry, 203 Family and Medical Leave Act (1993), 126 Faris, Jack, 206 Federalism, 85, 89 Federalist Papers, 76, 298–99 Federal Reserve Bank, 1, 201, 249–50, 261 Federal Reserve Bank of New York, 261 fees, investment, 228–29 Feinstein, Dianne, 225, 240, 245, 247 feudalism, 76, 80 filibusters: effects of, 53, 58, 85, 99, 109, 130–31, 213, 237–44, 245, 268, 280, 285, 287, 295, 303, 339n “rule of sixty,” 84, 237, 241–44, 258, 269–71, 280, 282, 286, 287, 296, 298–300 supermajority requirements and, 84, 237, 241–44, 258, 269–71, 280, 282, 286, 287, 296, 298–300 finance, insurance, and real estate (FIRE) sector, 271–72 Financial Accounting Standards Board (FASB), 65, 246–47, 320n financial crisis (2008), 1–2, 3, 11–12, 79–89, 185, 196, 198, 240–41, 248, 253–55, 258–73, 278, 280–88, 291–97, 301–2 financial services industry: accountability in, 65–66, 69, 71, 196, 197, 220–21, 249–50, 257, 265, 274, 277, 295–97 bailouts of, 1–2, 71, 198, 226, 249–50, 254, 261, 265, 274, 279, 282, 292, 295; see also specific firms bonuses and salaries of, 2, 67, 70, 229–30 campaign contributions of, 197–98, 200, 221–22, 224–30, 240–41, 247–50, 257, 271–75 computer models used by, 45, 46 conflicts-of-interest in, 55, 66, 69, 71, 196, 197, 220, 257, 277 deregulation of, 5, 66–70, 184–86, 196–98, 200, 221–22, 224–30, 232, 240–41, 247–50, 257, 261 financial instruments issued by, 46, 67, 68–70, 197, 198, 249, 301 lobbyists for, 2, 51, 66, 227–28, 229, 230, 249–50, 272, 273–76, 279, 287 mergers in, 249–50 political influence of, 2, 6, 51, 66, 104, 184–86, 195, 209, 224–30, 232, 240–41, 247–50, 256, 261, 282, 290–91 reform of, 2, 196–98, 220–21, 279 regulation of, 44, 45–47, 55–56, 66–70, 71, 80, 82, 88, 185, 195, 196–98, 219–22, 228, 247–50, 253, 254, 257, 261, 263, 270, 274–77, 279, 282, 285, 292, 295–96, 301 risk management in, 1–2, 44, 45–46, 69, 115, 197, 249 scandals in, 64, 65–66, 197, 198, 220–21, 295 technology of, 45, 68 transparency in, 249–50, 277 see also banking industry Flake, Jeff, 210 Ford, Gerald, 97, 98, 99, 120, 125, 126, 128, 172, 199 foreclosures, 88, 253 Founders, 75–76, 77, 81, 84, 85, 91, 297, 298, 299–300, 306, 339n 401(k) accounts, 29, 64 14(b) provision, Taft-Hartley Act (1947), 128, 129 Frank, Robert, 45 Frank, Thomas, 204 Franken, Al, 258 Fraser, Douglas, 131–32 Freedom Works, 283–84 free trade, 151, 232, 289, 301 Fried, Jesse, 63, 64 Frist, Bill, 200, 238 From, Al, 180 Fuld, Dick, 70 futures trading, 198, 249 Ganz, Marshall, 145, 153 Garn-St.


pages: 320 words: 33,385

Market Risk Analysis, Quantitative Methods in Finance by Carol Alexander

asset allocation, backtesting, barriers to entry, Brownian motion, capital asset pricing model, constrained optimization, credit crunch, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, financial engineering, fixed income, implied volatility, interest rate swap, low interest rates, market friction, market microstructure, p-value, performance metric, power law, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, seminal paper, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic bias, Thomas Bayes, transaction costs, two and twenty, value at risk, volatility smile, Wiener process, yield curve, zero-sum game

They have also built up arbitrage and proprietary trading books to profit from perceived market anomalies and take advantage of their market views. More recently, banks have started to manage credit risks actively by transferring them to the capital markets instead of warehousing them. Bonds are replacing loans, mortgages and other loans are securitized, and many of the remaining credit risks can now be covered with credit default swaps. Thus credit risks are being converted into market risks. The rapid development of capital markets and, in particular, of derivative products bears witness to these changes. At the time of writing this foreword, the total notional size of all derivative products exceeds $500 trillion whereas, in rough figures, the bond and money markets stand at about $80 trillion, the equity markets half that and loans half that again.

Alexander, C. and Barbosa, A. (2007) Effectiveness of minimum variance hedging. Journal of Portfolio Management 33, 46–59. Alexander, C. and Dimitriu, A. (2005) Rank alpha funds of hedge funds. Journal of Alternative Investments 8, 48–61. Alexander, C. and Kaeck, A. (2008) Regime dependent determinants of credit default swap spreads. Journal of Banking and Finance 32. In press. http://dx.doi.org/10.1016/j.jbankfin.2007.08.002. Baele, L., Ferrando, A., Hördahl, P., Krylova, E. and Monnet, C. (2004) Measuring European financial integration. Oxford Review of Economic Policy 20, 509–530. Berben, R.P. and Jansen, W.J. (2005) Comovement in international equity markets: A sectoral view.


pages: 481 words: 120,693

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

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, assortative mating, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black Swan, Boris Johnson, Branko Milanovic, Bretton Woods, BRICs, Bullingdon Club, business climate, call centre, carried interest, Cass Sunstein, Clayton Christensen, collapse of Lehman Brothers, commoditize, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Deng Xiaoping, disruptive innovation, don't be evil, double helix, energy security, estate planning, experimental subject, financial deregulation, financial engineering, financial innovation, Flash crash, Ford Model T, Frank Gehry, Gini coefficient, Glass-Steagall Act, global village, Goldman Sachs: Vampire Squid, Gordon Gekko, Guggenheim Bilbao, haute couture, high net worth, income inequality, invention of the steam engine, job automation, John Markoff, joint-stock company, Joseph Schumpeter, knowledge economy, knowledge worker, liberation theology, light touch regulation, linear programming, London Whale, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Max Levchin, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, NetJets, new economy, Occupy movement, open economy, Peter Thiel, place-making, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, postindustrial economy, Potemkin village, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, self-driving car, seminal paper, Sheryl Sandberg, short selling, Silicon Valley, Silicon Valley billionaire, Silicon Valley startup, Simon Kuznets, sovereign wealth fund, starchitect, stem cell, Steve Jobs, TED Talk, the long tail, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tony Hsieh, too big to fail, trade route, trickle-down economics, Tyler Cowen: Great Stagnation, wage slave, Washington Consensus, winner-take-all economy, zero-sum game

Soros complained that his years of semiretirement meant he didn’t have the kind of “detailed knowledge of particular companies I used to have, so I’m not in a position to pick stocks.” Moreover, “even many of the macro instruments that have been recently invented were unfamiliar to me.” At the moment he made his crisis call, Soros was so disengaged from daily trading that he didn’t even know what credit default swaps—the now notorious derivatives that brought down insurance giant AIG—were. Even so, his intervention was sufficient to deliver a 32 percent return for Quantum in 2007, making the then seventy-seven-year-old the second-highest-paid hedge fund manager in the world, according to Institutional Investor’s Alpha magazine.

One of the days on which it was evoked most energetically was November 4, 2007, when Prince resigned and his dancing comment became shorthand for Citigroup’s larger failure to anticipate the crisis under his leadership. Prince deserved his pink slip: during his tenure in the corner office, Citi increased its exposure to the subprime market, grew its credit default swap business (including the number of swaps it kept on its own books), and stashed billions of dollars in risky off-balance-sheet vehicles. But he wasn’t wrong about dancing to the music. When the music stops, the loser is the one left without a chair, but the rules of modern capitalism don’t allow the big players to sit down prematurely, either


pages: 316 words: 117,228

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

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

The relentless enforcement of legal rights, such as margin or collateral calls, that allow one party to extract cash payments from its counterparty when asset prices were falling across the board, brought the financial system close to the abyss already in 2007, a year before Lehman would trigger a near-fatal heart attack. A good example is the fate of credit default swaps (CDS), a kind of insurance contract that enables a party to acquire protection on the value of financial assets it does not own.17 According to a CDS contract, the insurer must make cash payments to the insured parties (“collateral calls”), if and when the value of the assets he is protecting declines beyond a certain threshold.18 Nobody had expected that these thresholds would ever be crossed, or if so, that this would a n e w co d e ?

., 169 Bank for International Settlement (BIS), 149–50 bankruptcy, ix–x; capital rule and, 207, 209, 211, 227; cloning legal persons and, 48– 49, 51, 55, 62–63, 73, 75; code masters and, 160, 168, 269n58; coding land and, 27; derivatives and, 144–52; empire of law and, 3, 13–14, 16, 21; global code and, 137, 144–53, 262n42; ISDA and, 147–51; law and, 3, 13, 16, 21, 73, 78, 87, 107, 137, 144–52, 160, 168, 209, 239n55, 262n42, 269n58; Lehman Brothers and, 48–58, 61–65, 70–75, 80, 85, 96, 101, 103–4, 106, 135, 149, 175, 190, 245n4, 246n6, 248n33; minting debt and, 78–80, 83–84, 87, 107, 255n71; safe harbors and, 63, 145, 148–50, 152, 207, 211, 227, 262n44, 263n49; United States and, 55, 148, 239n55, 255n71, 262n44 Banque de France, 104 Barclays, 203 barristers, 169–70 Bayerische Landesbank, 85 bearer assets, 198 Bear Stearns, 64, 83 Belize: British colonialism and, 26–27; coding land and, 23–29, 230, 241n7, 261n21; Constitution of, 25, 28, 241n7; courts and, 23–24, 27–29, 126, 230, 261n21; global code and, 261n21; independence of, 26– 27; Maya people and, 23–29, 230, 261n21; mining and, 25–27, 29, 37; Privy Council and, 27–29, 126 beneficiaries, 43–45, 53, 81, 115, 164, 181–82 big data, 126–31 bilateral investment treaties (BITs), 140, 155, 264n67 bilateral trade, 122, 132, 136, 140, 154–56, 256n23 bills of exchange, 57, 78, 88–92, 108, 198–99, 252n31 Bitcoin, 197–202 Black Act, 243n42 blacklisting, 73, 225 Blackstone, William, 46 blockchain, 184, 187–90, 192, 195, 197–98, 203–4, 270n2 blue-chip corporations, 83, 175–76, 269n55 BNP Paribas, 85 Bonaparte, Louis, 104 Bonaparte, Napoleon, 133, 242n27 bourgeoisie, 10, 208 Brandeis, Louis, 109 Braudel, Fernand, 9 Breast Cancer Susceptibility Gene (BRCA), 111–14, 116, 127, 130, 214 Brexit, 179 bright-line rule, 224–25 Bristol-Myers, 124 Bruges, 57–58 bubbles, 59, 247n26 bugs, 185, 188, 196 Campbell, Lord, 158, 170 Canada: coding land and, 29; Comprehensive Economic and Trade Agreement (CETA) and, 156–57, 264n69; Eli Lilly and, 138–43, 152–55, 261n17, 261n19; Federal Court of, 139; global code and, 138–43, 156–57, 261n17, 261n18, 263n57, 264n69; intellectual property and, 138–43, 152–55, 261n17, 261n19; NAFTA and, 124, 138, 138–42, 155, 261n20; USMCA and, 139, 261n20 Canadian Patent Act, 140, 261n23 Cancer Genetics Network Project, 113 capital: attributes of, 3–4, 11–15, 21, 39, 78, 161, 183, 205, 211–12, 233; coding land and, 24, 26, 29, 34–45; Commons on, 12; convertibility and, 3–4, 11, 13, 15, 19, 77–78, 183, 193, 199, 211, 229, 233; corporations and, 47–48, 52–53, 56–57, 64–67, 70, 73–76; digital code and, 183–86, 189, 195–200, 203; durability and, 3, 211, 229, 233 (see also durability); economic growth and, 2; empire of law and, 2–22; enigma of, 9–13; global code and, 132–38, 143, 149, 152–57; intangible, 8, 115–18; intellectual property and, 108, 112–20, 126, 130; labor and, 2, 9–11, 116, 160, 169, 217, 237n37; legal attributes and, 13–15; legal codes and, 2 (see also legal code); Levy on, 12; Marxism and, 9–11; minting debt and, 77–79, 83, 92, 100–102, 107; Piketty on, 4–5; priority rights and, 206–7, 215 (see also priority rights); in service of, 152–57; Smith on, 6, 46, 134, 220, 240n68; state power and, 15–19 (see indeX also state power); universality and, 3–4, 11, 13–14, 19, 21, 54, 211, 229, 233; venture, 112; wealth and, 12–13 (see also wealth) capital gains, 235n9 Capital in the Twenty-First Century (Piketty), 4–5 capitalism: capital rule and, 205–9, 212, 217, 222, 224, 228–29, 234; cloning legal persons and, 47; code masters and, 168, 179, 182, 266n24; coding land and, 26; digital code and, 199–200; empire of law and, 2, 4, 8, 10–14, 17–21, 238n44; free markets and, 4, 19, 106–7, 128–29; global code and, 132–33; historiography of, 10; nature’s code and, 112; substance of, 238n44 Capitalism without Capital (Haskel and Westlake), 115–16 capital rule: arbitration and, 215, 217, 223, 226; autonomy and, 209, 212–13, 215, 218–20, 232, 272n29; bankruptcy and, 207, 209, 211, 227; bright-line rule and, 224–25; capitalism and, 205–9, 212, 217, 222, 224, 228–29, 234; coercive power and, 220, 232–33; collateral and, 224; contracts and, 209–18, 222–27, 231, 276n37; convertibility and, 211, 226–27, 229, 233; corporate law and, 209–11, 224; costly externalities and, 226; courts and, 206–7, 211–18, 221–24, 227, 230; creditors and, 206–7, 211, 216; debt and, 206–7, 209, 219, 228; derivatives and, 211, 227; durability and, 211, 229, 233; elitism and, 218; enclosure and, 229; enforcement and, 210, 220, 223; enigma of capital and, 9–13; feudalism and, 5–6, 205, 211, 223, 276n24; firstmover advantage and, 214–15; global code and, 152–57; globalization and, 219–23, 277n51; governing the code and, 222–29; growth and, 220; harmonization and, 227; inequality and, 223; intangible capital and, 212, 216; International Center for Settlement of Investment Disputes (ICSID) and, 154–55; investment and, 225–26; knowledge and, 229; law’s inherent incompleteness and, 210–13; lawyers and, 206–16, 221, 224, 227–29, 234; legal attributes and, 13–15; legal code and, 205, 211–13, 216, 218–20, 225, 227, 230; legal structures and, 225; Marxism and, 207–8, 216, 234; mortgages and, 206–7, 211; New York Arbitration 281 Convention and, 154; partnerships and, 228; patents and, 211–15, 230; priority rights and, 206–7, 215; private code and, 20, 209–19; private law and, 209–15; property and, 206, 209, 212–20, 222, 224, 230, 276n24; public power and, 216–19; reform and, 218, 231; regulation and, 211, 213, 216–17, 221, 224–27, 274n1; resurrecting limitations and, 227; risk and, 207, 226, 229; roll-back strategies for, 224–29; roving, 219–21; safe harbors and, 63, 145, 148–50, 152, 207, 211, 227, 262n44, 263n49; shareholders and, 213, 229; slavery and, 205; sovereignty and, 234, 277n51; state power and, 15–18, 205, 208–9, 212, 216, 221–23; treaty law and, 225; United Kingdom and, 228, 234; United States and, 219, 227–28, 234; universality and, 211, 229, 233; veils and, 8, 13, 48, 207, 246n16; wealth and, 205–9, 215, 217, 221–22, 224, 230; Weber and, 206; without law, 229–34 Cayman Islands, 50, 71, 99, 135, 249n53 central banks: code masters and, 167; empire of law and, 6; global code and, 151; minting debt and, 77–78, 89, 102–6, 255n72 Chase, 64, 83–85, 248n32, 255n70 Chicago Mercantile Exchange, 200 China, 178 China Investment Corporation (CIC), 85 Chrysler, 247n17 Citigroup, 60, 248n32; foreign help for, 84; Kleros clones and, 100; NC2 and, 79–87, 94, 98–100, 106–7, 135, 251n4, 251n19 Citigroup Mortgage Realty Corporation (CMRC), 80–85 City Group Global Markets (CGGM), 85 civil law, 42–43, 133, 168–73, 178, 249n48 civil rights, 232 claims to future pay, 78, 84, 88 cloning legal persons: bankruptcy and, 48–49, 51, 55, 62–63, 73, 75; capitalism and, 47; collateral and, 51; contracts and, 47–48, 52–55, 58–60, 64–65, 68–69, 247n24; corporate law and, 47–56, 60– 62, 65, 67–72, 74, 76, 246n14, 246n16, 248n30; courts and, 58, 68–70, 73–76, 247n24; creditors and, 47–48, 51, 54–67, 71, 73, 75, 246n16, 247n24; debt and, 47–53, 56, 59–60, 67, 73–74; durability and, 47, 54–55; elitism and, 66, 75; immortality and, 50, 55, 65–67; 282 indeX cloning legal persons (continued) incorporation theory and, 69–70, 74, 136, 246n10; investment and, 48–53, 60–65, 67, 72, 75, 248n39; Kleros and, 99; labor and, 49; lawyers and, 48, 52, 70; legal entities and, 51–53, 55, 57, 65, 69–71; Lehman Brothers and, 48–58, 61–65, 70– 75, 80, 85, 96, 101, 103–4, 106, 135, 149, 175, 190, 245n4, 246n6, 248n33, 250n59; limited liability and, 60–61; loss shifting and, 55, 59–64, 67; monopolies and, 66; NC2 and, 79–87, 94, 98–100, 106–7, 135, 251n4, 251n19; priority rights and, 55–56, 63; private law and, 68; property and, 47, 68; regulation and, 249n46; risk and, 48, 54–56, 59, 63–66, 70, 74–75; Roman law and, 51; slavery and, 49, 54, 57, 60; universality and, 54; wealth and, 48, 56, 59, 64, 66–67 Coase, Ronald, 45, 192 code masters: arbitration and, 161–62, 178, 180–82; assets and, 158–61, 164–69, 174–75, 177, 180–82; bankruptcy and, 160, 168, 269n58; capitalism and, 168, 179, 182, 266n24; central banks and, 167; coercive power and, 177, 180; collateral and, 160, 177; common law and, 168–73, 176–78; contracts and, 159–60, 172, 178, 181–82; corporate law and, 159–60, 163–64, 168, 174–79, 269n60; courts and, 159–64, 168–73, 177, 180–82; creditors and, 158–59, 168; debt and, 158, 167, 174; durability and, 159, 161, 182; elitism and, 158, 162, 164, 175–77; enforcement and, 168, 180; globalization and, 176–79, 270n71; growth and, 166, 175, 267n26, 270n71; inequality and, 167; investment and, 160–61, 165, 167–68; labor and, 160, 169; legal code and, 158–59, 167, 177, 180; legal origin of, 167–76; Lehman Brothers and, 175; partnerships and, 162–63, 166, 175–78; poison pills and, 163–64, 266n15, 266n17; priority rights and, 158, 161; private law and, 169–73, 182; private money and, 175; property and, 158–60, 164, 172, 177; reform and, 158–59, 171; regulation and, 160–63, 168, 171–77, 182, 267n37, 268n42; risk and, 161–62, 165; securitization and, 165; shareholders and, 164, 168; sovereignty and, 160; United Kingdom and, 168, 178–79; United States and, 162, 168, 171, 174–79; wealth and, 159, 162, 164–67, 174, 176 coding land: acquired rights and, 45–46; autonomy and, 33; bankruptcy and, 27; Belize and, 23–29, 230, 241n7, 261n21; British colonies and, 39–42; capitalism and, 26; collateral and, 30, 35–36; common law and, 31–32, 40, 243n43; common use and, 29–30; contracts and, 41–42; Conveyance Act and, 38–39; corporate law and, 24, 35, 37, 44; courts and, 23–34, 38–45, 244n63; creditors and, 24, 30, 35–45; debt and, 30, 35–42; decoding the trust and, 42–45; digital code and, 183–90, 194, 197, 203–4; discovery doctrine and, 34–35; durability and, 24, 39, 42–43, 46; elitism and, 8, 40–41, 75, 158, 164, 254n55; emerging land market and, 32; enclosure and, 29–35, 39, 229, 256n14; eviction and, 41, 233; important role of land and, 23–24; inequality and, 46; investment and, 25, 37, 45, 241n13; landowners and, 24, 34–39, 42, 45, 56, 78, 128, 158–59, 166, 254n55; lawyers and, 24, 31–32, 35, 37– 38, 40, 43–45, 164, 240n6, 242n29; legal code and, 24, 39–40, 43; legal title and, 24–29, 33–34, 45–46; Maya people and, 23–29, 230, 261n21; monopolies and, 41; mortgages and, 35–38, 43; ownership and, 30, 34–35, 136; priority rights and, 24–25, 29, 37, 39, 46; property and, 23–39, 42–46, 240n2, 241n10, 241n13, 242n27, 242n36, 243n41, 245n75; protecting spoils and, 35–39; reform and, 38–41, 244n58, 244n64; regulation and, 44; risk and, 35, 41; securitization and, 43, 45; Settled Land Acts and, 38–39; settlers and, 33–35, 42, 125, 192–93; shielding and, 44; slavery and, 39; sovereignty and, 26–27, 33–34; state power and, 23, 46; Statute of Enrollments and, 44; Statute of Uses and, 44; titles and, 25–27, 30–35, 37, 43, 46, 125, 194; trust law and, 42–45; turning land into private, 29–35; usage and, 24–29; wealth and, 24, 27, 35–46 coercive power: capital rule and, 220, 232– 33; code masters and, 177, 180; digital code and, 187, 193; empire of law and, 4, 7, 15–21, 239n60; global code and, 132, 154; minting debt and, 90; trade secrets and, 126, 129; World Trade Organization (WTO) and, 125 Cohen, Morris, 137–38 indeX Coindesk, 203 collateral, ix–x; capital rule and, 224; cloning legal persons and, 51; code masters and, 160, 177; coding land and, 30, 35–36; digital code and, 187, 190–91, 271n19; empire of law and, 3, 7, 11–13, 16, 21, 238n49; global code and, 144, 148, 263n48; minting debt and, 78, 81, 86–87, 92, 97, 99, 103, 107; mortgages and, 13–14; slavery and, 11–12 collateralized debt obligations (CDOs), 87, 99–101, 108, 165, 211, 254n53 Columbia Law School, 270n4 Commerce Clause, 70, 177 commercial codes, 13, 238n48, 260n8 common law: code masters and, 168–73, 176–78; coding land and, 31–32, 40, 243n43; digital code and, 271n13; empire of law and, 5, 8; English law and, 27, 38–40, 43, 146, 178, 262n41; frustration of contracts and, 271n13; global code and, 133, 264n65; law schools and, 243n43; nature’s code and, 119; New York State laws and, 8, 76, 80, 132–33, 135, 143, 146, 150, 168, 178; Roman law and, 30, 42, 132–33, 135, 170, 177, 242n27, 243n43; United Kingdom and, 176–77 Common Pleas, 32 Commons, John, 12, 238n44 Companies Act, 61 competition: free trade and, 38; guild barriers and, 128–29; intangible capital and, 118; investment banking and, 50, 91– 92; lawyers and, 174, 176; private rights and, 122; property and, 121; regulatory, 68, 135, 221, 227; Schumpeter on, 118, 276n30; state power and, 221; tax shelters and, 72; trade secrets and, 128–29 Comprehensive Economic and Trade Agreement (CETA), 156–57, 264n69 conflict-of-law rules, 9, 68–69, 134–35, 212, 225, 249n48, 276n37 contingent convertibles (CoCos), 202 contracts, ix–x; blockchain and, 184, 187–90, 192, 195, 197–98, 203–4, 270n2; capital rule and, 209–18, 222–27, 231, 276n37; cloning legal persons and, 47–48, 52–55, 58–60, 64–65, 68–69, 247n24; code masters and, 159–60, 172, 178, 181–82; coding land and, 41–42; credible enforcement and, 1–2; digital code and, 183–92, 195, 198, 203, 271n13, 271n17, 271n18, 272n32; empire of law and, 2–8, 283 13, 15–16, 21, 238n48; enforcement of, 2, 16, 203; frustration of in common law, 271n13; global code and, 135–37, 139, 145–53; insurance, 190, 271n17; minting debt and, 78–81, 86, 88–89, 107; nature’s code and, 129; nexus of, 48; rise of West and, 4; Roman law and, 187; smart, 187– 91; theory of firms and, 272n32 convertibility: capital rule and, 211, 226–27, 229, 233; debt and, 3, 15, 77–78, 87–91; digital code and, 183, 193, 199; empire of law and, 3–4, 11, 13, 15, 19; state money and, 3 Conveyance Act, 38–39 copyright, 11, 115, 256n23 corporate law, ix–x; asset partitioning and, 53; capital rule and, 209–11, 224; choosing, 69–71; cloning legal persons and, 47–56, 60–62, 65, 67–72, 74, 76, 246n14, 246n16, 248n30; code masters and, 159–60, 163–64, 168, 174–79, 269n60; coding land and, 24, 35, 37, 44; digital code and, 185, 189, 196, 202; empire of law and, 3, 5, 8, 11, 13, 21, 238n54; enabling, 55; global code and, 135–36, 155; incorporation theory and, 69–70, 74, 136, 246n10; international private, 68–69; international treaty, 9, 120, 136–39, 225; legal personality and, 55; minting debt and, 78, 80, 86, 91, 98–102, 107, 252n22, 253n41; nature’s code and, 108, 115, 122, 125; seat theory and, 53, 69–70; shopping for, 67–69; sunset provisions and, 76; treaty law and, 70; veils and, 8, 13, 48, 246n16 corporations: arbitration and, 48, 56, 67, 73–76; autonomy and, 50; blue-chip, 83, 175–76, 269n55; bonds and, 5, 16, 44, 48–49, 83, 86, 102–5, 108, 128, 195, 198, 202, 211, 252n22, 262n32; choosing tax rate and, 71–73; coding modern, 54–56; conflict of law and, 9, 68–69, 134–35, 212, 225, 249n48, 276n37; contracts and, 47–48, 52–55, 58–60, 64–65, 68–69; durability and, 47, 54–55; essence of, 52; immortality and, 50, 55, 65–67; incorporation theory and, 69–70, 74, 136, 246n10; legal entities and, 14, 51–59, 65, 69–71, 249n46, 253n41; legal structures and, 48–51, 54, 58, 70–71, 76, 80; Lehman Brothers’ bankruptcy and, 48–58, 61–65, 70–75, 80, 85, 96, 101, 103–4, 106, 135, 149, 175, 190, 245n4, 284 indeX corporations (continued) 246n6, 248n33; limited liability and, 51, 53–54, 60–61, 63, 99, 254n49; loss shifting and, 55, 59–64, 67; mobility and, 68, 70; ownership and, 59, 67, 92, 118, 136; partnerships and, 65 (see also partnerships); poison pills and, 163–64, 266n15, 266n17; PRIMA and, 136; put option and, 55, 64, 226; RASCAL and, 73–75, 250n60, 250n62; rating agencies and, 80, 86–87, 98–100, 251n6, 251n19; regulation and, 47–48, 50, 56, 68, 73–76, 226, 249n46; risk and, 48, 54–56, 59, 63–66, 70, 74–75; Roman law and, 51, 54; shareholders and, 48–56 (see also shareholders); shielding and, 3, 14, 20, 22, 44, 47–48, 51–63, 65, 67, 71, 78, 84, 86, 99, 107, 129, 161, 165, 205, 215, 238n51, 246n16, 247n20; sovereignty and, 53, 66–70; subsidiaries and, 50–53, 58–59, 61–64, 70–74, 84, 131, 135, 149, 151, 191, 196, 247n17, 250n59, 259n80; United States and, 139, 142, 148, 151, 156; US Supreme Court and, 68 cotton, 41, 49, 246n5 courts: appeals and, 26–27, 72, 113, 139, 143, 155–56, 261n18; arbitration and, 180–82 (see also arbitration); Belize and, 23–24, 27–29, 126, 230, 261n21; Canada and, 138–43, 152–57, 261n17, 261n19; capital rule and, 206–7, 211–18, 221–24, 227, 230; cease and desist orders and, 113; certiorari writ and, 261n18; cloning legal persons and, 58, 68–70, 73–76, 247n24; code masters and, 159–64, 168–73, 177, 180–82; coding land and, 23–34, 38–45, 244n63; Common Pleas and, 32; Comprehensive Economic and Trade Agreement (CETA) and, 156–57; digital code and, 187, 204; discovery doctrine and, 34–35; empire of law and, 7–8, 12, 15–20; equity rule and, 31–32; European Court of Justice and, 70, 156; first-mover advantage and, 214–15; genetics and, 109–16, 127, 211, 214; global code and, 133, 136, 138–46, 150, 152–56, 261n18, 261n21, 262n45; Ibanez case and, 95–97; Indian Removal Act and, 34; indigenous rights and, 126; Inns of Court and, 242n29; International Court of Justice and, 125, 146; ISDA and, 146; jingle rule, 247n24; King’s Council and, 27, 31; landowners and, 38–39; minting debt and, 87, 90–91, 96–98, 104, 252n31; nature’s code and, 110–16; patents and, 120; plaintiffs and, 32, 58, 69, 113, 142, 214, 265n5, 275n17; Privy Council and, 27–29, 126; property and, 17, 23–28, 30, 38–39, 43–44, 96–97, 126, 136, 140, 143, 159–60, 172, 214–15, 218, 262; Star Chamber and, 31; sunset provisions and, 76; trade secrets and, 127–31; tribunals and, 18, 136–43, 146, 152, 155–57, 261n21, 264n70; US Supreme Court and, 34, 68, 110–13, 116, 127, 211, 214 credit cooperatives, 93–95 credit default swaps (CDS), 190–91, 271nn17–19 credit derivatives, 78, 145, 165, 227 Crédit Mobilier, 102–6 creditors: bailouts and, 55, 62, 64, 104–5, 151, 226, 247n17; capital rule and, 206–7, 211, 216; cloning legal persons and, 47– 48, 51, 54–67, 71, 73, 75, 246n16, 247n24; code masters and, 158–59, 168; coding land and, 24, 30, 35–45; Debt Recovery Act and, 39–40; digital code and, 187–88, 202; empire of law and, 3, 13–16, 20; eviction and, 41, 233; global code and, 144, 147–50, 262n41, 262n45; landlords and, 206–7; Lehman Brothers and, 61, 63–64, 71, 73, 103; limited liability and, 51, 53–54, 60–61, 63, 99, 254n49; lobbying by, 207; minting debt and, 77–79, 88–89, 92–93, 95, 103–5, 107; reciprocal claims and, 262n41; Roman law and, 54; shareholders and, 14, 48, 55–56, 60–67, 71, 104, 168, 202, 246n16; shielding assets from, 14, 20, 47–48, 54– 61, 63, 65, 67, 71, 107, 247n20; Statute of Enrollments and, 44; Statute of Uses and, 44; tort, 55, 59; trade secrets and, 128 Crick, Francis, 108–10 Critique of Rights (Menke), 209, 231 cryptocurrencies, 15, 192, 196–203, 238n53, 270n4, 273n43, 274n57 debt, ix; bills of exchange and, 57, 78, 88–92, 108, 198–99, 252n31; capital rule and, 206–7, 209, 219, 228; cloning legal persons and, 47–53, 56, 59–60, 67, 73–74; code masters and, 158, 167, 174; coding land and, 30, 35–42; convertibility and, 3, 15, 77–78, 87–91; credit cooperatives and, 93–95; Crédit Mobilier and, 102–6; creditors and, 3, indeX 13 (see also creditors); default and, 14, 35–36, 38, 42, 56, 62, 81–83, 88–89, 92, 96–97, 100, 102, 105, 137, 146–48, 151, 153, 170, 174, 180, 187, 190, 223, 233, 262n45; derivatives and, 78, 81, 86, 91; digital code and, 187, 190, 198–203; empire of law and, 3, 13–16, 20–21; foreclosure and, 39, 95–98, 253n44; global code and, 144, 147, 149–50, 262n41; Kleros clones and, 79, 86, 98–100, 107, 135, 165; minting, 77–107 (see also minting debt); NC2 and, 79–87, 94, 98–100, 106–7, 135, 251n4, 251n19; notes and, 78, 88–92, 98, 108, 198–200, 202; private money and, 86, 89, 92, 101–7, 147, 202; regulation and, 85, 90–91, 99–100, 103–7, 251n6, 255n73; risk and, 78–87, 90–95, 98–100, 104–5, 251n6, 251n19; securitization and, 78–86, 91–95, 98–101, 251n11, 251n13, 253n41; state money and, 77–78, 88–93, 106; unsecured, 79 Debt Recovery Act, 39–40 Deposit Trust Corporation, 254n49 derivatives: Bank for International Settlement (BIS) and, 149–50; bankruptcy and, 144–52; capital rule and, 211, 227; collateralized debt obligations (CDOs) and, 87, 99–101, 108, 165, 211, 254n53; comeback of, 262n36; complex credit, 165; digital code and, 189, 202; empire of law and, 5, 8; Financial Stability Board (FSB) and, 150–51; global code and, 143–53, 262n36, 263n49; International Swaps and Derivatives Association (ISDA) and, 145–53, 261n31, 271n18; Lehman Brothers and, 63; Loan Market Association (LMA) and, 262n32; Master Agreement (MA) and, 146–47, 150–51, 153; minting debt and, 78, 81, 86, 91; paving way for, 143–52; PRIME and, 146; safe harbors for, 263n49; transnational, 150–51 De Soto, Hernando, 14 digital autonomous organizations (DAO), 194–97, 272n29, 272n30, 272n33 digital code: arbitration and, 190, 204; assets and, 187–94, 197–204; autonomy and, 194–97; Bitcoin and, 197–202; blockchains and, 184, 187–90, 192, 195, 197–98, 203–4, 270n2; bugs and, 185, 188, 196; capitalism and, 199–200; capital rule and, 205, 208–9, 212, 216, 221–23; “code is law” and, 183, 196; 285 coercive power and, 187, 193; collateral and, 187, 190–91, 271n19; common law and, 271n13; contracts and, 183–92, 195, 198, 203, 271n13, 271n17, 271n18, 272n32; convertibility and, 183, 193, 199; corporate law and, 185, 189, 196, 202; courts and, 187, 204; creditors and, 187–88, 202; debt and, 187, 190, 198–203; derivatives and, 189, 202; durability and, 183, 193; elitism and, 186; enclosure and, 183, 203; enforcement and, 187, 190, 203; exogenous shocks and, 188; hierarchy and, 185–86, 201–2; immutable ledgers and, 188–90; investment and, 195–97, 200–202, 272n33; knowledge and, 183; lawyers and, 183–86, 188, 204; legal code and, 183–90, 194, 197, 203–4; legal entities and, 195; Lehman Brothers and, 190; LIBOR and, 190; Marxism and, 185; as meritocracy, 186; mining and, 200– 201; patents and, 203–4; priority rights and, 193; private code and, 198; private money and, 198–99, 202; property and, 184–86, 191–94, 198, 203–4, 272n28; realists and, 184–86; reform and, 273n46; regulation and, 185–86, 190, 271n17, 272n30; replacing law by, 183–84; residual rights and, 191–92; scalability and, 184; shareholders and, 195–96, 202; state money and, 198–203; state power and, 184, 193, 197; Szabo on, 192–93, 198; United States and, 202; utopists and, 184; wealth and, 198, 200 discovery doctrine, 34–35 dividends, 11, 53, 61–62, 103 DNA (deoxyribonucleic acid), 108–11, 114 Drahos, Peter, 124 dry exchange, 90 Du Pont, 124 durability: capital rule and, 211, 229, 233; cloning legal persons and, 47, 54–55; code masters and, 159, 161, 182; coding land and, 24, 39, 42–43, 46; digital code and, 183, 193; empire of law and, 3–5, 11, 13–15, 19, 21; intangible capital and, 117; minting debt and, 78 Dutch East India Company (VOC), 65–67, 196 East Asian Financial Crisis, 105 Economist, The (magazine), 37 Edward III, King of England, 118 Egypt, 133 286 indeX Eichengreen, Barry, 240n64 elephant curve, 1, 8 Eli Lilly, 138–43, 152–55, 261n17, 261n19 elitism: capital rule and, 218; cloning legal persons and, 66, 75; code masters and, 158, 162, 164, 175–77; coding land and, 8, 40–41, 75, 158, 164, 254n55; digital code and, 186; empire of law and, 2, 8; global code and, 133; gold coins and, 254n55; Goldman Sachs and, 175; Lehman Brothers and, 175; minting debt and, 85, 254n55; Roman law and, 132–33; WASPs and, 176 Elizabeth I, Queen of England, 32, 119 empire of law: arbitration and, 15, 18; bankruptcy and, 3, 13–14, 16, 21; capitalism and, 2, 4, 8, 10–14, 17–21, 238n44; coercive power and, 4, 7, 15–21, 239n60; collateral and, 3, 7, 11–13, 16, 21, 238n49; common law and, 5, 8; contracts and, 2–4, 7–8, 13, 15–16, 21, 238n48; convertibility and, 3–4, 11, 13, 15, 19; corporate law and, 3, 5, 8, 11, 13, 21, 238n54; courts and, 7–8, 12, 15–20; creditors and, 3, 13–16, 20; debt and, 3, 13–16, 20–21; derivatives and, 5, 8; durability and, 3–5, 11, 13–15, 19, 21; elephant curve and, 1, 8; elitism and, 2, 8; enforcement and, 2, 9, 12, 16–19, 239n60; enigma of capital and, 9–13; globalization and, 2; growth and, 1, 4, 8, 20, 235n10; inequality and, 1–3, 6, 21–22, 235n9, 240n69, 240n70; inheritance and, 238n48; intangible capital and, 13; investment and, 12, 14, 16; labor and, 2, 9–11, 237n37; law’s guiding hand and, 6–9; lawyers and, 3–4, 6, 8, 15, 19–20, 22, 165, 236n26; legal attributes and, 13–15; legal code and, 2–15, 19–22; legal entities and, 14; legal norms and, 16–17; legal structures and, 4, 6, 9, 18, 21; Marxism and, 2, 9–11, 22; monopolies and, 17; mortgages and, 13–15; patents and, 11; priority rights and, 13–14, 16, 18; private law and, 20–21; property and, 1–5, 11–14, 17, 19, 21, 238n44, 238n48, 238n50, 239n56, 240n68; reform and, 1; regulation and, 7; risk and, 14, 17; selfinterest and, 6, 8–9, 18, 232, 236n18; shielding and, 3, 14, 20, 22; slavery and, 11–12, 237n38, 237n40; state power and, 4, 14–19; universality and, 3–4, 11, 13–14, 15, 19, 21; wealth and, 1–8, 12–14, 17–22 enclosure: capital rule and, 229; coding land and, 229; digital code and, 183, 203; intangible capital and, 117, 256n14; knowledge and, 35, 108–9, 115, 117, 131, 183; nature’s code and, 109–12, 115; property and, 29–35, 39, 229; trade secrets and, 131 Enclosure Acts, 29–30, 242n22 enforcement: capital rule and, 210, 220, 223; code masters and, 168, 180; contract, 2, 16, 203; digital code and, 187, 190, 203; empire of law and, 2, 9, 12, 16–19, 239n60; global code and, 134, 139–40, 147, 152, 154; International Court of Justice and, 125; law, 16–19, 125, 152, 154, 168, 180, 187, 220, 259n80; minting debt and, 88; priority rights and, 16; trade secrets and, 130; World Trade Organization (WTO) and, 125 Engels, Friedrich, 185 English law.


pages: 154 words: 47,880

The System: Who Rigged It, How We Fix It by Robert B. Reich

"World Economic Forum" Davos, Adam Neumann (WeWork), affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Bernie Madoff, Bernie Sanders, Big Tech, Boeing 737 MAX, business cycle, Carl Icahn, clean water, collective bargaining, Cornelius Vanderbilt, corporate governance, corporate raider, corporate social responsibility, Credit Default Swap, crony capitalism, cryptocurrency, Donald Trump, ending welfare as we know it, financial deregulation, Glass-Steagall Act, Gordon Gekko, green new deal, Greta Thunberg, immigration reform, income inequality, independent contractor, Jeff Bezos, job automation, junk bonds, London Whale, Long Term Capital Management, market fundamentalism, mass incarceration, Michael Milken, mortgage debt, Occupy movement, opioid epidemic / opioid crisis, Paris climate accords, peak TV, Ponzi scheme, race to the bottom, Robert Bork, Ronald Reagan, Savings and loan crisis, shareholder value, Sheryl Sandberg, stock buybacks, too big to fail, trickle-down economics, union organizing, WeWork, women in the workforce, working poor, zero-sum game

But then something awkward happened. In the spring of 2012 an unassuming trader in JPMorgan’s London office named Bruno Iksil accumulated such a large position on an index based on the creditworthiness of more than one hundred companies that he distorted the market. The insurance he was selling (in the form of credit-default swaps) became cheaper than the individual companies on the index. Betting that the imbalance had to correct itself at some point, hedge funds saw an opportunity to make money by taking the other side of the trade. But instead of unwinding the position and taking losses, JPMorgan’s London team added to it.


pages: 624 words: 127,987

The Personal MBA: A World-Class Business Education in a Single Volume by Josh Kaufman

Albert Einstein, Alvin Toffler, Atul Gawande, Black Swan, Blue Ocean Strategy, business cycle, business process, buy low sell high, capital asset pricing model, Checklist Manifesto, cognitive bias, correlation does not imply causation, Credit Default Swap, Daniel Kahneman / Amos Tversky, David Heinemeier Hansson, David Ricardo: comparative advantage, Dean Kamen, delayed gratification, discounted cash flows, Donald Knuth, double entry bookkeeping, Douglas Hofstadter, Dunning–Kruger effect, en.wikipedia.org, Frederick Winslow Taylor, George Santayana, Gödel, Escher, Bach, high net worth, hindsight bias, index card, inventory management, iterative process, job satisfaction, Johann Wolfgang von Goethe, Kaizen: continuous improvement, Kevin Kelly, Kickstarter, Lao Tzu, lateral thinking, loose coupling, loss aversion, Marc Andreessen, market bubble, Network effects, Parkinson's law, Paul Buchheit, Paul Graham, place-making, premature optimization, Ralph Waldo Emerson, rent control, scientific management, side project, statistical model, stealth mode startup, Steve Jobs, Steve Wozniak, subscription business, systems thinking, telemarketer, the scientific method, time value of money, Toyota Production System, tulip mania, Upton Sinclair, Vilfredo Pareto, Walter Mischel, Y Combinator, Yogi Berra

Investment banks and financial firms like Goldman Sachs, JPMorgan Chase, and Lehman Brothers made a practice of buying “credit default swaps,” a form of financial Insurance, from other large firms. If a highly Leveraged deal went south, these investment banks thought the Insurance they had purchased would protect them from multimillion-dollar losses, so they took on more and more Leverage, increasing their risk exposure. When the housing market collapsed and the banks started losing money on the mortgage securities they held, they tried calling in their credit default swaps. Lo and behold, the other banks they had purchased the swaps from had also lost a huge amount of money on mortgage-backed securities and couldn’t honor the obligations.


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", 3Com Palm IPO, Alan Greenspan, Albert Einstein, asset allocation, Bear Stearns, beat the dealer, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, book value, Brownian motion, buy and hold, buy low sell high, caloric restriction, caloric restriction, carried interest, Chuck Templeton: OpenTable:, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, Garrett Hardin, George Santayana, German hyperinflation, Glass-Steagall Act, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Bogle, John Meriwether, John Nash: game theory, junk bonds, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, Mason jar, merger arbitrage, Michael Milken, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, PalmPilot, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, power law, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, risk-adjusted returns, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stock buybacks, stocks for the long run, survivorship bias, tail risk, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Tragedy of the Commons, uptick rule, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

Hundreds of billions of dollars’ worth of CMOs were sold to investors worldwide. The idea was so good that it was expanded to CDOs—collateralized debt obligations—where other kinds of debt like loans on autos or credit cards were used instead of home mortgages. Risky as these proved to be, an even more dangerous security, the credit default swap, or CDS, appeared on the scene, to the unconcern of sleeping regulators. A CDS is essentially an insurance policy that a lender can purchase to protect himself against a default by the borrower. Typically the insurance is bought for a certain number of years for a fixed annual payment. For instance, on the $320,000 loan to your home-buying friend, you might be worried about a default in the next five years so, if it were available, you might purchase insurance for the period at, say, $1,600 per year, or 0.5 percent of the initial loan amount.

For instance, on the $320,000 loan to your home-buying friend, you might be worried about a default in the next five years so, if it were available, you might purchase insurance for the period at, say, $1,600 per year, or 0.5 percent of the initial loan amount. Trillions of dollars’ worth of these credit default swaps were issued, and began trading like any other security. To buy or sell these contracts, you didn’t have to own the debt the CDS insured. That in itself wasn’t the problem, since the financial markets are simply one big casino, though one with economic benefits, and all investment positions are equivalent to bets.


pages: 497 words: 143,175

Pivotal Decade: How the United States Traded Factories for Finance in the Seventies by Judith Stein

1960s counterculture, accelerated depreciation, activist lawyer, affirmative action, airline deregulation, Alan Greenspan, anti-communist, Ayatollah Khomeini, barriers to entry, Berlin Wall, blue-collar work, Bretton Woods, business cycle, capital controls, centre right, collective bargaining, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, desegregation, do well by doing good, Dr. Strangelove, energy security, Fall of the Berlin Wall, falling living standards, feminist movement, financial deregulation, floating exchange rates, full employment, Glass-Steagall Act, Gunnar Myrdal, guns versus butter model, Ida Tarbell, income inequality, income per capita, intermodal, invisible hand, knowledge worker, laissez-faire capitalism, Les Trente Glorieuses, liberal capitalism, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, Martin Wolf, new economy, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, oil shock, open economy, Paul Samuelson, payday loans, post-industrial society, post-oil, price mechanism, price stability, Ralph Nader, RAND corporation, reserve currency, Robert Gordon, Robert Solow, Ronald Reagan, Savings and loan crisis, Simon Kuznets, strikebreaker, three-martini lunch, trade liberalization, union organizing, urban planning, urban renewal, War on Poverty, Washington Consensus, working poor, Yom Kippur War

It would complete its wish list by obtaining the Financial Services Modernization Act in 1999, which swept aside key provisions of the Glass-Steagall Act of 1933. The new law removed the last firewalls among commercial banks, insurance companies, securities firms, and investment banks. The following year the president signed the Commodity Futures Modernization Act, which exempted many financial products, like credit default swaps, from government regulation. This agenda was propelled by the increasing influence of wealth on public policy. In a study of congressional elections of the late 1990s, scholars found that 81 percent of donors earned more than $100,000 a year and only 5 percent earned less than $50,000.87 Clinton could not enjoy the dot.com prosperity.

The industry’s share of corporate profits rose from 10 percent in the early 1980S to 40 percent in 2007.109 Almost a quarter of the Forbes four hundred richest people in 2006 owed their fortunes to finance, compared with less than a tenth in 1982.110 The financial industry’s agenda—deregulation, free trade, and low taxation— has dominated the nation during the past thirty years.111 The new financial instruments, like the credit default swaps, were more like casino wagers than insurance against risk. They were ways of making high returns in an era of low interest rates. And they nearly took the system down. In October 2008 “the world [was] on the edge,” in the words of the Economist magazine, or on “the edge of the abyss,” in the language of the New York Times’s Krugman.112 The crisis spread to Europe and Asia— everywhere.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

"there is no alternative" (TINA), "World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, barriers to entry, battle of ideas, behavioural economics, Berlin Wall, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Great Leap Forward, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low interest rates, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Shiller, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

It was willful neglect that central bankers, in Europe and America, failed to take this into account.35 CONSEQUENCES OF CAPTURE Every aspect of central bank policy, both in Europe and America, in the run-up to the global financial and the euro crises, and in their aftermath, reflected the capture of the central bank by the financial sector—with perhaps the most dramatic manifestations occurring in the midst of the crises themselves. In 2012, Greece needed to restructure its bonds. Prudent banks had bought credit default swaps (CDSs) as insurance against a default in the bonds they owned. A CDS can provide the bondholder with a payment equal to the loss he would otherwise face if there is a default. When bonds are restructured, new bonds are issued in exchange for the old. The new bonds typically stretch out the repayment period, but there is also a write-down, with the nominal value of the new bonds markedly lower than that of the old.36 If this happened, the CDSs would make up for the losses.

., 266 Camdessus, Michel, 314 campaign contributions, 195, 355 Canada, 96 early 1990s expansion of, 209 in NAFTA, xiv railroad privatization in, 55 tax system in, 191 US’s free trade with, 45–46, 47 capital, 76–77 bank, 284–85 human, 78, 137 return to, 388 societal vs. physical, 77–78 tax on, 356 unemployment increased by, 264 capital adequacy standards, 152 capital budget, 245 capital controls, 389–90 capital flight, 126–34, 217, 354, 359 austerity and, 140 and labor flows, 135 capital flows, 14, 15, 25, 26, 27–28, 40, 116, 125, 128, 131, 351 economic volatility exacerbated by, 28, 274 and foreign ownership, 195 and technology, 139 capital inflows, 110–11 capitalism: crises in, xviii, 148–49 inclusive, 317 capital requirements, 152, 249, 378 Caprio, Gerry, 387 capture, 158–60 carbon price, 230, 260, 265, 368 cash, 39 cash flow, 194 Catalonia, xi CDU party, 314 central banks, 59, 354, 387–88 balance sheets of, 386 capture of, 158–59 credit auctions by, 282–84 credit creation by, 277–78 expertise of, 363 independence of, 157–63 inequality created by, 154 inflation and, 153, 166–67 as lender of last resort, 85, 362 as political institutions, 160–62 regulations and, 153 stability and, 8 unemployment and, 8, 94, 97, 106, 147, 153 CEO compensation, 383 Chapter 11, 259–60, 291 childhood poverty, 72 Chile, 55, 152–53 China, 81, 98, 164, 319, 352 exchange-rate policy of, 251, 254, 350–51 global integration of, 49–50 low prices of, 251 rise of, 75 savings in, 257 trade surplus of, 118, 121, 350–52 wages controlled in, 254 as world’s largest economy, 318, 327 chits, 287–88, 290, 299–300, 387, 388–389 Citigroup, 355 climate change, 229–30, 251, 282, 319 Clinton, Bill, xiv, xv, 187 closing hours, 220 cloves, 230 cognitive capture, 159 Cohesion Fund, 243 Cold War, 6 collateral, 364 collective action, 41–44, 51–52 and inequality, 338 and stabilization, 246 collective bargaining, 221 collective goods, 40 Common Agricultural Policy, 338 common regulatory framework, 241 communism, 10 Community Reinvestment Act (CRA), 360, 382 comparative advantage, 12, 171 competition, 12 competitive devaluation, 104–6, 254 compromise, 22–23 confidence, 95, 200–201, 384 in banks, 127 in bonds, 145 and structural reforms, 232 and 2008 crisis, 280 confirmation bias, 309, 335 Congress, US, 319, 355 connected lending, 280 connectedness, 68–69 Connecticut, GDP of, 92 Constitutional Court, Greek, 198 consumption, 94, 278 consumption tax, 193–94 contract enforcement, 24 convergence, 13, 92–93, 124, 125, 139, 254, 300–301 convergence criteria, 15, 87, 89, 96–97, 99, 123, 244 copper mines, 55 corporate income tax, 189–90, 227 corporate taxes, 189–90, 227, 251 corporations, 323 regulations opposed by, xvi and shutdown of Greek banks, 229 corruption, 74, 112 privatization and, 194–95 Costa, António, 332 Council of Economic Advisers, 358 Council of State, Greek, 198 countercyclical fiscal policy, 244 counterfactuals, 80 Countrywide Financial, 91 credit, 276–85 “divorce”’s effect on, 278–79 excessive, 250, 274 credit auctions, 282–84 credit bubbles, 122–123 credit cards, 39, 49, 153 credit creation, 248–50, 277–78, 386 by banks, 280–82 domestic control over, 279–82 regulation of, 277–78 credit default swaps (CDSs), 159–60 crisis policy reforms, 262–67 austerity to growth, 263–65 debt restructuring and, 265–67 Croatia, 46, 331, 338 currency crises, 349 currency pegs, xii current account, 333–34 current account deficits, 19, 88, 108, 110, 120–121, 221, 294 and exit from euro, 273, 285–89 see also trade deficit Cyprus, 16, 30, 140, 177, 331, 386 capital controls in, 390 debt-to-GDP ratio of, 231 “haircut” of, 350, 367 Czech Republic, 46, 331 debit cards, 39, 49 debtors’ prison, 204 debt restructuring, 201, 203–6, 265–67, 290–92, 372, 390 of private debt, 291 debts, xx, 15, 93, 96, 183 corporate, 93–94 crisis in, 110–18 in deflation, xii and exit from eurozone, 273 with foreign currency, 115–18 household, 93–94 increase in, 18 inherited, 134 limits of, 42, 87, 122, 141, 346, 367 monetization of, 42 mutualization of, 242–43, 263 place-based, 134, 242 reprofiling of, 32 restructuring of, 259 debt-to-GDP ratio, 202, 210–11, 231, 266, 324 Declaration of Independence, 319 defaults, 102, 241, 338, 348 and debt mutualization, 243 deficit fetishism, 96 deficits, fiscal, xx, 15, 20, 93, 96, 106, 107–8, 122, 182, 384 and balanced-budget multiplier, 188–90, 265 constitutional amendment on, 339 and exit from euro, 273, 289–90 in Greece, 16, 186, 215, 233, 285–86, 289 limit of, 42, 87, 94–95, 122, 138, 141, 186, 243, 244, 265, 346, 367 primary, 188 problems financing, 110–12 structural, 245 deficits, trade, see trade deficits deflation, xii, 147, 148, 151, 166, 169, 277, 290 Delors, Jacques, 7, 332 democracy, lack of faith in, 312–14 Democracy in America (Tocqueville), xiii democratic deficit, 26–27, 35, 57–62, 145 democratic participation, xix Denmark, 45, 307, 313, 331 euro referendum of, 58 deposit insurance, 31, 44, 129, 199, 301, 354–55, 386–87 common in eurozone, 241, 242, 246, 248 derivatives, 131, 355 Deutsche Bank, 283, 355 devaluation, 98, 104–6, 254, 344 see also internal devaluation developing countries, and Washington Consensus, xvi discretion, 262–63 discriminatory lending practices, 283 disintermediation, 258 divergence, 15, 123, 124–44, 255–56, 300, 321 in absence of crisis, 128–31 capital flight and, 126–34 crisis policies’ exacerbation of, 140–43 free mobility of labor and, 134–36, 142–44, 242 in public investment, 136–38 reforms to prevent, 243 single-market principle and, 125–26 in technology, 138–39 in wealth, 139–40 see also capital flows; labor movement diversification, of production, 47 Dodd-Frank Wall Street Reform and Consumer Protection Act, 355 dollar peg, 50 downsizing, 133 Draghi, Mario, 127, 145, 156, 158, 165, 269, 363 bond market supported by, 127, 200, 201 Drago, Luis María, 371 drug prices, 219 Duisenberg, Willem Frederik “Wim,” 251 Dynamic Stochastic Equilibrium model, 331 East Asia, 18, 25, 95, 102–3, 112, 123, 202, 364, 381 convergence in, 138 Eastern Europe, 10 Economic Adjustment Programme, 178 economic distortions, 191 economic growth, xii, 34 confidence and, 232 in Europe, 63–64, 69, 73–74, 74, 75, 163 lowered by inequality, 212–13 reform of, 263–65 and structural reforms, 232–35 economic integration, xiv–xx, 23, 39–50 euro and, 46–47 political integration vs., 51–57 single currency and, 45–46 economic rents, 226, 280 economics, politics and, 308–18 economic security, 68 economies of scale, 12, 39, 55, 138 economists, poor forecasting by, 307 education, 20, 76, 344 investment in, 40, 69, 137, 186, 211, 217, 251, 255, 300 electricity, 217 electronic currency, 298–99, 389 electronics payment mechanism, 274–76, 283–84 emigration, 4, 68–69 see also migration employment: central banks and, 8, 94, 97 structural reforms and, 257–60 see also unemployment Employment Act (1946), 148 energy subsidies, 197 Enlightenment, 3, 318–19 environment, 41, 257, 260, 323 equality, 225–26 equilibrium, xviii–xix Erasmus program, 45 Estonia, 90, 331, 346 euro, xiv, 325 adjustments impeded by, 13–14 case for, 35–39 creation of, xii, 5–6, 7, 10, 333 creation of institutions required by, 10–11 divergence and, see divergence divorce of, 272–95, 307 economic integration and, 46–47, 268 as entailing fixed exchange rate, 8, 42–43, 46–47, 86–87, 92, 93, 94, 102, 105, 143, 193, 215–16, 240, 244, 249, 252, 254, 286, 297 as entailing single interest rate, 8, 85–88, 92, 93, 94, 105, 129, 152, 240, 244, 249 and European identification, 38–39 financial instability caused by, 131–32 growth promised by, 235 growth slowed by, 73 hopes for, 34 inequality increased by, xviii interest rates lowered by, 235 internal devaluation of, see internal devaluation literature on, 327–28 as means to end, xix peace and, 38 proponents of, 13 referenda on, 58, 339–40 reforms needed for, xii–xiii, 28–31 risk of, 49–50 weakness of, 224 see also flexible euro Eurobond, 356 euro crisis, xiii, 3, 4, 9 catastrophic consequences of, 11–12 euro-euphoria, 116–17 Europe, 151 free trade area in, 44–45 growth rates in, 63–64, 69, 73–74, 74, 75, 163 military conflicts in, 196 social models of, 21 European Central Bank (ECB), 7, 17, 80, 112–13, 117, 144, 145–73, 274, 313, 362, 368, 380 capture of, 158–59 confidence in, 200–201 corporate bonds bought by, 141 creation of, 8, 85 democratic deficit and, 26, 27 excessive expansion controlled by, 250 flexibility of, 269 funds to Greece cut off by, 59 German challenges to, 117, 164 governance and, 157–63 inequality created by, 154–55 inflation controlled by, 8, 25, 97, 106, 115, 145, 146–50, 151, 163, 165, 169–70, 172, 250, 256, 266 interest rates set by, 85–86, 152, 249, 302, 348 Ireland forced to socialize losses by, 134, 156, 165 new mandate needed by, 256 as political institution, 160–62 political nature of, 153–56 quantitative easing opposed by, 151 quantitative easing undertaken by, 164, 165–66, 170, 171 regulations by, 249, 250 unemployment and, 163 as unrepresentative, 163 European Commission, 17, 58, 161, 313, 332 European Court of Human Rights, 45 European Economic Community (EEC), 6 European Exchange Rate Mechanism (ERM), 30, 335 European Exchange Rate Mechanism II (ERM II), 336 European Free Trade Association, 44 European Free Trade Association Court, 44 European Investment Bank (EIB), 137, 247, 255, 301 European Regional Development Fund, 243 European Stability Mechanism, 23, 246, 357 European Union: budget of, 8, 45, 91 creation of, 4 debt and deficit limits in, 87–88 democratic deficit in, 26–27 economic growth in, 215 GDP of, xiii and lower rates of war, 196 migration in, 90 proposed exit of UK from, 4 stereotypes in, 12 subsidiarity in, 8, 41–42, 263 taxes in, 8, 261 Euro Summit Statement, 373 eurozone: austerity in, see austerity banking union in, see banking union counterfactual in, 235–36 double-dip recessions in, 234–35 Draghi’s speech and, 145 economic integration and, xiv–xx, 23, 39–50, 51–57 as flawed at birth, 7–9 framework for stability of, 244–52 German departure from, 32, 292–93 Greece’s possible exit from, 124 hours worked in, 71–72 lack of fiscal policy in, 152 and move to political integration, xvi, 34, 35, 51–57 Mundell’s work on dangers of, 87 policies of, 15–17 possible breakup of, 29–30 privatization avoided in, 194 saving, 323–26 stagnant GDP in, 12, 65–68, 66, 67 structure of, 8–9 surpluses in, 120–22 theory of, 95–97 unemployment in, 71, 135, 163, 177–78, 181, 331 working-age population of, 70 eurozone, proposed structural reforms for, 239–71 common financial system, see banking union excessive fiscal responsibility, 163 exchange-rate risks, 13, 47, 48, 49–50, 125, 235 exchange rates, 80, 85, 288, 300, 338, 382, 389 of China, 251, 254, 350–51 and competitive devaluation, 105–6 after departure of northern countries, 292–93 of euro, 8, 42–43, 46–47, 86–87, 92, 93, 94, 102, 105, 215–16, 240, 244, 249, 252, 254, 286, 297 flexible, 50, 248, 349 and full employment, 94 of Germany, 254–55, 351 gold and, 344–45 imports and, 86 interest rates and, 86 quantitative easing’s lowering of, 151 real, 105–6 and single currencies, 8, 42–43, 46–47, 86–87, 92, 93, 94, 97–98 stabilizing, 299–301 and trade deficits, 107, 118 expansionary contractions, 95–96, 208–9 exports, 86, 88, 97–99, 98 disappointing performance of, 103–5 external imbalances, 97–98, 101, 109 externalities, 42–43, 121, 153, 301–2 surpluses as, 253 extremism, xx, 4 Fannie Mae, 91 farmers, US, in deflation, xii Federal Deposit Insurance Corporation (FDIC), 91 Federal Reserve, US, 349 alleged independence of, 157 interest rates lowered by, 150 mandate of, 8, 147, 172 money pumped into economy by, 278 quantitative easing used by, 151, 170 reform of, 146 fiat currency, 148, 275 and taxes, 284 financial markets: lobbyists from, 132 reform of, 214, 228–29 short-sighted, 112–13 financial systems: necessity of, xix real economy of, 149 reform of, 257–58 regulations needed by, xix financial transaction system, 275–76 Finland, 16, 81, 122, 126, 292, 296, 331, 343 growth in, 296–97 growth rate of, 75, 76, 234–35 fire departments, 41 firms, 138, 186–87, 245, 248 fiscal balance: and cutting spending, 196–98 tax revenue and, 190–96 Fiscal Compact, 141, 357 fiscal consolidation, 310 fiscal deficits, see deficits, fiscal fiscal policy, 148, 245, 264 in center of macro-stabilization, 251 countercyclical, 244 in EU, 8 expansionary, 254–55 stabilization of, 250–52 fiscal prudence, 15 fiscal responsibility, 163 flexibility, 262–63, 269 flexible euro, 30–31, 272, 296–305, 307 cooperation needed for, 304–5 food prices, 169 forbearance, 130–31 forecasts, 307 foreclosure proposal, 180 foreign ownership, privatization and, 195 forestry, 81 France, 6, 14, 16, 114, 120, 141, 181–82, 331, 339–40, 343 banks of, 202, 203, 231, 373 corporate income tax in, 189–90 euro creation regretted in, 340 European Constitution referendum of, 58 extreme right in, xi growth in, 247 Freddie Mac, 91 Freefall (Stiglitz), 264, 335 free mobility of labor, xiv, 26, 40, 125, 134–36, 142–44, 242 Friedman, Milton, 151, 152–53, 167, 339 full employment, 94–97, 379 G-20, 121 gas: import of, 230 from Russia, 37, 81, 93 Gates Foundation, 276 GDP-indexed bonds, 267 German bonds, 114, 323 German Council of Economic Experts, 179, 365 Germany, xxi, 14, 30, 65, 108, 114, 141, 181–82, 207, 220, 286, 307, 331, 343, 346, 374 austerity pushed by, 186, 232 banks of, 202, 203, 231–32, 373 costs to taxpayers of, 184 as creditor, 140, 187, 267 debt collection by, 117 debt in, 105 and debt restructuring, 205, 311 in departure from eurozone, 32, 292–93 as dependent on Russian gas, 37 desire to leave eurozone, 314 ECB criticized by, 164 EU economic practices controlled by, 17 euro creation regretted in, 340 exchange rate of, 254–55, 351 failure of, 13, 78–79 flexible exchange of, 304 GDP of, xviii, 92 in Great Depression, 187 growing poverty in, 79 growth of, 78, 106, 247 hours worked per worker in, 72 inequality in, 79, 333 inflation in, 42, 338, 358 internal solidarity of, 334 lack of alternative to euro seen by, 11 migrants to, 320–21, 334–35, 393 minimum wage in, 42, 120, 254 neoliberalism in, 10 and place-based debt, 136 productivity in, 71 programs designed by, 53, 60, 61, 202, 336, 338 reparations paid by, 187 reunification of, 6 rules as important to, 57, 241–42, 262 share of global employment in, 224 shrinking working-age population of, 70, 78–79 and Stability and Growth Pact, 245 and structural reforms, 19–20 “there is no alternative” and, 306, 311–12 trade surplus of, 117, 118–19, 120, 139, 253, 293, 299, 350–52, 381–82, 391 “transfer union” rejected by, 22 US loans to, 187 victims blamed by, 9, 15–17, 177–78, 309 wages constrained by, 41, 42–43 wages lowered in, 105, 333 global financial crisis, xi, xiii–xiv, 3, 12, 17, 24, 67, 73, 75, 114, 124, 146, 148, 274, 364, 387 and central bank independence, 157–58 and confidence, 280 and cost of failure of financial institutions, 131 lessons of, 249 monetary policy in, 151 and need for structural reform, 214 originating in US, 65, 68, 79–80, 112, 128, 296, 302 globalization, 51, 321–23 and diminishing share of employment in advanced countries, 224 economic vs. political, xvii failures of, xvii Globalization and Its Discontents (Stig-litz), 234, 335, 369 global savings glut, 257 global secular stagnation, 120 global warming, 229–30, 251, 282, 319 gold, 257, 275, 277, 345 Goldman Sachs, 158, 366 gold standard, 148, 291, 347, 358 in Great Depression, xii, 100 goods: free movement of, 40, 143, 260–61 nontraded, 102, 103, 169, 213, 217, 359 traded, 102, 103, 216 Gordon, Robert, 251 governance, 157–63, 258–59 government spending, trade deficits and, 107–8 gravity principle, 124, 127–28 Great Depression, 42, 67, 105, 148, 149, 168, 313 Friedman on causes of, 151 gold standard in, xii, 100 Great Malaise, 264 Greece, 14, 30, 41, 64, 81, 100, 117, 123, 142, 160, 177, 265–66, 278, 307, 331, 343, 366, 367–68, 374–75, 386 austerity opposed by, 59, 60–62, 69–70, 207–8, 392 balance of payments, 219 banks in, 200–201, 228–29, 231, 270, 276, 367, 368 blaming of, 16, 17 bread in, 218, 230 capital controls in, 390 consumption tax and, 193–94 counterfactual scenario of, 80 current account surplus of, 287–88 and debt restructuring, 205–7 debt-to-GDP ratio of, 231 debt write-offs in, 291 decline in labor costs in, 56, 103 ECB’s cutting of funds to, 59 economic growth in, 215, 247 emigration from, 68–69 fiscal deficits in, 16, 186, 215, 233, 285–86, 289 GDP of, xviii, 183, 309 hours worked per worker in, 72 inequality in, 72 inherited debt in, 134 lack of faith in democracy in, 312–13 living standards in, 216 loans in, 127 loans to, 310 migrants and, 320–21 milk in, 218, 223, 230 new currency in, 291, 300 oligarchs in, 16, 227 output per working-age person in, 70–71 past downturns in, 235–36 pensions in, 16, 78, 188, 197–98, 226 pharmacies in, 218–20 population decline in, 69, 89 possible exit from eurozone of, 124, 197, 273, 274, 275 poverty in, 226, 261, 376 primary surplus of, 187–88, 312 privatization in, 55, 195–96 productivity in, 71, 342 programs imposed on, xv, 21, 27, 60–62, 140, 155–56, 179–80, 181, 182–83, 184–85, 187–88, 190–93, 195–96, 197–98, 202–3, 205, 206, 214–16, 218–23, 225–28, 229, 230, 231, 233–34, 273, 278, 308, 309–11, 312, 315–16, 336, 338 renewable energy in, 193, 229 social capital destroyed in, 78 sovereign spread of, 200 spread in, 332 and structural reforms, 20, 70, 188, 191 tax revenue in, 16, 142, 192, 227, 367–368 tools lacking for recovery of, 246 tourism in, 192, 286 trade deficits in, 81, 194, 216–17, 222, 285–86 unemployment in, xi, 71, 236, 267, 332, 338, 342 urgency in, 214–15 victim-blaming of, 309–11 wages in, 216–17 youth unemployment in, xi, 332 Greek bonds, 116, 126 interest rates on, 4, 114, 181–82, 201–2, 323 restructuring of, 206–7 green investments, 260 Greenspan, Alan, 251, 359, 363 Grexit, see Greece, possible exit from eurozone of grocery stores, 219 gross domestic product (GDP), xvii decline in, 3 measurement of, 341 Growth and Stability Pact, 87 hedge funds, 282, 363 highways, 41 Hitler, Adolf, 338, 358 Hochtief, 367–68 Hoover, Herbert, 18, 95 human capital, 78, 137 human rights, 44–45, 319 Hungary, 46, 331, 338 hysteresis, 270 Iceland, 44, 111, 307, 354–55 banks in, 91 capital controls in, 390 ideology, 308–9, 315–18 imports, 86, 88, 97–99, 98, 107 incentives, 158–59 inclusive capitalism, 317 income, unemployment and, 77 income tax, 45 Independent Commission for the Reform of International Corporate Taxation, 376–377 Indonesia, 113, 230–31, 314, 350, 364, 378 industrial policies, 138–39, 301 and restructuring, 217, 221, 223–25 Industrial Revolution, 3, 224 industry, 89 inequality, 45, 72–73, 333 aggregate demand lowered by, 212 created by central banks, 154 ECB’s creation of, 154–55 economic performance affected by, xvii euro’s increasing of, xviii growth’s lowering of, 212 hurt by collective action, 338 increased by neoliberalism, xviii increase in, 64, 154–55 inequality in, 72, 212 as moral issue, xviii in Spain, 72, 212, 225–26 and tax harmonization, 260–61 and tax system, 191 inflation, 277, 290, 314, 388 in aftermath of tech bubble, 251 bonds and, 161 central banks and, 153, 166–67 consequences of fixation on, 149–50, 151 costs of, 270 and debt monetization, 42 ECB and, 8, 25, 97, 106, 115, 145, 146–50, 151, 163, 165, 169–70, 172, 255, 256, 266 and food prices, 169 in Germany, 42, 338, 358 interest rates and, 43–44 in late 1970s, 168 and natural rate hypothesis, 172–73 political decisions and, 146 inflation targeting, 157, 168–70, 364 information, 335 informational capital, 77 infrastructure, xvi–xvii, 47, 137, 186, 211, 255, 258, 265, 268, 300 inheritance tax, 368 inherited debt, 134 innovation, 138 innovation economy, 317–18 inputs, 217 instability, xix institutions, 93, 247 poorly designed, 163–64 insurance, 355–356 deposit, see deposit insurance mutual, 247 unemployment, 91, 186, 246, 247–48 integration, 322 interest rates, 43–44, 86, 282, 345, 354 in aftermath of tech bubble, 251 ECB’s determination of, 85–86, 152, 249, 302, 348 and employment, 94 euro’s lowering of, 235 Fed’s lowering of, 150 on German bonds, 114 on Greek bonds, 4, 114, 181–82 on Italian bonds, 114 in late 1970s, 168 long-term, 151, 200 negative, 316, 348–49 quantitative easing and, 151, 170 short-term, 249 single, eurozone’s entailing of, 8, 85–88, 92, 93, 94, 105, 129, 152, 240, 244, 249 on Spanish bonds, 114, 199 spread in, 332 stock prices increased by, 264 at zero lower bound, 106 intermediation, 258 internal devaluation, 98–109, 122, 126, 220, 255, 388 supply-side effects of, 99, 103–4 International Commission on the Measurement of Economic Performance and Social Progress, 79, 341 International Labor Organization, 56 International Monetary Fund (IMF), xv, xvii, 10, 17, 18, 55, 61, 65–66, 96, 111, 112–13, 115–16, 119, 154, 234, 289, 309, 316, 337, 349, 350, 370, 371, 381 and Argentine debt, 206 conditions of, 201 creation of, 105 danger of high taxation warnings of, 190 debt reduction pushed by, 95 and debt restructuring, 205, 311 and failure to restore credit, 201 global imbalances discussed by, 252 and Greek debts, 205, 206, 310–11 on Greek surplus, 188 and Indonesian crisis, 230–31, 364 on inequality’s lowering of growth, 212–13 Ireland’s socialization of losses opposed by, 156–57 mistakes admitted by, 262, 312 on New Mediocre, 264 Portuguese bailout of, 178–79 tax measures of, 185 investment, 76–77, 111, 189, 217, 251, 264, 278, 367 confidence and, 94 divergence in, 136–38 in education, 137, 186, 211, 217, 251, 255, 300 infrastructure in, xvi–xvii, 47, 137, 186, 211, 255, 258, 265, 268, 300 lowered by disintermediation, 258 public, 99 real estate, 199 in renewable energy, 229–30 return on, 186, 245 stimulation of, 94 in technology, 137, 138–39, 186, 211, 217, 251, 258, 265, 300 investor state dispute settlement (ISDS), 393–94 invisible hand, xviii Iraq, refugees from, 320 Iraq War, 36, 37 Ireland, 14, 16, 44, 113, 114–15, 122, 178, 234, 296, 312, 331, 339–40, 343, 362 austerity opposed in, 207 debt of, 196 emigrants from, 68–69 GDP of, 18, 231 growth in, 64, 231, 247, 340 inherited debt in, 134 losses socialized in, 134, 156–57, 165 low debt in, 88 real estate bubble in, 108, 114–15, 126 surplus in, 17, 88 taxes in, 142–43, 376 trade deficits in, 119 unemployment in, 178 irrational exuberance, 14, 114, 116–17, 149, 334, 359 ISIS, 319 Italian bonds, 114, 165, 323 Italy, 6, 14, 16, 120, 125, 331, 343 austerity opposed in, 59 GDP per capita in, 352 growth in, 247 sovereign spread of, 200 Japan, 151, 333, 342 bubble in, 359 debt of, 202 growth in, 78 quantitative easing used by, 151, 359 shrinking working-age population of, 70 Java, unemployment on, 230 jobs gap, 120 Juncker, Jean-Claude, 228 Keynes, John Maynard, 118, 120, 172, 187, 351 convergence policy suggested by, 254 Keynesian economics, 64, 95, 108, 153, 253 King, Mervyn, 390 knowledge, 137, 138–39, 337–38 Kohl, Helmut, 6–7, 337 krona, 287 labor, marginal product of, 356 labor laws, 75 labor markets, 9, 74 friction in, 336 reforms of, 214, 221 labor movement, 26, 40, 125, 134–36, 320 austerity and, 140 capital flows and, 135 see also migration labor rights, 56 Lamers, Karl, 314 Lancaster, Kelvin, 27 land tax, 191 Latin America, 10, 55, 95, 112, 202 lost decade in, 168 Latvia, 331, 346 GDP of, 92 law of diminishing returns, 40 learning by doing, 77 Lehman Brothers, 182 lender of last resort, 85, 362, 368 lending, 280, 380 discriminatory, 283 predatory, 274, 310 lending rates, 278 leverage, 102 Lichtenstein, 44 Lipsey, Richard, 27 liquidity, 201, 264, 278, 354 ECB’s expansion of, 256 lira, 14 Lithuania, 331 living standards, 68–70 loans: contraction of, 126–27, 246 nonperforming, 241 for small and medium-size businesses, 246–47 lobbyists, from financial sector, 132 location, 76 London interbank lending rate (LIBOR), 131, 355 Long-Term Refinancing Operation, 360–361 Lucas, Robert, xi Luxembourg, 6, 94, 142–43, 331, 343 as tax avoidance center, 228, 261 luxury cars, 265 Maastricht Treaty, xiii, 6, 87, 115, 146, 244, 298, 339, 340 macro-prudential regulations, 249 Malta, 331, 340 manufacturing, 89, 223–24 market failures, 48–49, 86, 148, 149, 335 rigidities, 101 tax policy’s correction of, 193 market fundamentalism, see neoliberalism market irrationality, 110, 125–26, 149 markets, limitations of, 10 Meade, James, 27 Medicaid, 91 medical care, 196 Medicare, 90, 91 Mellon, Andrew, 95 Memorandum of Agreement, 233–34 Merkel, Angela, 186 Mexico, 202, 369 bailout of, 113 in NAFTA, xiv Middle East, 321 migrant crisis, 44 migration, 26, 40, 68–69, 90, 125, 320–21, 334–35, 342, 356, 393 unemployment and, 69, 90, 135, 140 see also labor movement military power, 36–37 milk, 218, 223, 230 minimum wage, 42, 120, 254, 255, 351 mining, 257 Mississippi, GDP of, 92 Mitsotakis, Constantine, 377–78 Mitsotakis, Kyriakos, 377–78 Mitterrand, François, 6–7 monetarism, 167–68, 169, 364 monetary policy, 24, 85–86, 148, 264, 325, 345, 364 as allegedly technocratic, 146, 161–62 conservative theory of, 151, 153 in early 1980s US, 168, 210 flexibility of, 244 in global financial crisis, 151 political nature of, 146, 153–54 recent developments in theory of, 166–73 see also interest rates monetary union, see single currencies money laundering, 354 monopolists, privatization and, 194 moral hazard, 202, 203 mortgage rates, 170 mortgages, 302 multinational chains, 219 multinational development banks, 137 multinationals, 127, 223, 376 multipliers, 211–12, 248 balanced-budget, 188–90, 265 Mundell, Robert, 87 mutual insurance, 247 mutualization of debt, 242–43, 263 national development banks, 137–38 natural monopolies, 55 natural rate hypothesis, 172 negative shocks, 248 neoliberalism, xvi, 24–26, 33, 34, 98–99, 109, 257, 265, 332–33, 335, 354 on bubbles, 381 and capital flows, 28 and central bank independence, 162–63 in Germany, 10 inequality increased by, xviii low inflation desired by, 147 recent scholarship against, 24 Netherlands, 6, 44, 292, 331, 339–40, 343 European Constitution referendum of, 58 New Democracy Party, Greek, 61, 185, 377–78 New Mediocre, 264 New World, 148 New Zealand, 364 Nokia, 81, 234, 297 nonaccelerating inflation rate of unemployment (NAIRU), 379–80 nonaccelerating wage rate of unemployment (NAWRU), 379–80 nongovernmental organizations (NGOs), 276 nonperforming loans, 241 nontraded goods sector, 102, 103, 169, 213, 217, 359 North American Free Trade Agreement (NAFTA), xiv North Atlantic Treaty Organization (NATO), 196 Norway, 12, 44, 307 referendum on joining EU, 58 nuclear deterrence, 38 Obama, Barack, 319 oil, import of, 230 oil firms, 36 oil prices, 89, 168, 259, 359 oligarchs: in Greece, 16, 227 in Russia, 280 optimal currency area, 345 output, 70–71, 111 after recessions, 76 Outright Monetary Transactions program, 361 overregulate, 132 Oxfam, 72 panic of 1907, 147 Papandreou, Andreas, 366 Papandreou, George, xiv, 60–61, 184, 185, 220, 221, 226–27, 309, 312, 366, 373 reform of banks suggested by, 229 paradox of thrift, 120 peace, 34 pensions, 9, 16, 78, 177, 188, 197–98, 226, 276, 370 People’s Party, Portugal, 392 periphery, 14, 32, 171, 200, 296, 301, 318 see also specific countries peseta, 14 pharmacies, 218–20 Phishing for Phools (Akerlof and Shiller), 132 physical capital, 77–78 Pinochet, Augusto, 152–53 place-based debt, 134, 242 Pleios, George, 377 Poland, 46, 333, 339 assistance to, 243 in Iraq War, 37 police, 41 political integration, xvi, 34, 35 economic integration vs., 51–57 politics, economics and, 308–18 pollution, 260 populism, xx Portugal, 14, 16, 64, 177, 178, 331, 343, 346 austerity opposed by, 59, 207–8, 315, 332, 392 GDP of, 92 IMF bailout of, 178–79 loans in, 127 poverty in, 261 sovereign spread of, 200 Portuguese bonds, 179 POSCO, 55 pound, 287, 335, 346 poverty, 72 in Greece, 226, 261 in Portugal, 261 in Spain, 261 predatory lending, 274, 310 present discount value, 343 Price of Inequality, The (Stiglitz), 154 prices, 19, 24 adjustment of, 48, 338, 361 price stability, 161 primary deficit, 188, 389 primary surpluses, 187–88 private austerity, 126–27, 241–42 private sector involvement, 113 privatization, 55, 194–96, 369 production costs, 39, 43, 50 production function, 343 productivity, 71, 332, 348 in manufacturing, 223–24 after recessions, 76–77 programs, 17–18 Germany’s design of, 53, 60, 61, 187–88, 205, 336, 338 imposed on Greece, xv, 21, 27, 60–62, 140, 155–56, 179–80, 181, 182–83, 184–85, 187–88, 190–93, 195–96, 197–98, 202–3, 205, 206, 214–16, 218–23, 225–28, 229, 230, 231, 233–34, 273, 278, 308, 309–11, 312, 315–16, 336, 338 of Troika, 17–18, 21, 155–57, 179–80, 181, 182–83, 184–85, 187–93, 196, 202, 205, 207, 208, 214–16, 217, 218–23, 225–28, 229, 231, 233–34, 273, 278, 308, 309–11, 312, 313, 314, 315–16, 323–24, 346, 366, 379, 392 progressive automatic stabilizers, 244 progressive taxes, 248 property rights, 24 property taxes, 192–93, 227 public entities, 195 public goods, 40, 337–38 quantitative easing (QE), 151, 164, 165–66, 170–72, 264, 359, 361, 386 railroads, 55 Reagan, Ronald, 168, 209 real estate bubble, 25, 108, 109, 111, 114–15, 126, 148, 172, 250, 301, 302 cause of, 198 real estate investment, 199 real exchange rate, 105–6, 215–16 recessions, recovery from, 94–95 recovery, 76 reform, 75 theories of, 27–28 regulations, 24, 149, 152, 162, 250, 354, 355–356, 378 and Bush administration, 250–51 common, 241 corporate opposition to, xvi difficulties in, 132–33 of finance, xix forbearance on, 130–31 importance of, 152–53 macro-prudential, 249 in race to bottom, 131–34 Reinhardt, Carmen, 210 renewable energy, 193, 229–30 Republican Party, US, 319 research and development (R&D), 77, 138, 217, 251, 317–18 Ricardo, David, 40, 41 risk, 104, 153, 285 excessive, 250 risk markets, 27 Rogoff, Kenneth, 210 Romania, 46, 331, 338 Royal Bank of Scotland, 355 rules, 57, 241–42, 262, 296 Russia, 36, 264, 296 containment of, 318 economic rents in, 280 gas from, 37, 81, 93, 378 safety nets, 99, 141, 223 Samaras, Antonis, 61, 309, 377 savings, 120 global, 257 savings and loan crisis, 360 Schäuble, Wolfgang, 57, 220, 314, 317 Schengen area, 44 schools, 41, 196 Schröeder, Gerhard, 254 self-regulation, 131, 159 service sector, 224 shadow banking system, 133 shareholder capitalism, 21 Shiller, Rob, 132, 359 shipping taxes, 227, 228 short-termism, 77, 258–59 Silicon Valley, 224 silver, 275, 277 single currencies: conflicts and, 38 as entailing fixed exchange rates, 8, 42–43, 46–47, 86–87, 92, 93, 94, 97–98 external imbalances and, 97–98 and financial crises, 110–18 integration and, 45–46, 50 interest rates and, 8, 86, 87–88, 92, 93, 94 Mundell’s work on, 87 requirements for, 5, 52–53, 88–89, 92–94, 97–98 and similarities among countries, 15 trade integration vs., 393 in US, 35, 36, 88, 89–92 see also euro single-market principle, 125–26, 231 skilled workers, 134–35 skills, 77 Slovakia, 331 Slovenia, 331 small and medium-sized enterprises (SMEs), 127, 138, 171, 229 small and medium-size lending facility, 246–47, 300, 301, 382 Small Business Administration, 246 small businesses, 153 Smith, Adam, xviii, 24, 39–40, 41 social cohesion, 22 Social Democratic Party, Portugal, 392 social program, 196 Social Security, 90, 91 social solidarity, xix societal capital, 77–78 solar energy, 193, 229 solidarity fund, 373 solidarity fund for stabilization, 244, 254, 264, 301 Soros, George, 390 South Dakota, 90, 346 South Korea, 55 bailout of, 113 sovereign risk, 14, 353 sovereign spreads, 200 sovereign wealth funds, 258 Soviet Union, 10 Spain, 14, 16, 114, 177, 178, 278, 331, 335, 343 austerity opposed by, 59, 207–8, 315 bank bailout of, 179, 199–200, 206 banks in, 23, 186, 199, 200, 242, 270, 354 debt of, 196 debt-to-GDP ratio of, 231 deficits of, 109 economic growth in, 215, 231, 247 gold supply in, 277 independence movement in, xi inequality in, 72, 212, 225–26 inherited debt in, 134 labor reforms proposed for, 155 loans in, 127 low debt in, 87 poverty in, 261 real estate bubble in, 25, 108, 109, 114–15, 126, 198, 301, 302 regional independence demanded in, 307 renewable energy in, 229 sovereign spread of, 200 spread in, 332 structural reform in, 70 surplus in, 17, 88 threat of breakup of, 270 trade deficits in, 81, 119 unemployment in, 63, 161, 231, 235, 332, 338 Spanish bonds, 114, 199, 200 spending, cutting, 196–98 spread, 332 stability, 147, 172, 261, 301, 364 automatic, 244 bubble and, 264 central banks and, 8 as collective action problem, 246 solidarity fund for, 54, 244, 264 Stability and Growth Pact, 245 standard models, 211–13 state development banks, 138 steel companies, 55 stock market, 151 stock market bubble, 200–201 stock market crash (1929), 18, 95 stock options, 259, 359 structural deficit, 245 Structural Funds, 243 structural impediments, 215 structural realignment, 252–56 structural reforms, 9, 18, 19–20, 26–27, 214–36, 239–71, 307 from austerity to growth, 263–65 banking union, 241–44 and climate change, 229–30 common framework for stability, 244–52 counterproductive, 222–23 debt restructuring and, 265–67 of finance, 228–29 full employment and growth, 256–57 in Greece, 20, 70, 188, 191, 214–36 growth and, 232–35 shared prosperity and, 260–61 and structural realignment, 252–56 of trade deficits, 216–17 trauma of, 224 as trivial, 214–15, 217–20, 233 subsidiarity, 8, 41–42, 263 subsidies: agricultural, 45, 197 energy, 197 sudden stops, 111 Suharto, 314 suicide, 82, 344 Supplemental Nutrition Assistance Program (SNAP), 91 supply-side effects: in Greece, 191, 215–16 of investments, 367 surpluses, fiscal, 17, 96, 312, 379 primary, 187–88 surpluses, trade, see trade surpluses “Swabian housewife,” 186, 245 Sweden, 12, 46, 307, 313, 331, 335, 339 euro referendum of, 58 refugees into, 320 Switzerland, 44, 307 Syria, 321, 342 Syriza party, 309, 311, 312–13, 315, 377 Taiwan, 55 tariffs, 40 tax avoiders, 74, 142–43, 227–28, 261 taxes, 142, 290, 315 in Canada, 191 on capital, 356 on carbon, 230, 260, 265, 368 consumption, 193–94 corporate, 189–90, 227, 251 cross-border, 319, 384 and distortions, 191 in EU, 8, 261 and fiat currency, 284 and free mobility of goods and capital, 260–61 in Greece, 16, 142, 192, 193–94, 227, 367–68 ideal system for, 191 IMF’s warning about high, 190 income, 45 increase in, 190–94 inequality and, 191 inheritance, 368 land, 191 on luxury cars, 265 progressive, 248 property, 192–93, 227 Reagan cuts to, 168, 210 shipping, 227, 228 as stimulative, 368 on trade surpluses, 254 value-added, 190, 192 tax evasion, in Greece, 190–91 tax laws, 75 tax revenue, 190–96 Taylor, John, 169 Taylor rule, 169 tech bubble, 250 technology, 137, 138–39, 186, 211, 217, 251, 258, 265, 300 and new financial system, 274–76, 283–84 telecoms, 55 Telmex, 369 terrorism, 319 Thailand, 113 theory of the second best, 27–28, 48 “there is no alternative” (TINA), 306, 311–12 Tocqueville, Alexis de, xiii too-big-to-fail banks, 360 tourism, 192, 286 trade: and contractionary expansion, 209 US push for, 323 trade agreements, xiv–xvi, 357 trade balance, 81, 93, 100, 109 as allegedly self-correcting, 98–99, 101–3 and wage flexibility, 104–5 trade barriers, 40 trade deficits, 89, 139 aggregate demand weakened by, 111 chit solution to, 287–88, 290, 299–300, 387, 388–89 control of, 109–10, 122 with currency pegs, 110 and fixed exchange rates, 107–8, 118 and government spending, 107–8, 108 of Greece, 81, 194, 215–16, 222, 285–86 structural reform of, 216–17 traded goods, 102, 103, 216 trade integration, 393 trade surpluses, 88, 118–21, 139–40, 350–52 discouragement of, 282–84, 299–300 of Germany, 118–19, 120, 139, 253, 293, 299, 350–52, 381–82, 391 tax on, 254, 351, 381–82 Transatlantic Trade and Investment Partnership, xv, 323 transfer price system, 376 Trans-Pacific Partnership, xv, 323 Treasury bills, US, 204 Trichet, Jean-Claude, 100–101, 155, 156, 164–65, 251 trickle-down economics, 362 Troika, 19, 20, 26, 55, 56, 58, 60, 69, 99, 101–3, 117, 119, 135, 140–42, 178, 179, 184, 195, 274, 294, 317, 362, 370–71, 373, 376, 377, 386 banks weakened by, 229 conditions of, 201 discretion of, 262 failure to learn, 312 Greek incomes lowered by, 80 Greek loan set up by, 202 inequality created by, 225–26 poor forecasting of, 307 predictions by, 249 primary surpluses and, 187–88 privatization avoided by, 194 programs of, 17–18, 21, 155–57, 179–80, 181, 182–83, 184–85, 187–93, 196, 197–98, 202, 204, 205, 207, 208, 214–16, 217, 218–23, 225–28, 229, 231, 233–34, 273, 278, 308, 309–11, 312, 313, 314, 315–16, 323–24, 348, 366, 379, 392 social contract torn up by, 78 structural reforms imposed by, 214–16, 217, 218–23, 225–38 tax demand of, 192 and tax evasion, 367 see also European Central Bank (ECB); European Commission; International Monetary Fund (IMF) trust, xix, 280 Tsipras, Alexis, 61–62, 221, 273, 314 Turkey, 321 UBS, 355 Ukraine, 36 unemployment, 3, 64, 68, 71–72, 110, 111, 122, 323, 336, 342 as allegedly self-correcting, 98–101 in Argentina, 267 austerity and, 209 central banks and, 8, 94, 97, 106, 147 ECB and, 163 in eurozone, 71, 135, 163, 177–78, 181, 331 and financing investments, 186 in Finland, 296 and future income, 77 in Greece, xi, 71, 236, 267, 331, 338, 342 increased by capital, 264 interest rates and, 43–44 and internal devaluation, 98–101, 104–6 migration and, 69, 90, 135, 140 natural rate of, 172–73 present-day, in Europe, 210 and rise of Hitler, 338, 358 and single currency, 88 in Spain, 63, 161, 231, 235, 332, 338 and structural reforms, 19 and trade deficits, 108 in US, 3 youth, 3, 64, 71 unemployment insurance, 91, 186, 246, 247–48 UNICEF, 72–73 unions, 101, 254, 335 United Kingdom, 14, 44, 46, 131, 307, 331, 332, 340 colonies of, 36 debt of, 202 inflation target set in, 157 in Iraq War, 37 light regulations in, 131 proposed exit from EU by, 4, 270 United Nations, 337, 350, 384–85 creation of, 38 and lower rates of war, 196 United States: banking system in, 91 budget of, 8, 45 and Canada’s 1990 expansion, 209 Canada’s free trade with, 45–46, 47 central bank governance in, 161 debt-to-GDP of, 202, 210–11 financial crisis originating in, 65, 68, 79–80, 128, 296, 302 financial system in, 228 founding of, 319 GDP of, xiii Germany’s borrowing from, 187 growing working-age population of, 70 growth in, 68 housing bubble in, 108 immigration into, 320 migration in, 90, 136, 346 monetary policy in financial crisis of, 151 in NAFTA, xiv 1980–1981 recessions in, 76 predatory lending in, 310 productivity in, 71 recovery of, xiii, 12 rising inequality in, xvii, 333 shareholder capitalism of, 21 Small Business Administration in, 246 structural reforms needed in, 20 surpluses in, 96, 187 trade agenda of, 323 unemployment in, 3, 178 united currency in, 35, 36, 88, 89–92 United States bonds, 350 unskilled workers, 134–35 value-added tax, 190, 192 values, 57–58 Varoufakis, Yanis, 61, 221, 309 velocity of circulation, 167 Venezuela, 371 Versaille, Treaty of, 187 victim blaming, 9, 15–17, 177–78, 309–11 volatility: and capital market integration, 28 in exchange rates, 48–49 Volcker, Paul, 157, 168 wage adjustments, 100–101, 103, 104–5, 155, 216–17, 220–22, 338, 361 wages, 19, 348 expansionary policies on, 284–85 Germany’s constraining of, 41, 42–43 lowered in Germany, 105, 333 wage stagnation, in Germany, 13 war, change in attitude to, 38, 196 Washington Consensus, xvi Washington Mutual, 91 wealth, divergence in, 139–40 Weil, Jonathan, 360 welfare, 196 West Germany, 6 Whitney, Meredith, 360 wind energy, 193, 229 Wolf, Martin, 385 worker protection, 56 workers’ bargaining rights, 19, 221, 255 World Bank, xv, xvii, 10, 61, 337, 357, 371 World Trade Organization, xiv youth: future of, xx–xxi unemployment of, 3, 64, 71 Zapatero, José Luis Rodríguez, xiv, 155, 362 zero lower bound, 106 ALSO BY JOSEPH E.


pages: 457 words: 128,838

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order by Paul Vigna, Michael J. Casey

Airbnb, Alan Greenspan, altcoin, Apple Newton, bank run, banking crisis, bitcoin, Bitcoin Ponzi scheme, blockchain, Bretton Woods, buy and hold, California gold rush, capital controls, carbon footprint, clean water, Cody Wilson, collaborative economy, collapse of Lehman Brothers, Columbine, Credit Default Swap, cross-border payments, cryptocurrency, David Graeber, decentralized internet, disinformation, disintermediation, Dogecoin, driverless car, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, Firefox, Flash crash, Ford Model T, Fractional reserve banking, Glass-Steagall Act, hacker house, Hacker News, Hernando de Soto, high net worth, informal economy, intangible asset, Internet of things, inventory management, Joi Ito, Julian Assange, Kickstarter, Kuwabatake Sanjuro: assassination market, litecoin, Long Term Capital Management, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, Money creation, money: store of value / unit of account / medium of exchange, Nelson Mandela, Network effects, new economy, new new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, off-the-grid, offshore financial centre, payday loans, Pearl River Delta, peer-to-peer, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, printed gun, profit motive, QR code, RAND corporation, regulatory arbitrage, rent-seeking, reserve currency, Robert Shiller, Ross Ulbricht, Satoshi Nakamoto, seigniorage, shareholder value, sharing economy, short selling, Silicon Valley, Silicon Valley startup, Skype, smart contracts, special drawing rights, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, supply-chain management, Ted Nelson, The Great Moderation, the market place, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, Turing complete, Tyler Cowen, Tyler Cowen: Great Stagnation, Uber and Lyft, uber lyft, underbanked, Vitalik Buterin, WikiLeaks, Y Combinator, Y2K, zero-sum game, Zimmermann PGP

Financial markets are especially ripe for Blockchain 2.0 innovation. Many modern securities contracts are already codified, digitized, and automated. Yet they are run by Wall Street banks and are written and litigated by high-powered lawyers pulling down six- or seven-figure retainers. One can imagine credit-default swaps, a class of derivative that gained notoriety during the financial crisis, established on a blockchainlike decentralized infrastructure. CDS contracts, which function as insurance, require one party, usually an investment bank or an insurance company, to make a payment to the other party, typically a creditor that has lent money to a third-party debtor, if and when that debtor is deemed to be in default.

One would have thought that the backlash to the disaster of 2008 would have guaranteed that banks would be forced to list the nontransparent derivative securities that helped blow up the financial system on new online exchanges designed to allow transparent pricing and information about products such as credit default swaps. But Wall Street lobbyists fought the various reform-mind lawmakers that tried to make that happen and succeeded in watering down their bills such that many derivatives continued to trade in opaque “over-the-counter markets,” leaving us in the dark about the financial risks they contain. Still, the stand-and-fight strategy is expensive and not guaranteed to win.


pages: 504 words: 129,087

The Ones We've Been Waiting For: How a New Generation of Leaders Will Transform America by Charlotte Alter

"Hurricane Katrina" Superdome, "World Economic Forum" Davos, 4chan, affirmative action, Affordable Care Act / Obamacare, basic income, Berlin Wall, Bernie Sanders, Big Tech, Black Lives Matter, carbon footprint, carbon tax, clean water, collective bargaining, Columbine, corporate personhood, correlation does not imply causation, Credit Default Swap, crowdsourcing, data science, David Brooks, deepfake, deplatforming, disinformation, Donald Trump, double helix, East Village, ending welfare as we know it, fake news, Fall of the Berlin Wall, feminist movement, Ferguson, Missouri, financial deregulation, Francis Fukuyama: the end of history, gentrification, gig economy, glass ceiling, Glass-Steagall Act, Google Hangouts, green new deal, Greta Thunberg, housing crisis, illegal immigration, immigration reform, income inequality, Intergovernmental Panel on Climate Change (IPCC), job-hopping, Kevin Kelly, knowledge economy, Lyft, mandatory minimum, Marc Andreessen, Mark Zuckerberg, mass incarceration, McMansion, medical bankruptcy, microaggression, move fast and break things, Nate Silver, obamacare, Occupy movement, opioid epidemic / opioid crisis, passive income, pre–internet, race to the bottom, RAND corporation, Ronald Reagan, sexual politics, Sheryl Sandberg, side hustle, Silicon Valley, single-payer health, Snapchat, Social Justice Warrior, Steve Bannon, TaskRabbit, tech bro, too big to fail, Uber and Lyft, uber lyft, universal basic income, unpaid internship, We are the 99%, white picket fence, working poor, Works Progress Administration

They had worked hard for their wealth, and if keeping it meant changing a few rules and cutting a few taxes and kneecapping a few regulations, then so be it. Wasn’t that the meaning of American freedom, after all? Weren’t they the embodiment of the American dream? Their dream transformed the American economy and political system. They developed obscure new financial tools—leveraged buyouts, derivatives, credit default swaps—that made the financial system more about short-term trading than long-term productivity. They flooded Washington, DC, with litigators and lobbyists who made money helping big business make more money. Armed with the conviction of their own “meritocracy,” they perpetuated the myth of deserved destiny: that the rich were rich because they worked hard, and that the poor were poor because they didn’t.

., 31, 53, 71, 75–76, 102 Buttigieg, Pete, xv, xxi, 3–8, 132, 142–45, 282–87 academic accomplishments of, 7–8 addresses Women’s March, 198 announces presidential candidacy, 287 black community and, 144–45 childhood of, 5–7 digital revolution and, 61–62 economic development initiatives of, 143–44 elected mayor of South Bend, 143 enlistment and service in military of, 73–77 essay on Bernie Sanders written by, 7–8 future of Democratic party and, 289–91 generational argument for presidential candidacy of, 284–85 at Harvard, 3–5, 8 marriage of, 146 as mayor of South Bend, 143–45 media appearances of, 283–84 moderate views and personality of, 285–86 Muslim travel ban protests and, 202 9/11 terrorist attacks and, 3–4 Ocasio-Cortez and, 290 personality of, 4–5, 6 policing and, 144 presidential campaign of, 284–87 sexuality of, 7, 145–46 on socialism, 218 technocratic solutions embraced by, 143 work on Obama 2008 presidential campaign, 85–86 BuzzFeed, 52 cancel culture, 37 capitalism, 213, 214–15, 216, 221 Carlson, Tucker, 222 Carr, Justin, 127 Carter, Lee, 223 Carter, Michael, 216–17, 220–21, 228 Casten, Sean, 241 Castile, Philandro, 121 cell phones, 55, 57 Chadwick, Sarah, 247 Chakrabarti, Saikat, 209, 222, 279–80, 281 Chetty, Raj, 137 child safety, 36–38 China, 47 Chrysler, 102, 103–4, 105 Churchill, Winston, 151 Cisneros, Gil, 270 Citizens United decision, 114 Civilian Conservation Corps, 217 civil rights movement, 29 The Class of ’74: Congress after Watergate and the Roots of Partisanship (Lawrence), 276 Clean Power Plan, 196 climate change, 31, 157–59 Crenshaw and, 254 Curbelo and, 157–58 Green New Deal and, 191, 273–75, 278–79 hurricane frequency and intensity and, 43 Intergovernmental Panel on Climate Change (IPCC) report on, 190 Paris Climate Agreement, United States withdrawal from, xvi, 158, 195, 258 Republicans and, 157–59 Stefanik and, 157–58 student protests and, 190–91 Sunrise Movement and, 189–90, 191 Thunberg speeches on, 190 Trump’s views on, 195–96 Climate Solutions Caucus, 157–59 Clinton, Bill, xvi, 27, 30–31, 106, 169, 249 balanced budget of, 31 crime bill of, 30–31 earned income tax credit and, 30 Clinton, Hillary, 86–87, 106, 166, 167, 169–70, 234–35 CNN, 172, 173, 175, 242 coaches, 51 Coakley, Martha, 107 Cobb, Jelani, 119 Cohen, Ben, 115 Cohen, Michael, 252, 261 Colbert, Stephen, 266, 284, 288 colleges/universities administrators hired by, increase in, 50–51 college process and, 47 cut in funding for public universities, 50 discrimination claims related to admissions criteria, 47–48 increase in number of students attending, 47–48 international student enrollment, 47 race as factor in admissions process, 48 reasons for increase in cost of, 50–51 student enrollment and, 50 student loan debt and, 44–52 Collins, Susan, 206–7 Columbine High School shooting, 27 communism, 213 Congress, 196–98 age of members, during Trump presidency, 196–97 freshman class of 2018, 265–81 out of touch with changes in American society, 196–98 2018 elections, 226–45 Watergate babies, 276 Consumer Financial Protection Board (CFPB), 194–95 Costello, Ryan, 264 Couric, Katie, 4, 53 Crazy Horse, 181 credit default swaps, 28–29 Crenshaw, Dan, xxi, 13–14 belief in War on Terror of, 66–67 campaign for and election to House of Representatives, 250–52 childhood of, 13–14 loses eye in IED blast on battle damage assessment (BDA) mission, 65–66 medals received by, 66 Navy SEAL career of, 63–66 9/11 terrorist attacks and, 13 on outrage culture, 252 on ROTC scholarship to Tufts University, 14 on Trump and Trump’s policies, 252–57 2012 presidential election and, 173–75, 177–78 Crenshaw, Kimberlé, 199 Crenshaw, Tara, 251 crime bill of 1994 (Violent Crime Control and Law Enforcement Act), 30–31 Crow, Jason, 270 crowd-sourced collaboration, 55 Crowley, Joe, 224, 226, 228, 229 Cruz, Ted, xviii, 147 Curbelo, Carlos, 155–57, 258 bipartisanship of, 161 climate change and, 157–58 defeated in reelection bid, 2018, 264 elected to House of Representatives, 155–56 immigration legislation sponsored by, 160 reelected to House of Representatives, 2016, 262 on Trump and Trump’s policies, 262–64 2012 presidential election and, 169 youth of, 156 DACA (Deferred Action for Childhood Arrivals program), 195, 263 Dakota Access Pipeline, 181–82 Davidson, Pete, 251, 253 Day Without Immigrants, 204 Dean, Howard, 82, 86, 90 Deferred Action for Childhood Arrivals (DACA) program, 195, 263 DeGroot, Jake, 117 democratic socialism.


pages: 511 words: 132,682

Competition Overdose: How Free Market Mythology Transformed Us From Citizen Kings to Market Servants by Maurice E. Stucke, Ariel Ezrachi

"Friedman doctrine" OR "shareholder theory", affirmative action, Airbnb, Alan Greenspan, Albert Einstein, Andrei Shleifer, behavioural economics, Bernie Sanders, Boeing 737 MAX, Cambridge Analytica, Cass Sunstein, choice architecture, cloud computing, commoditize, corporate governance, Corrections Corporation of America, Credit Default Swap, crony capitalism, delayed gratification, disinformation, Donald Trump, en.wikipedia.org, fake news, Garrett Hardin, George Akerlof, gig economy, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Google Chrome, greed is good, hedonic treadmill, incognito mode, income inequality, income per capita, independent contractor, information asymmetry, invisible hand, job satisfaction, labor-force participation, late fees, loss aversion, low skilled workers, Lyft, mandatory minimum, Mark Zuckerberg, market fundamentalism, mass incarceration, Menlo Park, meta-analysis, Milgram experiment, military-industrial complex, mortgage debt, Network effects, out of africa, Paradox of Choice, payday loans, Ponzi scheme, precariat, price anchoring, price discrimination, profit maximization, profit motive, race to the bottom, Richard Thaler, ride hailing / ride sharing, Robert Bork, Robert Shiller, Ronald Reagan, search costs, shareholder value, Sheryl Sandberg, Shoshana Zuboff, Silicon Valley, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Stanford prison experiment, Stephen Hawking, sunk-cost fallacy, surveillance capitalism, techlash, The Chicago School, The Market for Lemons, The Myth of the Rational Market, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Davenport, Thorstein Veblen, Tim Cook: Apple, too big to fail, Tragedy of the Commons, transaction costs, Uber and Lyft, uber lyft, ultimatum game, Vanguard fund, vertical integration, winner-take-all economy, Yochai Benkler

As an editor of the Financial Times noted, “All the ingredients—including, crucially, a laissez-faire Federal Reserve under Alan Greenspan—were now in place for high-octane financial capitalism.”15 Not only did the government deregulate, but Greenspan, among others, under the guise of promoting competition, resisted recommendations to crack down on subprime mortgages or impose regulations on the complex financial instruments that include credit default swaps, which figured prominently in the financial crisis.16 As the economist Paul Krugman chronicled in a column written during the George W. Bush administration: Consider the press conference held on June 3, 2003—just about the time subprime lending was starting to go wild—to announce a new initiative aimed at reducing the regulatory burden on banks.

., 235–36, 237 Smith on, 236–37 squeezed out by bad competition, 230 Ultimatum Game, 237–39, 240 See also noble competition competition ideology, 121–45 overview, xiii, 142–45, 291–92 and bank deregulation, 127–30 belief that competition is necessary and always good, 123–26 cost of competition ideology, 138–40 current oversimplified version, 228 for defusing responsibility, 282 for deregulating, 155–57 eroding social capital, 249–51 federal courts, 125–26 Federal Reserve Chairman, 128 and lobbyists, 152, 155–57 only choices are competition or communism/socialism, 233 and public program spending cuts, 184–85 reductive competition ideology, 126–30, 146–47, 155–57, 176 rise of, without qualifiers, 131, 131–32, 132 safety net for those left behind, 269–72 UK’s privatization of their water supply, 187–89 using to reframe toxic effects of competition, 281 utilizing in the absence of competition, 176–77 competition machine, 41–66 overview, 65–66, 70 and Boeing MAX jets‘ fatal flaw, 264–67 consumers‘ belief in, 47–48, 49 fraud discovery and placing blame, 45–47 government’s responsibility to provide regulatory guardrails, 264–67 horsemeat scandal, xii, 41–42, 45–47 steam engine metaphor, 42 competition machine conditions consumers do not notice quality degradation, 49, 58–62 diminishing profitability, 45, 49, 50–58 intense competitive pressure, 43–45, 44, 49, 50 sellers’ challenged by consumers’ failure to notice quality degradation, 49, 62–65 Competitive Escalation Paradigm, 35–36 competitors alignment of collective and individual interests of, 70 harm from race to the bottom, 4–6, 9–12, 25–27 identifying and exploiting customers’ weaknesses, 73–74, 82–84 limiting customer choices, 102–3 complex pricing, 82 conditional cooperation, 240–44 Consumer Financial Protection Bureau (CFPB), 268–69 consumers belief that high price = quality, 59–60 data on behaviors of, 87–91, 204–5, 207–9 data on emotions of, 205, 218–19, 220 gazelles with trackers metaphor, 92–93 identifying weaknesses of, 199–201 irrationality of, 71–74 job satisfaction levels, 227 life satisfaction levels, 247–49, 252 products with choice overload built in, 103–4 Trump rolling back financial protection for, 268–69, 285–86 See also competition machine conditions Cook, Tim, 221–22 CoreCivic, 166–70, 169, 173, 175, 177 Cornell University rejection rate, 15 corporations. See big business; specific businesses Corrections Corporation of America (CCA), 165, 166, 170. See also CoreCivic Costco and other club stores, 102–3 cream skimming, 169–70, 175, 183–87 credit card industry, 68, 69, 70–71, 75–77 credit default swaps, 128 criminal sentencing, 80–81, 176–77 crony capitalism, 160, 163, 230, 285 Cruz, Ted, 266 cultural conditioning college as route to social mobility, 29–30 competition delivers quality at a low price, 47–48, 49 competition is always good, x, 284 embarrassment for gullibility, 70 and escalation paradigm, 35–36 lifelong superior achievement goal, 32–33 to love competition, 125 to not compete, 122 self-interest, 71, 235–36 and status competition, 28 See also human nature culture, x–xi Dalai Lama, 253 Dale, Stacy, 36–37 D’Angelo, Jonathan, 112–13 Dartmouth College, 25 Darwin, Charles, 39 data for Amazon’s personal recommendations, 105–6, 107 analytical power of, 218–19 children’s data gleaned for advertisers, 193–95 college scorecard data, 300–304, 318n86 on consumers’ behavior, 87–91, 204–5, 207–9 Gamemakers attract bidders/advertisers, 207–9 Gamemakers’ harvesting techniques, 194, 203–7 in Las Vegas, 87–91 dating services, online overview, 108–9 competition levels, 109–12, 111 InterActiveCorp, 109–11, 111, 115–16 and marriage, 114–15 profiting from choice overload, 113–14, 115–16 slow dating, 117 deadbeat customers, 70–71 Dear Genevieve effect, 12–15, 16, 19–20, 38–39 death bonds, 245 decision aids for choice overload, 101–2 de-escalating the arms race colleges and universities, 25–27, 40, 133–34 collegiate sports, 134–38, 140–41 students and parents, 27–34, 40 Deloitte, 277 deregulation of banks, 126–30 derivatives market, 261–63 diaper apps, 197 digital ad market, 210 diminishing returns, 96–97 dissent, noncompliance, and change, 284–87 divergence of individual and collective interests, 12–20, 39–40, 242–43, 263 DOJ (US Department of Justice), 128, 172–73, 174, 232 do not track features on mobile phones, 212–13 Dostoyevsky, Fyodor, 71 drip pricing overview, 147 and anchor value, 80–81 and brain fatigue, 81–82 Caesars opposition to, 84–87 casino lobbyists combat FTC’s plan, 150–52 vs. consumer’s ability to compare prices, 155–57 consumers’ loss aversion, 81 countries with laws against, 148 FTC attempt to legalize, 148–50 in hotels, 78–80, 82–84, 147, 148–54 lobbyists use competition ideology, 150–52 and sunk cost fallacy, 81 Duhigg, Charles, 227 Duke University, 16–17, 24 dynamic ads, 204–5 Easterbrook, Frank H., 234–35 Economist, 197 Eliot, T.


pages: 454 words: 134,482

Money Free and Unfree by George A. Selgin

Alan Greenspan, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, centralized clearinghouse, Charles Lindbergh, credit crunch, Credit Default Swap, crony capitalism, disintermediation, Dutch auction, fear of failure, fiat currency, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, foreign exchange controls, Fractional reserve banking, German hyperinflation, Glass-Steagall Act, Hyman Minsky, incomplete markets, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, large denomination, liquidity trap, Long Term Capital Management, low interest rates, market microstructure, Money creation, money market fund, moral hazard, Network effects, Northern Rock, oil shock, Paul Samuelson, Phillips curve, plutocrats, price stability, profit maximization, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, Robert Gordon, Robert Solow, Savings and loan crisis, savings glut, seigniorage, special drawing rights, The Great Moderation, the payments system, too big to fail, transaction costs, Tyler Cowen, unorthodox policies, vertical integration, Y2K

When it was placed into FDIC receivership in September 2008, Washington Mutual was five times larger, on an inflation-adjusted basis, than Continental Illinois at the time of its failure. Still, the FDIC was able, after wiping out its shareholders and most of its secured bondholders, to sell it to JPMorgan Chase without either inconveniencing its customers or disrupting financial markets (Tarr 2010).37 Or consider Lehman Brothers. It was one of the largest dealers in credit default swaps (CDSs). Peter Wallison (2009: 6; see also Tarr 2010) nevertheless found “no indication that any financial institution became troubled or failed” because of its failure.38 Wallison (2009: 6) explains: Lehman’s inability to meet its obligations did not result in the “contagion” that is the hallmark of systemic risk.

No bank or any other Lehman counterparty seems to have been injured in any major respect by Lehman’s failure, although of course losses occurred. . . . Although there were media reports that AIG had to be rescued shortly after Lehman’s failure because it had been exposed excessively to Lehman through credit default swaps (CDSs), these were inaccurate. When all the CDSs on Lehman were settled about a month later, AIG’s exposure turned out to be only $6.2 million. Moreover, although Lehman was one of the largest players in the CDS market, all its CDS obligations were settled without incident. Wallison’s statement should be amended to allow for the fact that, on the Tuesday following Lehman’s Monday bankruptcy filing, the Reserve Primary money market mutual fund, having written off its large holdings of unsecured Lehman paper (and having lacked sponsors capable of making up for the loss), had to reduce its share price below the pledged $1 level to 97 cents.


pages: 561 words: 138,158

Shutdown: How COVID Shook the World's Economy by Adam Tooze

2021 United States Capitol attack, air freight, algorithmic trading, Anthropocene, Asian financial crisis, asset-backed security, Ayatollah Khomeini, bank run, banking crisis, Basel III, basic income, Ben Bernanke: helicopter money, Benchmark Capital, Berlin Wall, Bernie Sanders, Big Tech, bitcoin, Black Lives Matter, Black Monday: stock market crash in 1987, blue-collar work, Bob Geldof, bond market vigilante , Boris Johnson, Bretton Woods, Brexit referendum, business cycle, business process, business process outsourcing, buy and hold, call centre, capital controls, central bank independence, centre right, clean water, cognitive dissonance, contact tracing, contact tracing app, coronavirus, COVID-19, credit crunch, Credit Default Swap, cryptocurrency, currency manipulation / currency intervention, currency peg, currency risk, decarbonisation, deindustrialization, Donald Trump, Elon Musk, energy transition, eurozone crisis, facts on the ground, failed state, fake news, Fall of the Berlin Wall, fear index, financial engineering, fixed income, floating exchange rates, friendly fire, George Floyd, gig economy, global pandemic, global supply chain, green new deal, high-speed rail, housing crisis, income inequality, inflation targeting, invisible hand, It's morning again in America, Jeremy Corbyn, junk bonds, light touch regulation, lockdown, low interest rates, margin call, Martin Wolf, mass immigration, mass incarceration, megacity, megaproject, middle-income trap, Mikhail Gorbachev, Modern Monetary Theory, moral hazard, oil shale / tar sands, Overton Window, Paris climate accords, Pearl River Delta, planetary scale, Potemkin village, price stability, Productivity paradox, purchasing power parity, QR code, quantitative easing, remote working, reserve currency, reshoring, Robinhood: mobile stock trading app, Ronald Reagan, secular stagnation, shareholder value, Silicon Valley, six sigma, social distancing, South China Sea, special drawing rights, stock buybacks, tail risk, TikTok, too big to fail, TSMC, universal basic income, Washington Consensus, women in the workforce, yield curve

Rather than raising rates to counter the loss of confidence, emerging market central banks followed their advanced economy counterparts in cutting them. By April, international capital markets were reopening too. The drive to raise funds was led by rich OPEC members who needed to offset the loss of oil and gas revenues. But Indonesia, and eventually Egypt, Honduras, and Panama, took advantage as well. The price of credit default swaps—insurance against default—on EM debt plunged—in the case of Indonesia from 290 to less than 100 basis points.38 The average yield on emerging market dollar-denominated debt, which had spiked as high as 8 percent, fell back to where it started before the crisis at 4.5 percent. That was far more than advanced economies were paying, but it meant that the pain was tolerable.

See also green agenda Clinton, Bill, 46, 287, 295, 300 Clinton, Hillary, 206, 288 Coalition for Epidemic Preparedness Innovations (CEPI), 237, 243 Cold War, 1, 15, 18–19, 203 Colombia, 164, 169, 170 Comando Vermelho (Red Command), 87 Commercial Paper Funding Facility (CPFF), 129 Common Framework for Debt Treatments Beyond the DSSI, 260 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), 206–7, 209–10 Confindustria, 86, 284–85 Conservative Party (UK), 141 Conte, Giuseppe, 71, 135, 284 contract labor, 104, 154 COP26 meeting, 2, 190–91 Corbyn, Jeremy, 11, 146 Coronavirus Aid, Relief, and Economic Security Act (CARES Act), 131, 135, 136–41, 151–53, 221–22, 270–75, 289, 299 Correa, Rafael, 168 Costa, António, 134 Côte d’Ivoire, 268 COVAX, 243, 246, 249, 251 COVID-19 Tools Accelerator, 243 Crashed (Tooze), 23 Crédit Agricole, 187 credit default swaps, 165 Croce, Benedetto, 24 cruise industry, 106–7, 153 Cruz, Ted, 162, 219, 253 Cuba, 30, 88 Cuomo, Andrew, 35, 83, 98 currency values, 70, 155–56, 170 Czech Republic, 196, 233 Dalio, Ray, 201, 202–3 De Blasio, Bill, 80, 83 Debt Service Suspension Initiative (DSSI), 162–63, 252, 254, 256–60, 261, 264, 268, 303 “debt trap,” 256 Defense Production Act, 87, 245, 289 deflation, 145, 148 democracy and democratic institutions, 21, 45, 283–84, 287 Democratic Party, 16, 90, 139, 216–17, 221–22, 270–71, 275–76, 290, 299–300 Democratic Republic of the Congo, 33 Denmark, 137 Department of Health and Human Services (HHS), 75 Deutsche Bank, 115 Deutsche Telekom, 212 developing countries, 72, 156–61, 254, 255, 261, 263–64 Development Finance Institute Canada (DFIC), 263 Dimon, Jamie, 217, 228 disease eradication programs, 32–34 Dominican Republic, 9 Dornbusch, Rudiger, 15, 147 Draghi, Mario, 130, 178, 182, 285, 286, 288 Dutch State Treasury Agency, 283 Duterte, Rodrigo, 11, 83 East Africa, 102, 189 East Asia, 5, 233 East Asian financial crisis (1997), 156 Eastern Europe, 190, 280 East-West conflict narrative, 68 Ebola, 30–31, 35, 46, 52, 236, 247 Ecuador, 8, 71, 161, 163–64, 166–67, 168, 265, 268 Egypt, 83–84, 165 electronics manufacturing industry, 54, 60–61 emerging markets, 13, 116–17, 155–72, 265–67, 294, 302 energy sector, 79.


pages: 689 words: 134,457

When McKinsey Comes to Town: The Hidden Influence of the World's Most Powerful Consulting Firm by Walt Bogdanich, Michael Forsythe

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Alistair Cooke, Amazon Web Services, An Inconvenient Truth, asset light, asset-backed security, Atul Gawande, Bear Stearns, Boris Johnson, British Empire, call centre, Cambridge Analytica, carbon footprint, Citizen Lab, cognitive dissonance, collective bargaining, compensation consultant, coronavirus, corporate governance, corporate social responsibility, Corrections Corporation of America, COVID-19, creative destruction, Credit Default Swap, crony capitalism, data science, David Attenborough, decarbonisation, deindustrialization, disinformation, disruptive innovation, do well by doing good, don't be evil, Donald Trump, double entry bookkeeping, facts on the ground, failed state, financial engineering, full employment, future of work, George Floyd, Gini coefficient, Glass-Steagall Act, global pandemic, illegal immigration, income inequality, information security, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), invisible hand, job satisfaction, job-hopping, junk bonds, Kenneth Arrow, Kickstarter, load shedding, Mark Zuckerberg, megaproject, Moneyball by Michael Lewis explains big data, mortgage debt, Multics, Nelson Mandela, obamacare, offshore financial centre, old-boy network, opioid epidemic / opioid crisis, profit maximization, public intellectual, RAND corporation, Rutger Bregman, scientific management, sentiment analysis, shareholder value, Sheryl Sandberg, Silicon Valley, smart cities, smart meter, South China Sea, sovereign wealth fund, tech worker, The future is already here, The Nature of the Firm, too big to fail, urban planning, WikiLeaks, working poor, Yogi Berra, zero-sum game

Because Wall Street had a seemingly insatiable desire to buy mortgages and auto loans, especially higher-yielding subprime loans, loan officers increasingly didn’t care whether a borrower was creditworthy. Easy money ruled the day. Credit ratings that were supposed to provide a check on irresponsible lending instead falsely certified high-risk investment products as safe. The world’s biggest insurer, AIG, eagerly sold financial instruments, called credit default swaps, intended to protect investors against doomsday losses that its top executives were convinced would never come. As the mayor and the senator spoke, Wall Street’s transformation into a giant casino had yet to seep into the public consciousness, though the evidence of it was there for those who wanted to find it.

., 83 Cozzi, Dr. Michael, 138 Crain’s Chicago Business, 55–56 Crane, Jim, 218 “Creating Change That Matters” report, 278 creative destruction, 204 credit card debt, 182, 184 credit default swaps, 172 credit enhancement, 183–84, 188 credit-rating agencies, 172, 183, 187 credit securitization, 172–73, 181–90, 207–8 Credit Suisse, 18 Crimea, 26 Crosthwaite, K. C., 127 Cummings, Walter, 177 Customs and Border Protection (CBP), 83, 86–87 CVS, 142 D D’Abreu, Shawn, 59 DaimlerChrysler, 227 Dallas office, 206 Dalton, Ian, 268–69 Daniel, Ron, 98, 181 Dash, Penny, 265, 274 data analytics baseball and, 209, 212–22 gambling and, 210–13 prescriptions and, 130–31, 139–40 Davidson College, 179 Davis, Ian, 98–99, 241, 249 Davis, Jacky, 272 Davis, William, 56–57 Dawson, Luan, 12 “Death by Guru” (Krugman), 206 Deaths of Despair and the Future of Capitalism (Gawande), 147 debt.


pages: 181 words: 50,196

The Rich and the Rest of Us by Tavis Smiley

"there is no alternative" (TINA), affirmative action, Affordable Care Act / Obamacare, An Inconvenient Truth, back-to-the-land, benefit corporation, Bernie Madoff, Bernie Sanders, Buckminster Fuller, Corrections Corporation of America, Credit Default Swap, death of newspapers, deindustrialization, ending welfare as we know it, F. W. de Klerk, fixed income, full employment, housing crisis, Howard Zinn, income inequality, job automation, liberation theology, Mahatma Gandhi, mass incarceration, mega-rich, military-industrial complex, Nelson Mandela, new economy, obamacare, Occupy movement, plutocrats, profit motive, Ralph Waldo Emerson, Ronald Reagan, shareholder value, Silicon Valley, Steve Jobs, traffic fines, trickle-down economics, War on Poverty, We are the 99%, white flight, women in the workforce, working poor

That’s how it used to kind of work. “Now what they’re doing is making record profits and then putting the money in their bank account. They’re doing it in part because it’s their rainy-day fund. They know the other shoe hasn’t dropped. They know the crash of ’08 wasn’t the last crash. They’re still doing credit default swaps and derivatives and all this crazy casino stuff on Wall Street. They know another crash could happen. They want to make sure that they’re protected on their Noah’s Ark where they’ve put their $2 trillion of cash.” Americans shouldn’t be allowed to suffer while the rich celebrate their blunders with $500,000 watches and multimillion-dollar yachts.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

Alan Greenspan, Andrei Shleifer, asset allocation, Bear Stearns, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, financial engineering, fixed income, follow your passion, global macro, Gordon Gekko, high net worth, index fund, it's over 9,000, John Bogle, John Meriwether, Long Term Capital Management, mail merge, managed futures, margin call, mass immigration, merger arbitrage, Michael Milken, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, short squeeze, Silicon Valley, tail risk, Thales and the olive presses, Thales of Miletus, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule, Vanguard fund, Y2K, Yogi Berra, zero-sum game

Of course, their counter party is betting the opposite; this difference in opinion is what makes the market. Some critics—including the Oracle of Omaha—have coined derivatives as weapons of mass destruction in the market . . . and for good reason. Back in 2008, AIG almost brought the world to its knees by not having enough capital on hand to make good on Lehman credit default swaps (CDSs), which are basically contracts that allow the buyer to buy insurance on a potential debt default. In other words, if I am worried that Lehman is going out of business I can buy CDSs on Lehman’s debt. The contractor must then pay to make that debt whole in the event of a default. Guess what?


pages: 809 words: 237,921

The Narrow Corridor: States, Societies, and the Fate of Liberty by Daron Acemoglu, James A. Robinson

Affordable Care Act / Obamacare, agricultural Revolution, AltaVista, Andrei Shleifer, bank run, Berlin Wall, British Empire, California gold rush, central bank independence, centre right, classic study, collateralized debt obligation, collective bargaining, colonial rule, Computer Numeric Control, conceptual framework, Corn Laws, Cornelius Vanderbilt, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Dava Sobel, David Ricardo: comparative advantage, Deng Xiaoping, discovery of the americas, double entry bookkeeping, Edward Snowden, en.wikipedia.org, equal pay for equal work, European colonialism, export processing zone, Ferguson, Missouri, financial deregulation, financial innovation, flying shuttle, Francis Fukuyama: the end of history, full employment, Glass-Steagall Act, Great Leap Forward, high-speed rail, income inequality, income per capita, industrial robot, information asymmetry, interest rate swap, invention of movable type, Isaac Newton, it's over 9,000, James Watt: steam engine, John Harrison: Longitude, joint-stock company, Kula ring, labor-force participation, land reform, Mahatma Gandhi, manufacturing employment, mass incarceration, Maui Hawaii, means of production, megacity, Mikhail Gorbachev, military-industrial complex, Nelson Mandela, obamacare, openstreetmap, out of africa, PageRank, pattern recognition, road to serfdom, Ronald Reagan, seminal paper, Skype, spinning jenny, Steven Pinker, the market place, transcontinental railway, War on Poverty, WikiLeaks

As a result, the huge growth in collateralized debt obligations based on mortgage-backed securities (which created synthetic securities of different risk profiles from large pools of mortgages) and credit default swaps took place almost entirely outside any regulatory framework. This was one of the reasons why an insurance company, the American Insurance Group (AIG), could sell massive amounts of credit default swaps and take on a vast amount of risk. With this wave of deregulation in place, the cycle continued, and profits in finance grew. Deregulation in finance contributed to inequality. Megaprofits on Wall Street not only added to the more unequal distribution of income between owners of major financial institutions, including hedge funds specializing in risky investments for wealthy clients, but boosted overall inequality because high-level managers and traders in the financial industry started receiving huge pay packages and bonus payments.

Together with greater concentration came a huge shift toward riskier activities, such as financial derivatives including interest rate swaps (where one party to the financial contract makes payments to the other depending on whether a benchmark interest rate is below or above a threshold) or credit default swaps (where payments are made depending on whether a debtor defaults). Even though the financial sector was branching into riskier activities, the rising political power of banks blocked any new regulations and in fact pushed for further deregulation. With greater concentration, fewer regulations, and more aggressive risk-taking came greater revenues and profits.


pages: 309 words: 54,839

Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum & Smart Contracts by David Gerard

altcoin, Amazon Web Services, augmented reality, Bernie Madoff, bitcoin, Bitcoin Ponzi scheme, blockchain, Blythe Masters, Bretton Woods, Californian Ideology, clean water, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, distributed ledger, Dogecoin, Dr. Strangelove, drug harm reduction, Dunning–Kruger effect, Ethereum, ethereum blockchain, Extropian, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, functional programming, index fund, information security, initial coin offering, Internet Archive, Internet of things, Kickstarter, litecoin, M-Pesa, margin call, Neal Stephenson, Network effects, operational security, 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, Vitalik Buterin, 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.


pages: 169 words: 52,744

Big Capital: Who Is London For? by Anna Minton

"there is no alternative" (TINA), Airbnb, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Capital in the Twenty-First Century by Thomas Piketty, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, eurozone crisis, Fall of the Berlin Wall, Frank Gehry, gentrification, high net worth, high-speed rail, housing crisis, illegal immigration, Kickstarter, land bank, land value tax, market design, new economy, New Urbanism, offshore financial centre, payday loans, post-truth, quantitative easing, rent control, rent gap, Right to Buy, Russell Brand, sovereign wealth fund, the built environment, The Wealth of Nations by Adam Smith, urban renewal, working poor

But that is to miss the point, which is that the hugely inflated value of land in London is a direct result of the glut of foreign investment in the more expensive parts of the city, to an extent that it could be termed a ‘super prime crisis’. The sub-prime crisis in the US, which triggered the 2008 financial crash, saw the frenzied trading of credit default swaps and collateralized debt obligations in very high-risk mortgages entirely break the connection with the reality of people on the ground, who were in no position to afford mortgages. Today, what economists call the ‘exchange value’ of housing in London, and many other parts of the UK, has entirely broken the connection with its ‘use value’.


pages: 178 words: 52,637

Quality Investing: Owning the Best Companies for the Long Term by Torkell T. Eide, Lawrence A. Cunningham, Patrick Hargreaves

air freight, Albert Einstein, asset light, backtesting, barriers to entry, buy and hold, carbon tax, cashless society, cloud computing, commoditize, Credit Default Swap, discounted cash flows, discovery of penicillin, endowment effect, global pandemic, haute couture, hindsight bias, legacy carrier, low cost airline, mass affluent, Network effects, oil shale / tar sands, pattern recognition, price elasticity of demand, proprietary trading, shareholder value, smart grid, sovereign wealth fund, supply-chain management, vertical integration

In industries where growth and economics can be detached for significant periods of time, short-term market share gains may be a negative. Take industries such as insurance and bank lending. Gaining market share in bank lending is easy: simply lower credit standards. The risk from such behavior may not appear for years when defaults occur, as the credit default swaps at the heart of the 2008 financial crisis highlighted. Likewise, insurance companies can quickly gain share by relaxing underwriting discipline, with associated losses delayed until claims are filed. In these settings, market share must be viewed with a correspondingly long horizon. While quality companies should still gain share over the long run, in these industries they likely cede share during economic booms and gain during economic busts.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, book value, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, Cornelius Vanderbilt, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, 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, flying shuttle, Glass-Steagall Act, Gordon Gekko, Henri Poincaré, Henry Singleton, high net worth, impact investing, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, John Bogle, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, margin call, means of production, Menlo Park, merger arbitrage, Michael Milken, 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, Performance of Mutual Funds in the Period, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit maximization, proprietary trading, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Sand Hill Road, Savings and loan crisis, seminal paper, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, tail risk, technology bubble, Teledyne, The Wealth of Nations by Adam Smith, time value of money, tontine, too big to fail, transaction costs, two and twenty, underbanked, Vanguard fund, working poor, yield curve

It creates competitive disparities between large and small institutions, because everybody knows small institutions can fail. So it’s more expensive for them to raise capital and secure funding.”43 Indeed, by studying the effect of government guarantees on the cost of borrowing of large banks by looking at the credit default swap market before and during the Great Recession, academics at Oxford’s Saïd Business School have found some evidence for the reduction in borrowing costs.44 The concept of too big to fail has been correctly understood to be a destructive force by many. There has been some progress toward mitigating the issue with the Wall Street Reform and Consumer Protection Act, more commonly referred to as Dodd-Frank.

Cheever, 192 Cowles, Alfred, III, 247–48 Cowles Commission for Research in Economics (now Cowles Foundation), 247 Crash of 1929: analysis of, 247; causes of, 190; closed-end mutual funds during, 141; Great Depression and, 203–5, 208, 222; regulatory response to, 210–12; warnings for, 197 credit, 5; cheap, 205; consumer, 39; creditworthiness, 208, 221, 222, 322; extension, 208; interest-free loans, 25; letters of, 22 credit default swap market, 220 cross-exchange arbitrage, 171 “Cross-Section of Expected Stock Returns, The” (Fama and French), 245 curbstone brokers, 88–89 Curtiss-Wright Corporation, 192 cyclical crises: management of, 225–26; reducing effects of, 9 daimyo (feudal ruler), 45 Dantzig, George, 240 David, Donald, 275 Davis, James, 155 Davison, Henry, 200–201 De Angelis, Tino, 167–70 debt: government, depository receipt for, 140; mortgage, highly rated tranches of, 224; products, 283.


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, false flag, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, general purpose technology, Glass-Steagall Act, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low interest rates, low skilled workers, M-Pesa, market bubble, means of production, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, post-Fordism, Post-Keynesian economics, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Solow, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

Table 2 shows that less that 10 percent of over-the-counter transactions actually involved non-financial enterprises: the great bulk comprised transactions that took place among financial institutions, and thus referred mostly to financial derivatives. In fact, growth in the derivatives markets has generally been dominated by interest-rate and foreign-exchange derivatives; since the early 2000s the strongest growth has been in credit default swaps (CDS), which are briefly discussed in Part III of this book.10 The price of financial derivatives depends, among other factors, on the rate of interest, and the rate that is typically used to value most financial derivatives is the London Interbank Offered Rate (LIBOR). The LIBOR is determined by a committee comprising several of the banks that dominate the derivatives markets; its determination involves the simple averaging of interest rates (excluding outliers) submitted by LIBOR committee banks daily.

The underlying logic of Basel III is similar to that of the previous two accords: market-conducive regulation designed by the financial system and aiming to strengthen the solvency of individual financial institutions by improving capital adequacy. One important difference, however, is the stronger emphasis on risk deriving from open market trading particularly in connection with derivatives. In the course of the crisis of 2007 it became apparent that heavy use of credit default swaps by banks and other financial institutions created new sources of credit risk arising out of market trading. The integration of derivative instruments into the accounting practices of banks has been instrumental in creating these new risks, a development that has become gradually evident in the 2000s.


The Volatility Smile by Emanuel Derman,Michael B.Miller

Albert Einstein, Asian financial crisis, Benoit Mandelbrot, Black Monday: stock market crash in 1987, book value, Brownian motion, capital asset pricing model, collateralized debt obligation, continuous integration, Credit Default Swap, credit default swaps / collateralized debt obligations, discrete time, diversified portfolio, dividend-yielding stocks, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, implied volatility, incomplete markets, law of one price, London Whale, mandelbrot fractal, market bubble, market friction, Myron Scholes, prediction markets, quantitative trading / quantitative finance, risk tolerance, riskless arbitrage, Sharpe ratio, statistical arbitrage, stochastic process, stochastic volatility, transaction costs, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

When you buy a corporate bond, you are exposed to both riskless interest rates and the credit spread, because the bond’s yield is a combination of the riskless rate and the credit spread. In order to be exposed to the credit spread only, you have to short Treasury bonds in just the right amount to eliminate the pure interest-rate risk. Credit default swaps were invented to address this problem by providing pure exposure to credit spreads. Similarly, variance swaps, which we are about to discuss, were invented to provide pure exposure to variance independent of stock price. The key to replicating a variance swap is based on the following formula, previously derived for the incremental profit earned from delta-hedging an option using the implied volatility hedge ratio over the next instant of time dt: Profit = ) 1 2( 2 ΓS 𝜎R − 𝛴 2 dt 2 (4.7) Here S is the stock price, Γ is the second partial derivative of the option price with respect to S, and 𝜎 R and 𝛴 are, respectively, the realized volatility and implied volatility.

See also State-contingent securities Asian financial crisis of 1997, 150 Asian options, 297 Assumptions, of Black-Scholes-Merton model, 85 At-the-money (ATM) options: deltas of, 141–142 hedging error in, 111–114 Monte Carlo simulations of, 106–110 Avoidable investment risks, 25–26 Axiomatic approach, to financial engineering, 6, 8 Barrier options: approximate static hedge for, 42–44 in local volatility models, 292–296 replicating portfolio for, 220–221 weak static replication of, 206–219 Barrier option parity, 223–224 Best stock-only hedge, 379–381 Binomial derivation, of Dupire’s equation, 270–275 Binomial diffusion-only model, 388f Binomial jump model, 389f, 390 Binomial local volatility models, 250–257 Binomial model, 227–246 of barrier options, 295n.1 of call option value, 46 convexity in, 49–50 Dupire’s equation derived from, 270–275 extending Black-Scholes-Merton model with, 237–246 for option valuation, 232–237 stochastic stock price and volatility in, 333–334 for stock evolution, 227–232 Binomial Poisson process, 391 Binomial trees: with Cox-Ross-Rubinstein convention, 242–243 difficulties with, 262–263 for future returns of stocks, 21–22 for lookback options, 299–300 of riskless security, 23–24 Bjerg, Ole, 21n.2 Black, Fischer, 16 Black-Scholes-Merton (BSM) equation, 85–89 Black-Scholes-Merton (BSM) formula, and implied distributions, 175 Black-Scholes-Merton (BSM) model, 2–3 derivatives of, 419–420 in dynamic replication, 46, 47, 203 extending, with binomial model, 237–246 extension of, with stochastic volatility models, 320, 325, 344–350 and hedged options, 94 hedge ratios under, 379 implied volatility in, 80 impracticality of, 204 501 502 Black-Scholes-Merton (BSM) model (Continued) as inconsistent with volatility smiles, 163 local volatility as extension of, 303–304 stochastic volatility models in, 321–325 transaction costs in, 117, 125, 127 Black-Scholes-Merton (BSM) partial differential equation, 304 and binomial model, 235–237 in stochastic volatility models, 349 Black-Scholes-Merton (BSM) risk-neutral probability density, 197–200 Black-Scholes partial differential equation (PDE), 208 Bonds: long zero coupon, 39f riskless, see Riskless bonds short-term government, 154n.1 Bounds: no-arbitrage, See No-arbitrage bounds on profit and loss when hedging at realized volatility, 99–100 Boundary payoffs, in weak static replication, 205 Breeden-Litzenberger formula: and Dupire’s equation, 265 in implied distribution, 180–183, 184f, 185–186 BSM, see Black-Scholes-Merton Butterfly spread: in Breeden-Litzenberger formula, 181–182 in derivation of Dupire’s equation, 273–275 payoff and value of, 156–157 Calendar spread: in derivation of Dupire’s equation, 271–273 and Dupire’s equation, 267–268 Calibration: for jumps, 387–391 of local volatility models, 165 of quadrinomial tree, 350 and trinomial jump-diffusion, 398–401 Call option payoff functions, 35 Call option value, 46 Call price, 45–46 Call spread, 155–156 Capital asset pricing model (CAPM), 32 INDEX CBOE (Chicago Board Options Exchange), 82 CEV (constant elasticity of variance) model, 166–167 Chain rule: hedge ratio from, 169 in stochastic volatility models, 342 Chicago Board Options Exchange (CBOE), 82 Collars, 38–40 Compensated process, 400–401 Compensation, for jumps, 387–391 Constant elasticity of variance (CEV) model, 166–167 Convexity: and dynamic replication, 49–50 as function of volatility, 322 gains from, 52 payout with positive, 48f as quality of options, 45–46 Correlated stocks, 31–34 Costs, types of, 117. See also Transaction costs Cox, John, 166 Cox-Ross-Rubinstein (CRR) convention: in binomial local volatility models, 252–253 in binomial models, 229–231 local vs. implied volatility in, 258–259 and time-dependent deterministic volatility, 242–243 Credit default swaps, 64 Crepey, Stephane, 307, 308, 317 Currency crisis of 1998, 2 Delta (Δ): and convexity, 49–50 defined, 46 Heaviside and Dirac delta functions, 190–191 of hedge ratios, 291 implied volatility as function of, 137–138 of lookback calls, 297, 300–301 sticky delta rule, 311–315 and strike, 141–143 and volatility smile, 140–143 Delta-hedged portfolios: as bet on variance, 64 defined, 47 Index hedging error in, 110–111 profit and loss with, 101 Demeterfi, Kresimir, 80 Derivatives: as non-independent securities, 35 relative valuation for, 12 Derman, Emanuel, 268 Diffusion, jumps plus, 395–398 Diffusion speed, in implied volatility, 285 Digital European call options, 171–173 Dilution, as risk management strategy, 27 Dirac, Paul, 6 Dirac delta functions: in static replication, 190–191 in stochastic volatility models, 328 Discrete hedging, 105–116 and accurate replication, 115–116 example of, 114–115 hedging error in, 110–114 Monte Carlo simulation for, 105–110 Discrete random variables, 252n.2 Diversification: for jump risk, 397 limitations of, 32 as risk management strategy, 31 Dividends, random, 396 Dividend yield: stock with continuous known, 240–242 zero, in Black-Scholes-Merton model, 237–238 Dominant index paths, 299–300 Down-and-out barrier options, 293f with nonzero riskless rate, 211–212 static hedge for, 212–214 with zero riskless rate and zero dividend yield, 207–211 Drift: in jump-diffusion models, 398–399 in jump modeling, 389 in stochastic volatility models, 349–350, 364–365 Dupire’s equation, 265–277 binomial derivation of, 270–275 formal proof of, 275–277 for local volatility models, 265–270 Dynamic hedging, 64, 204 Dynamic replication, 44–52, 53f and convexity, 49–50 defined, 16 for hedging options, 52, 53f 503 implied vs. realized volatility in, 50–51 notation for implied variables, 51–52 simplified explanation of, 44–49 Efficient market hypothesis (EMH), 17–18 Einstein, Albert, 417 Enterprise value, 165–166 Equities: and enterprise value, 165–166 volatility smile in individual, 148–149 Equity indexes: emergence of smile in, 4–5 jumps in, 383 local volatility model for, 307–308 volatility smile in, 144–148, 375 Error(s): in discrete hedging, 110–114 in replication, 81–82, 219 Euclid, 6 Euler’s equation, 355 European down-and-out call, 42–44 European options: Merton inequalities for, 154–158 sticky delta rule for, 313 value of, 37–38 volatility sensitivity of, 57–58 European up-and-in puts with barrier equal to strike, 206–207 Exact static replication, 37–42 Exotic options: in local volatility models, 292–301 replicating, 187–190 replicating, with vanilla options, 192–194, 195f–196f, 197 valuing, with smile models, 171–173 Fama, Eugene, 18 Financial crisis of 2007-2008, 1–2 Financial engineering, 7–8 challenges of, 417 mathematical finance vs., 5–6 role of, in financial crisis of 2007-2008, 1–2 Financial models, 1–12 Black-Scholes-Merton model, 2–3 and implied volatility smile, 3–5 inherent problems of, 417 purpose of, 8–12 in replication valuation, 15 and theory, 5–8 504 Financial theory, 5–8 Fisk-Stratonovich integral, 424, 427 Foreign exchange (FX) options: jumps in, 383 volatility smile in, 149–150 Formal proof, of Dupire’s equation, 275–277 Forward approach, to stochastic integration, 425–426 Forward integrals, 427–429 Forward Itô integrals, 92–93 Forward numerical integration, 423–424 Forward rates, 260–261 Frequentist probabilities, 19–20 Future expectations, and current values, 51 Future volatility: in Black-Scholes-Merton formula, 131 hedged option strategies as bet on, 89 FX options, see Foreign exchange (FX) options Gains, from convexity, 52.


pages: 204 words: 58,565

Keeping Up With the Quants: Your Guide to Understanding and Using Analytics by Thomas H. Davenport, Jinho Kim

behavioural economics, Black-Scholes formula, business intelligence, business process, call centre, computer age, correlation coefficient, correlation does not imply causation, Credit Default Swap, data science, en.wikipedia.org, feminist movement, Florence Nightingale: pie chart, forensic accounting, global supply chain, Gregor Mendel, Hans Rosling, hypertext link, invention of the telescope, inventory management, Jeff Bezos, Johannes Kepler, longitudinal study, margin call, Moneyball by Michael Lewis explains big data, Myron Scholes, Netflix Prize, p-value, performance metric, publish or perish, quantitative hedge fund, random walk, Renaissance Technologies, Robert Shiller, self-driving car, sentiment analysis, six sigma, Skype, statistical model, supply-chain management, TED Talk, text mining, the scientific method, Thomas Davenport

Cassano wasn’t the only person to lose the money, but as the muckraking reporter Matt Taibbi wrote in Rolling Stone, he was “Patient Zero of the global economic meltdown.”a Taibbi also described him as “a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead,” but that is not part of our story. If he’d made lots of money instead of losing it, we’re sure his appearance would have improved. Where do analytics and quantitative reasoning—or, more accurately, the lack of it—come in? AIGFP lost all of that money through selling a financial product called credit default swaps (CDSs), or insurance policies on the value of mortgage-backed derivatives. Gretchen Morgenson, a New York Times reporter, noted shortly after these events, “Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default.


pages: 243 words: 61,237

To Sell Is Human: The Surprising Truth About Moving Others by Daniel H. Pink

always be closing, Atul Gawande, barriers to entry, behavioural economics, business cycle, call centre, Cass Sunstein, Checklist Manifesto, choice architecture, complexity theory, Credit Default Swap, Daniel Kahneman / Amos Tversky, disintermediation, Elisha Otis, future of work, George Akerlof, independent contractor, information asymmetry, Jeff Bezos, Kickstarter, longitudinal study, Marc Andreessen, Menlo Park, out of africa, Richard Thaler, rolodex, Ronald Reagan, Steve Jobs, The Market for Lemons, Upton Sinclair, Wall-E, zero-sum game

Tammy Darvish survives—and thrives—because she lives by caveat venditor. The decline of information asymmetry hasn’t ended all forms of lying, cheating, and other sleazebaggery. One glimpse of the latest financial shenanigans from Wall Street, the City, or Hong Kong confirms that unhappy fact. When the product is complicated—credit default swaps, anyone?—and the potential for lucre enormous, some people will strive to maintain information imbalances and others will opt for outright deception. That won’t change. As long as flawed and fallible human beings walk the planet, caveat emptor remains useful guidance. I heed this principle.


pages: 205 words: 61,903

Survival of the Richest: Escape Fantasies of the Tech Billionaires by Douglas Rushkoff

"World Economic Forum" Davos, 4chan, A Declaration of the Independence of Cyberspace, agricultural Revolution, Airbnb, Alan Greenspan, Amazon Mechanical Turk, Amazon Web Services, Andrew Keen, AOL-Time Warner, artificial general intelligence, augmented reality, autonomous vehicles, basic income, behavioural economics, Big Tech, biodiversity loss, Biosphere 2, bitcoin, blockchain, Boston Dynamics, Burning Man, buy low sell high, Californian Ideology, carbon credits, carbon footprint, circular economy, clean water, cognitive dissonance, Colonization of Mars, coronavirus, COVID-19, creative destruction, Credit Default Swap, CRISPR, data science, David Graeber, DeepMind, degrowth, Demis Hassabis, deplatforming, digital capitalism, digital map, disinformation, Donald Trump, Elon Musk, en.wikipedia.org, energy transition, Ethereum, ethereum blockchain, European colonialism, Evgeny Morozov, Extinction Rebellion, Fairphone, fake news, Filter Bubble, game design, gamification, gig economy, Gini coefficient, global pandemic, Google bus, green new deal, Greta Thunberg, Haight Ashbury, hockey-stick growth, Howard Rheingold, if you build it, they will come, impact investing, income inequality, independent contractor, Jane Jacobs, Jeff Bezos, Jeffrey Epstein, job automation, John Nash: game theory, John Perry Barlow, Joseph Schumpeter, Just-in-time delivery, liberal capitalism, Mark Zuckerberg, Marshall McLuhan, mass immigration, megaproject, meme stock, mental accounting, Michael Milken, microplastics / micro fibres, military-industrial complex, Minecraft, mirror neurons, move fast and break things, Naomi Klein, New Urbanism, Norbert Wiener, Oculus Rift, One Laptop per Child (OLPC), operational security, Patri Friedman, pattern recognition, Peter Thiel, planetary scale, Plato's cave, Ponzi scheme, profit motive, QAnon, RAND corporation, Ray Kurzweil, rent-seeking, Richard Thaler, ride hailing / ride sharing, Robinhood: mobile stock trading app, Sam Altman, Shoshana Zuboff, Silicon Valley, Silicon Valley billionaire, SimCity, Singularitarianism, Skinner box, Snapchat, sovereign wealth fund, Stephen Hawking, Steve Bannon, Steve Jobs, Steven Levy, Steven Pinker, Stewart Brand, surveillance capitalism, tech billionaire, tech bro, technological solutionism, technoutopianism, Ted Nelson, TED Talk, the medium is the message, theory of mind, TikTok, Torches of Freedom, Tragedy of the Commons, universal basic income, urban renewal, warehouse robotics, We are as Gods, WeWork, Whole Earth Catalog, work culture , working poor

All these specious loans were part of the “subprime” mortgage market, which was itself serving as the collateral for a series of other loans, and so on, and so on. All those loans and loans on loans were packaged into “baskets” that were sold to investors. Shares in these baskets, in turn, could be speculated on through other derivatives, which could themselves be bet on—or against—with credit default swaps. It would have worked forever, as long as housing prices kept increasing at ever faster rates, supporting all the financial instruments that were depending on them. But the inevitable crash came just a few months after my mugging. Experts differ on exactly what triggered it. Either the rise in house prices began decelerating, interest rates went up, or both.


pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

Affordable Care Act / Obamacare, Airbus A320, airline deregulation, Alan Greenspan, anti-communist, asset allocation, banking crisis, Bear Stearns, Boeing 747, Bonfire of the Vanities, British Empire, business cycle, 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, financial engineering, Ford Model T, full employment, Glass-Steagall Act, global supply chain, Gordon Gekko, guest worker program, guns versus butter model, high-speed rail, hiring and firing, housing crisis, Howard Zinn, income inequality, independent contractor, index fund, industrial cluster, informal economy, invisible hand, John Bogle, Joseph Schumpeter, junk bonds, Kenneth Rogoff, Kitchen Debate, knowledge economy, knowledge worker, laissez-faire capitalism, Larry Ellison, late fees, Long Term Capital Management, low cost airline, low interest rates, manufacturing employment, market fundamentalism, Maui Hawaii, mega-rich, Michael Shellenberger, military-industrial complex, MITM: man-in-the-middle, 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, proprietary trading, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Bork, Robert Shiller, rolodex, Ronald Reagan, Savings and loan crisis, shareholder value, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Solyndra, Steve Jobs, stock buybacks, tech worker, Ted Nordhaus, 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

When Senator Blanche Lincoln of Arkansas proposed barring banks from marketing derivatives, she came under withering fire from business interests as well as the banks. The Obama administration, in retreat, pushed to make the derivatives trade more open and regulated, but the banks fought successfully to exempt certain derivatives, such as the credit default swaps that played a big role in the mortgage blowup. Former Fed chairman Paul Volcker advocated barring all regulated banks from proprietary trading on their own account (what came to be called “the Volcker Rule”), to keep superbanks from speculating recklessly and putting the whole system at risk again.

They realized that if millions of poor-credit-risk borrowers were sold 2/28 subprime loans in 2004, 2005, and 2006, then two years later, when their low teaser rates ran out and their monthly payments ballooned, they would default en masse. This would bust the secondary mortgage market. So they bought insurance on mortgage bonds, in the form of credit default swaps, and cashed in big-time when the market collapsed. Hedge fund managers such as John Paulson, Mike Burry of Scion Fund, and Steve Eisman of FrontPoint Partners made a mint betting against the flimsy promise of home ownership for virtually everyone. Eventually, traders at Goldman Sachs smelled blood in the water and made a killing, too.


pages: 614 words: 174,226

The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society by Binyamin Appelbaum

90 percent rule, airline deregulation, Alan Greenspan, Alvin Roth, Andrei Shleifer, anti-communist, battle of ideas, Benoit Mandelbrot, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, Celtic Tiger, central bank independence, clean water, collective bargaining, Corn Laws, correlation does not imply causation, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, desegregation, Diane Coyle, Donald Trump, Dr. Strangelove, ending welfare as we know it, financial deregulation, financial engineering, financial innovation, fixed income, flag carrier, floating exchange rates, full employment, George Akerlof, George Gilder, Gini coefficient, greed is good, Greenspan put, Growth in a Time of Debt, Ida Tarbell, income inequality, income per capita, index fund, inflation targeting, invisible hand, Isaac Newton, It's morning again in America, Jean Tirole, John Markoff, Kenneth Arrow, Kenneth Rogoff, land reform, Les Trente Glorieuses, long and variable lags, Long Term Capital Management, low cost airline, low interest rates, manufacturing employment, means of production, Menlo Park, minimum wage unemployment, Mohammed Bouazizi, money market fund, Mont Pelerin Society, Network effects, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, Paul Samuelson, Philip Mirowski, Phillips curve, plutocrats, precautionary principle, price stability, profit motive, public intellectual, Ralph Nader, RAND corporation, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Bork, Robert Gordon, Robert Solow, Ronald Coase, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Silicon Valley, Simon Kuznets, starchitect, Steve Bannon, Steve Jobs, supply-chain management, The Chicago School, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, trickle-down economics, ultimatum game, Unsafe at Any Speed, urban renewal, War on Poverty, Washington Consensus, We are all Keynesians now

Both paled in comparison to the wave that began in the early 1990s, when clever bankers popularized credit derivatives, which let investors bet on the possibility that borrowers would fail to repay debts.16 The market for credit derivatives proved to be huge. The value of just one variety, known as credit default swaps, increased from literally nothing in the early 1990s to an estimated $62 trillion by 2007 — more than the value of the world’s economic output in that year.17 The government’s Depression-era regulations carefully limited the activities of commercial banks, but industry lawyers concluded those laws had not anticipated the new derivatives, and did not bar banks from diving into the market.

Credit derivatives can also be bets on intermediate events, like changes in a credit rating or in some other measure of the probability of eventual default. For the history of the market in credit derivatives, see Gillian Tett, Fool’s Gold (New York: Free Press, 2009). 17. Gretchen Morgenson, “Credit Default Swap Market Under Scrutiny,” New York Times, August 10, 2008. 18. Rob Wells, “New York Fed President Warns About Swaps Market,” Associated Press, January 30, 1992. 19. Paul Volcker at the time was the chairman of the Group of Thirty, the trade group that issued the report on derivatives. He writes in his memoir that he insisted on toning down its conclusions.


pages: 288 words: 64,771

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality by Brink Lindsey

Airbnb, Asian financial crisis, bank run, barriers to entry, Bernie Sanders, Build a better mousetrap, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Cass Sunstein, collective bargaining, creative destruction, Credit Default Swap, crony capitalism, Daniel Kahneman / Amos Tversky, David Brooks, diversified portfolio, Donald Trump, Edward Glaeser, endogenous growth, experimental economics, experimental subject, facts on the ground, financial engineering, financial innovation, financial intermediation, financial repression, hiring and firing, Home mortgage interest deduction, housing crisis, income inequality, informal economy, information asymmetry, intangible asset, inventory management, invisible hand, Jones Act, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, knowledge worker, labor-force participation, Long Term Capital Management, low skilled workers, Lyft, Mark Zuckerberg, market fundamentalism, mass immigration, mass incarceration, medical malpractice, Menlo Park, moral hazard, mortgage debt, Network effects, patent troll, plutocrats, principal–agent problem, regulatory arbitrage, rent control, rent-seeking, ride hailing / ride sharing, Robert Metcalfe, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, Silicon Valley ideology, smart cities, software patent, subscription business, tail risk, tech bro, too big to fail, total factor productivity, trade liberalization, tragedy of the anticommons, Tragedy of the Commons, transaction costs, tulip mania, Tyler Cowen, Uber and Lyft, uber lyft, Washington Consensus, white picket fence, winner-take-all economy, women in the workforce

In a beguiling bit of alchemy, low-quality mortgages could be transformed into AAA securities by slicing pools of mortgages into “tranches” so that the senior-most slices are the last to absorb any default losses. This alchemy could then be embellished with “synthetic” securities comprising tranches of tranches. Other derivatives, like credit default swaps, appeared to spread risk even more widely, fueling demand for even more expansion of mortgage credit. Egged on by the combination of financial innovation and expectations of ever-rising home prices, mortgage lending exploded and underwriting standards collapsed. Charles Calomiris and Stephen Haber offer a good summary of that collapse: “In 1990 a mortgage applicant needed a 20 percent down payment, a good credit rating, and a stable, verifiable employment and income history in order to obtain a low-risk, 30-year fixed-rate mortgage, but by 2003 she could obtain a high-risk, negatively amortizing adjustable-rate mortgage by offering only a 3 percent down payment and simply stating her income and employment history, with no independent verification.”11 Rarities before the late 1990s, high-risk subprime and Alt-A mortgages went from 8 percent of new mortgage lending in 2001 to 36 percent in 2006.12 For a while, the deterioration in credit standards kept the home price boom going, but eventually the bubble burst, nearly taking the global economy with it.


The Techno-Human Condition by Braden R. Allenby, Daniel R. Sarewitz

"World Economic Forum" Davos, Abraham Maslow, airport security, Anthropocene, augmented reality, carbon credits, carbon footprint, clean water, cognitive dissonance, cognitive load, coherent worldview, conceptual framework, creative destruction, Credit Default Swap, decarbonisation, different worldview, Edward Jenner, facts on the ground, friendly fire, Hans Moravec, industrial cluster, information security, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jane Jacobs, land tenure, Lewis Mumford, life extension, Long Term Capital Management, market fundamentalism, mutually assured destruction, Nick Bostrom, nuclear winter, Peter Singer: altruism, planetary scale, precautionary principle, prediction markets, radical life extension, Ralph Waldo Emerson, Ray Kurzweil, Silicon Valley, smart grid, source of truth, stem cell, Stewart Brand, synthetic biology, technoutopianism, the built environment, The Wealth of Nations by Adam Smith, transcontinental railway, We are as Gods, Whole Earth Catalog

And, of course, economies, financial networks, and technologies have become far more complex since then-to the point where, as the Panic of 2008 showed, even the most sophisticated investors, financial institutions, and regulators completely lost track of the risk packaged in modern financial instruments such as mortgage-backed securities and credit-default swaps. We cannot centrally control the global economy; indeed, it may be impossible to centrally conceptualize it for much longer without escaping from the one thing that seems most essential to our modern identities: the belief in our ability to act on the basis of rational understanding. So, yes, perhaps the ruckus about transhumanism does signal the need for a profound change in humans and their institutions-but if it does, the need is completely different from what the transhumanists and their enemies have in mind.


pages: 265 words: 69,310

What's Yours Is Mine: Against the Sharing Economy by Tom Slee

4chan, Airbnb, Amazon Mechanical Turk, asset-backed security, barriers to entry, Benchmark Capital, benefit corporation, Berlin Wall, big-box store, bike sharing, bitcoin, blockchain, Californian Ideology, citizen journalism, collaborative consumption, commons-based peer production, congestion charging, Credit Default Swap, crowdsourcing, data acquisition, data science, David Brooks, democratizing finance, do well by doing good, don't be evil, Dr. Strangelove, emotional labour, Evgeny Morozov, gentrification, gig economy, Hacker Ethic, impact investing, income inequality, independent contractor, informal economy, invisible hand, Jacob Appelbaum, Jane Jacobs, Jeff Bezos, John Zimmer (Lyft cofounder), Kevin Roose, Khan Academy, Kibera, Kickstarter, license plate recognition, Lyft, machine readable, Marc Andreessen, Mark Zuckerberg, Max Levchin, move fast and break things, natural language processing, Netflix Prize, Network effects, new economy, Occupy movement, openstreetmap, Paul Graham, peer-to-peer, peer-to-peer lending, Peter Thiel, pre–internet, principal–agent problem, profit motive, race to the bottom, Ray Kurzweil, recommendation engine, rent control, ride hailing / ride sharing, sharing economy, Silicon Valley, Snapchat, software is eating the world, South of Market, San Francisco, TaskRabbit, TED Talk, the Cathedral and the Bazaar, the long tail, The Nature of the Firm, Thomas L Friedman, transportation-network company, Travis Kalanick, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, ultimatum game, urban planning, WeWork, WikiLeaks, winner-take-all economy, Y Combinator, Yochai Benkler, Zipcar

Now, hedge-funds, asset managers and banks are using marketplace lending as a supplier of loans in their chase for yield . . . . Asset managers have started to securitize marketplace loans into asset-backed securities, and hedge-funds use large amounts of borrowed money to leverage their investments. Some investors are already talking about the need to create credit default swaps for marketplace loans.” 59 The problems of alienation, erosion, and distortion all sharpen as the scale of financial involvement grows. Sharing Economy advocates who seek to recapture the egalitarian, sustainable, and community focus that inspired many to join the movement can do so only by avoiding the temptations of believing in a technological fix for society, powered by venture capital and free markets.


pages: 239 words: 70,206

Data-Ism: The Revolution Transforming Decision Making, Consumer Behavior, and Almost Everything Else by Steve Lohr

"World Economic Forum" Davos, 23andMe, Abraham Maslow, Affordable Care Act / Obamacare, Albert Einstein, Alvin Toffler, Bear Stearns, behavioural economics, big data - Walmart - Pop Tarts, bioinformatics, business cycle, business intelligence, call centre, Carl Icahn, classic study, cloud computing, computer age, conceptual framework, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, Danny Hillis, data is the new oil, data science, David Brooks, driverless car, East Village, Edward Snowden, Emanuel Derman, Erik Brynjolfsson, everywhere but in the productivity statistics, financial engineering, Frederick Winslow Taylor, Future Shock, Google Glasses, Ida Tarbell, impulse control, income inequality, indoor plumbing, industrial robot, informal economy, Internet of things, invention of writing, Johannes Kepler, John Markoff, John von Neumann, lifelogging, machine translation, Mark Zuckerberg, market bubble, meta-analysis, money market fund, natural language processing, obamacare, pattern recognition, payday loans, personalized medicine, planned obsolescence, precision agriculture, pre–internet, Productivity paradox, RAND corporation, rising living standards, Robert Gordon, Robert Solow, Salesforce, scientific management, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, SimCity, six sigma, skunkworks, speech recognition, statistical model, Steve Jobs, Steven Levy, The Design of Experiments, the scientific method, Thomas Kuhn: the structure of scientific revolutions, Tony Fadell, unbanked and underbanked, underbanked, Von Neumann architecture, Watson beat the top human players on Jeopardy!, yottabyte

Andrew Lo of MIT and his two coauthors contend that new streams of financial data—aggregated, properly encrypted, and then analyzed—could give strong clues to hidden risk bombs in the system, like the institutions that touched off the crisis in the fall of 2008, Lehman Brothers and the American International Group. Such data, the authors argue, could “have played a critical role in providing regulators and investors with advance notice of AIG’s unusually concentrated position in credit-default swaps, as well as the exposure of money market funds to Lehman bonds.” This is big data as a financial microscope. The goal is to see the inner workings of markets in illuminating detail to inform understanding and guide action. So Berner is a big-data proponent, but not without qualification. He is skeptical of the uncompromising data-ists who celebrate correlation as plenty good enough without theory, without a model of how the world works.


Bulletproof Problem Solving by Charles Conn, Robert McLean

active transport: walking or cycling, Airbnb, Amazon Mechanical Turk, asset allocation, availability heuristic, Bayesian statistics, behavioural economics, Big Tech, Black Swan, blockchain, book value, business logic, business process, call centre, carbon footprint, cloud computing, correlation does not imply causation, Credit Default Swap, crowdsourcing, David Brooks, deep learning, Donald Trump, driverless car, drop ship, Elon Musk, endowment effect, fail fast, fake news, future of work, Garrett Hardin, Hyperloop, Innovator's Dilemma, inventory management, iterative process, loss aversion, megaproject, meta-analysis, Nate Silver, nudge unit, Occam's razor, pattern recognition, pets.com, prediction markets, principal–agent problem, RAND corporation, randomized controlled trial, risk tolerance, Silicon Valley, SimCity, smart contracts, stem cell, sunk-cost fallacy, the rule of 72, the scientific method, The Signal and the Noise by Nate Silver, time value of money, Tragedy of the Commons, transfer pricing, Vilfredo Pareto, walkable city, WikiLeaks

No regrets moves come into play when you are comfortable with the level of uncertainty, or can edge out into a competitive space with incremental learning moves; this often involves the capability building you'll need no matter what the outcome. Big bets are taken when you have a level of confidence about an outcome not shared by others. The Big Short book and film, describing the investments in shorting subprime mortgage credit default swaps in the US, is a great example of a big bet when uncertainty remained high.6 The investors spotlighted in the book felt the mortgage securities were mispriced and took big bets when others weren't prepared to. Of course, big bets can also go bad when uncertainty resolves itself in ways that leave an asset investment stranded.


pages: 226 words: 65,516

Kings of Crypto: One Startup's Quest to Take Cryptocurrency Out of Silicon Valley and Onto Wall Street by Jeff John Roberts

4chan, Airbnb, Alan Greenspan, altcoin, Apple II, Bernie Sanders, Bertram Gilfoyle, Big Tech, bitcoin, blockchain, Blythe Masters, Bonfire of the Vanities, Burning Man, buttonwood tree, cloud computing, coronavirus, COVID-19, creative destruction, Credit Default Swap, cryptocurrency, democratizing finance, Dogecoin, Donald Trump, double helix, driverless car, Elliott wave, Elon Musk, Ethereum, ethereum blockchain, family office, financial engineering, Flash crash, forensic accounting, hacker house, Hacker News, hockey-stick growth, index fund, information security, initial coin offering, Jeff Bezos, John Gilmore, Joseph Schumpeter, litecoin, Marc Andreessen, Mark Zuckerberg, Masayoshi Son, Menlo Park, move fast and break things, Multics, Network effects, offshore financial centre, open borders, Paul Graham, Peter Thiel, Ponzi scheme, prediction markets, proprietary trading, radical decentralization, ransomware, regulatory arbitrage, reserve currency, ride hailing / ride sharing, Robert Shiller, rolodex, Ross Ulbricht, Sam Altman, Sand Hill Road, Satoshi Nakamoto, sharing economy, side hustle, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, smart contracts, SoftBank, software is eating the world, Startup school, Steve Ballmer, Steve Jobs, Steve Wozniak, transaction costs, Vitalik Buterin, WeWork, work culture , Y Combinator, zero-sum game

But even as the lords of Wall Street sneered at cryptocurrency, not all their soldiers were so skeptical. At Coinbase, a growing pile of job applicants listed New York firms as their current employer. At Dimon’s own firm, in a high-profile defection, senior executive Blythe Masters left to run a blockchain startup called Digital Asset. Masters was already renowned on Wall Street for inventing credit default swaps, the contracts Warren Buffett correctly labeled as “time bombs,” which could (and did) set off a financial crisis. Now, she would become the face of a faction in the crypto world known as “blockchain, not bitcoin.” It was inevitable that as bitcoin grew, people without the same agenda as the libertarian types in the Valley would find useful apps for blockchain’s ledger technology, and that’s what was happening.


pages: 661 words: 185,701

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance by Eswar S. Prasad

access to a mobile phone, Adam Neumann (WeWork), Airbnb, algorithmic trading, altcoin, bank run, barriers to entry, Bear Stearns, Ben Bernanke: helicopter money, Bernie Madoff, Big Tech, bitcoin, Bitcoin Ponzi scheme, Bletchley Park, blockchain, Bretton Woods, business intelligence, buy and hold, capital controls, carbon footprint, cashless society, central bank independence, cloud computing, coronavirus, COVID-19, Credit Default Swap, cross-border payments, cryptocurrency, deglobalization, democratizing finance, disintermediation, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, Ethereum, ethereum blockchain, eurozone crisis, fault tolerance, fiat currency, financial engineering, financial independence, financial innovation, financial intermediation, Flash crash, floating exchange rates, full employment, gamification, gig economy, Glass-Steagall Act, global reserve currency, index fund, inflation targeting, informal economy, information asymmetry, initial coin offering, Internet Archive, Jeff Bezos, Kenneth Rogoff, Kickstarter, light touch regulation, liquidity trap, litecoin, lockdown, loose coupling, low interest rates, Lyft, M-Pesa, machine readable, Mark Zuckerberg, Masayoshi Son, mobile money, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, offshore financial centre, open economy, opioid epidemic / opioid crisis, PalmPilot, passive investing, payday loans, peer-to-peer, peer-to-peer lending, Peter Thiel, Ponzi scheme, price anchoring, profit motive, QR code, quantitative easing, quantum cryptography, RAND corporation, random walk, Real Time Gross Settlement, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, risk/return, Robinhood: mobile stock trading app, robo advisor, Ross Ulbricht, Salesforce, Satoshi Nakamoto, seigniorage, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, smart contracts, SoftBank, special drawing rights, the payments system, too big to fail, transaction costs, uber lyft, unbanked and underbanked, underbanked, Vision Fund, Vitalik Buterin, Wayback Machine, WeWork, wikimedia commons, Y Combinator, zero-sum game

Some policymakers worry that these markets now indeed serve mainly as an arena for sophisticated forms of financial gambling that have little to do with protecting against basic forms of risk. Consider the case of derivatives linked to corporate bonds. Bonds are safer than equities, but in the event a company were to go bankrupt and have insufficient assets to meet its liabilities, even bondholders could find their investments wiped out. Enter credit default swaps (CDSs), an instrument created specifically to insure against such risks. A CDS provides insurance that pays off if a company goes bankrupt or is otherwise unable to repay its bonds and defaults on them. This derivative allows investors, for a price, to buy corporate bonds with more peace of mind and, in turn, makes it easier for companies to raise money through such bonds.

See also digital banks Chile, 292, 345 China: Bitcoin mining in, 136, 140, 142, 392–393n; capital controls in, 292, 293–294, 296, 309, 437–438n; cash in, 3–4, 12, 31, 32f–33f, 33, 61, 218, 220f, 224–225, 232–233, 240, 243–245; CBDCs in, 4, 13, 199, 232–233, 240, 245–246, 250–254, 273, 309–311, 350; credit scoring in, 75; cryptocurrencies in, 177, 293–294, 296 (see also Bitcoin); digital lending systems in, 73–77, 78–79; economic growth in, 15, 278; exchange rates in, 310, 437n, 442n; fiat currency in, 61; financial inclusion in, 54; global distribution of money, 29–30, 30f–31f; insurance in, 82–83; legal tender in, 243–244, 253, 254; Libra pushback by, 170; payment systems in, 15–16, 46–47, 64, 84–87, 92–93, 199, 273, 281, 284, 298, 309, 327–328, 335, 379–380n, 382n, 435n; privacy issues in, 104–105; regulation of financial system in, 102, 318, 327–328, 352; shadow financial system in, 52, 326; US dollar challenged by, 307–311, 440n, 442n; US trade deficits financed by, 7 Colombia, 344, 345 corruption, 13, 212–214, 215, 216, 223, 293, 346 Costa Rica, 344 counterfeit currencies, 198, 218–219, 220f–221f COVID-19 pandemic, 7, 71, 75–76, 83, 95, 173, 208, 224–225, 239, 306–307, 323, 330–331 credit and debit cards: in advanced economies, 15; cash advantages over, 232–235; challenger banks issuing, 68; in developing economies, 345; digital payment systems linked to, 87; fraudulent charges on, 86, 136, 379n; helicopter drops of money via, 208; prepaid, as e-money, 245; retail payments with, 45–46, 86, 284; transaction fees, 86, 92–93; transaction validation, immutability, and verification with, 118–119; trust and confidence in, 18–19, 20 credit default swaps (CDSs), 42–43, 44 crime and illegal transactions: Bitcoin and, 145–147; cash and, 13, 210–211, 214–217, 230–231, 239, 357; CBDCs reducing, 13, 210–211, 217, 229, 252; cryptocurrencies and, 157, 159, 169–171, 175, 176, 178, 263–264; mobile money and, 371n; privacy vs., 228–229; shadow economy and, 215–216 crisis management, 330–331 Cross-Border Interbank Payment System (CIPS), 284, 435n crowdfunding, 72–73, 98, 289, 373n cryptocurrencies: anonymity of, 137–138, 157–159, 197, 258, 397n; backing of, 149, 155–157, 169, 171, 172–173, 258, 259–260, 261, 264–265, 311–312, 351, 358; Bitcoin alternatives, 150–162; capital controls and, 293–296; central bank response to, 11, 358; coins and coin offerings, 150–151, 162–168, 177, 179, 257, 400n; crime and illegal transactions with, 157, 159, 169–171, 175, 176, 178, 263–264; decentralized, 8–9, 11, 56, 90, 119–120, 129, 147, 148, 159, 182–187, 197, 357–359; defined, 109; derivatives, 179–180; digital wallets for, 152; double-spending issues, 135–136; financial system changes with, 8, 9–12; flash loans with, 183–185, 407n; fraud and, 151, 153, 165, 181; future of, 188–189, 355, 357–359; hacking issues, 129, 134–135, 153, 158, 184–185; for international payments, 174, 283, 287, 298, 301, 311–312; ironies with, 357–359; Libra / Diem as, 9–10, 11, 168–175, 189, 296, 300–301, 305, 351; manipulation of, 175–176; meme coins, 187–188; number of, 109, 385–386n, 395n; official, 197, 257–265, 344; permissionless composability with, 185–186; price of, 155–156, 163, 164–166, 179–180; Proof of Stake protocol, 152–155, 197; regulations on, 151, 156–157, 165, 168, 170–171, 175–182, 185–186, 257, 405–406n; smart contracts, 159–162, 161f, 173, 182–187, 398n; stablecoins, 10, 155–157, 169, 201, 287, 296, 300–301, 311–312, 351; supply of, 154, 358; tokens, 150–151, 162–168; transaction fees with, 152; trust and confidence in, 20, 56, 173, 358–359; US dollar challenged by, 298, 300–301.


pages: 279 words: 76,796

The Unbanking of America: How the New Middle Class Survives by Lisa Servon

Affordable Care Act / Obamacare, Airbnb, basic income, behavioural economics, Build a better mousetrap, business cycle, Cass Sunstein, choice architecture, creative destruction, Credit Default Swap, cross-border payments, do well by doing good, employer provided health coverage, financial exclusion, financial independence, financial innovation, gender pay gap, gentrification, George Akerlof, gig economy, Glass-Steagall Act, income inequality, independent contractor, informal economy, Jane Jacobs, Joseph Schumpeter, late fees, low interest rates, Lyft, M-Pesa, medical bankruptcy, microcredit, Occupy movement, payday loans, peer-to-peer lending, precariat, Ralph Nader, Richard Thaler, Robert Shiller, Ronald Reagan, Savings and loan crisis, sharing economy, subprime mortgage crisis, too big to fail, transaction costs, unbanked and underbanked, underbanked, universal basic income, Unsafe at Any Speed, We are the 99%, white flight, working poor, Zipcar

The costs of these inefficiencies hit lower-income and disadvantaged groups the hardest, so if savings are passed on to consumers, it would represent a significant gain. For the most part, banks and alternative financial-services businesses are not known as nimble innovators or entrepreneurs. Historically, banks have valued safety and have been slow to embrace change. The big-bank innovations we’ve witnessed over the past several years—the credit default swaps and complex global-finance deals—have nothing to do with normal retail customers like you and me. Banks’ staid culture, combined with the huge aversion to risk they’ve adopted in the wake of the financial crisis, makes them poorly poised to take advantage of new customer-focused opportunities.


pages: 258 words: 73,109

The (Honest) Truth About Dishonesty: How We Lie to Everyone, Especially Ourselves by Dan Ariely

accounting loophole / creative accounting, Albert Einstein, behavioural economics, Bernie Madoff, Broken windows theory, cashless society, clean water, cognitive dissonance, cognitive load, Credit Default Swap, Donald Trump, fake it until you make it, financial engineering, fudge factor, John Perry Barlow, new economy, operational security, Richard Feynman, Schrödinger's Cat, Shai Danziger, shareholder value, social contagion, Steve Jobs, Tragedy of the Commons, Walter Mischel

If being one step removed from money liberates people from their moral shackles, what will happen as more and more banking is done online? What will happen to our personal and social morality as financial products become more obscure and less recognizably related to money (think, for example, about stock options, derivatives, and credit default swaps)? Some Companies Already Know This! As scientists, we took great care to carefully document, measure, and examine the influence of being one step removed from money. But I suspect that some companies intuitively understand this principle and use it to their advantage. Consider, for example, this letter that I received from a young consultant: Dear Dr.


pages: 268 words: 74,724

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

Airbnb, Alan Greenspan, Apollo 13, bank run, Bear Stearns, Bernie Madoff, bitcoin, Bretton Woods, business logic, buy and hold, Carl Icahn, Carmen Reinhart, corporate raider, correlation does not imply causation, cotton gin, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, Fairchild Semiconductor, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Glass-Steagall Act, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, junk bonds, Kenneth Rogoff, Kickstarter, Larry Ellison, liquidity trap, low interest rates, Mark Zuckerberg, market bubble, Michael Milken, Money creation, money market fund, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, Phillips curve, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Solyndra, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Travis Kalanick, Uber for X, War on Poverty, yield curve

Growth economics is all about reducing the barriers to production, so I can’t stress enough that the often-incomprehensible notion of credit is equally simple. And it can be explained by the world around us. Up front, I want to establish that this book is not about the mechanics of bonds, credit default swaps, and other forms of finance. Furthermore, it does not aim to explain the mechanics of banking and the Federal Reserve. There are countless detailed books on those subjects. Instead, Who Needs the Fed? covers the all-important subject of credit, along with the role of banking and the Fed when it comes to accessing it.


pages: 300 words: 78,475

Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream by Arianna Huffington

Alan Greenspan, American Society of Civil Engineers: Report Card, Apollo 13, Bear Stearns, Bernie Madoff, Bernie Sanders, call centre, carried interest, citizen journalism, clean water, collateralized debt obligation, Cornelius Vanderbilt, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, do what you love, extreme commuting, Exxon Valdez, full employment, Glass-Steagall Act, greed is good, Greenspan put, guns versus butter model, high-speed rail, housing crisis, immigration reform, invisible hand, knowledge economy, laissez-faire capitalism, late fees, low interest rates, market bubble, market fundamentalism, Martin Wolf, medical bankruptcy, microcredit, military-industrial complex, Neil Armstrong, new economy, New Journalism, offshore financial centre, Ponzi scheme, post-work, proprietary trading, Report Card for America’s Infrastructure, Richard Florida, Ronald Reagan, Rosa Parks, Savings and loan crisis, single-payer health, smart grid, The Wealth of Nations by Adam Smith, Timothy McVeigh, too big to fail, transcontinental railway, trickle-down economics, winner-take-all economy, working poor, Works Progress Administration

All three calamities occurred because elected officials who should have been enforcing a regulatory system that protects working families instead allowed the system to protect the corporations it was meant to watch over. Most of the systemic breakdowns that led to the regulatory failure at Upper Big Branch and on the BP rig were the same ones that led to the housing bubble, credit-default swaps, toxic derivatives—and, by extension, the bank bailout, long-term unemployment, and the rapid decline of America’s middle class. Days after the Upper Big Branch disaster, the New York Times described the Mine Safety and Health Administration (MSHA), the regulatory agency that so atrociously failed the Upper Big Branch miners, this way: it is “fundamentally weak in several areas”; “the fines it levies are relatively small, and many go uncollected for years”; “it lacks subpoena power, a basic investigatory tool”; “its investigators are not technically law enforcement officers”; “its criminal sanctions are weak”; “fines remain so low that they are mere rounding errors on the bottom lines” of the companies being regulated; and it shows a “reluctance to flex all of its powers.”23 In an eerie echo, in the wake of the Deepwater Horizon disaster, the Wall Street Journal described the Minerals Management Service (MMS), the government agency that oversees offshore drilling, this way: it “doesn’t write or implement most safety regulations, having gradually shifted such responsibilities to the oil industry itself”; it “seldom referred safety or environmental violations to the Justice Department for criminal prosecution, even when it should have done so”; and it “got out of the business of telling companies what training was necessary for workers involved in keeping wells from gushing out of control.”24 Florida senator Bill Nelson summed it up: “If MMS wasn’t asleep at the wheel, it sure was letting Big Oil do most of the driving.”25 Chris Oynes, the Interior Department’s top official overseeing offshore oil and gas drilling, announced his retirement shortly after the disastrous explosion, and Elizabeth Birnbaum, the head of MMS, was forced out thirty-seven days after the spill began—just another pair of resignations that came too late to make a difference.26, 27 The problem isn’t a shortage of regulators.


pages: 236 words: 77,735

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

affirmative action, Alan Greenspan, asset allocation, backtesting, barriers to entry, Bear Stearns, Bernie Madoff, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fear index, fiat currency, financial engineering, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, Glass-Steagall Act, global macro, High speed trading, housing crisis, index fund, joint-stock company, junk bonds, managed futures, Market Wizards by Jack D. Schwager, Michael Milken, military-industrial complex, money market fund, moral hazard, Myron Scholes, National best bid and offer, off-the-grid, passive investing, Ponzi scheme, power law, price discovery process, proprietary trading, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, short squeeze, stocks for the long run, stocks for the long term, too big to fail, trade route, Vanguard fund, walking around money

Senator Phil Gramm got the bill passed with the help of a slew of other delusional bureaucrats. This is the same Phil Gramm, king of deregulation, who gave us the Commodity Futures Modernization Act of 2000, which allowed Enron to blow up the energy markets. On top of that, it opened the door for credit default swaps to be excluded from regulation when transacted between sophisticated parties. Greenspan loved that bill when he told the U.S. Senate, “If our derivatives markets are to remain innovative and competitive internationally, they need the legal and regulatory certainty that only legislation can provide.”3 Bill Clinton signed on the dotted line.


pages: 264 words: 76,643

The Growth Delusion: Wealth, Poverty, and the Well-Being of Nations by David Pilling

Airbnb, Alan Greenspan, banking crisis, Bernie Sanders, Big bang: deregulation of the City of London, Branko Milanovic, call centre, carbon tax, centre right, clean tech, clean water, collapse of Lehman Brothers, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, Deng Xiaoping, Diane Coyle, Donald Trump, double entry bookkeeping, Easter island, Erik Brynjolfsson, falling living standards, financial deregulation, financial engineering, financial intermediation, financial repression, Gini coefficient, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Google Hangouts, Great Leap Forward, Hans Rosling, happiness index / gross national happiness, Higgs boson, high-speed rail, income inequality, income per capita, informal economy, invisible hand, Jeremy Corbyn, job satisfaction, Mahatma Gandhi, Mahbub ul Haq, market fundamentalism, Martin Wolf, means of production, military-industrial complex, Monkeys Reject Unequal Pay, mortgage debt, off grid, old-boy network, Panopticon Jeremy Bentham, peak oil, performance metric, pez dispenser, profit motive, purchasing power parity, race to the bottom, rent-seeking, Robert Gordon, Ronald Reagan, Rory Sutherland, science of happiness, shareholder value, sharing economy, Simon Kuznets, sovereign wealth fund, TED Talk, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, total factor productivity, Tragedy of the Commons, transaction costs, transfer pricing, trickle-down economics, urban sprawl, women in the workforce, World Values Survey

As in Iceland, banks that had once relied on steady retail depositors for their capital took to the wholesale markets, sucking up and recycling first petro-dollars from the Middle East and then the surplus savings of workers and peasants in booming China.13 A process now known by the hideously ugly term “financialization” took hold. Anonymous capital markets replaced the once-simple relationship between borrower and lender. New products sprang up to fill this new market, including complex derivatives, or bets on the future movement of prices. Soon banks were talking a new language of forward exchange rates, credit default swaps, and collateralized debt obligations. The less ordinary people understood about what was really going on the better. I remember in the mid-2000s being lectured by senior bankers who explained to me condescendingly how derivatives were making the world a safer place by spreading risk to the four corners of the earth.


pages: 247 words: 74,612

For the Love of Money: A Memoir by Sam Polk

Bear Stearns, carried interest, Credit Default Swap, eat what you kill, fixed income, food desert, hiring and firing, Northern Rock, nuclear winter, Rosa Parks, SimCity

I looked around to make sure no one could see my monitor. I knew I wasn’t supposed to open this file, but I double-clicked. It was an analysis comparing recent bond trader contracts to CDS trader contracts. The Great Gatsby’s Nick Carraway was a bond salesman, which is to say that bonds have been around a long time. CDSs (credit default swaps, also called credit derivatives) were brand-new. They were essentially insurance policies on companies. You paid a quarterly fee, but if the company went bankrupt, you’d be fully compensated for the losses. There were two key differences between CDSs and bonds. If you wanted to buy a million dollars’ worth of bonds, you had to invest a million dollars.


pages: 373 words: 80,248

Empire of Illusion: The End of Literacy and the Triumph of Spectacle by Chris Hedges

Albert Einstein, AOL-Time Warner, Ayatollah Khomeini, Bear Stearns, Cal Newport, clean water, collective bargaining, corporate governance, creative destruction, Credit Default Swap, Glass-Steagall Act, haute couture, Herbert Marcuse, Honoré de Balzac, Howard Zinn, illegal immigration, income inequality, Joseph Schumpeter, Naomi Klein, offshore financial centre, Plato's cave, power law, Ralph Nader, Ronald Reagan, scientific management, Seymour Hersh, single-payer health, social intelligence, statistical model, uranium enrichment

The corporate con artists and economists who have rigged our financial system continue to speak to us in the obscure and incomprehensible language coined by specialists on Wall Street and at elite business schools. They use terms such as securitization, deleveraging, structured investment vehicles, and credit default swaps to shut us out of the debate. This retreat by elites into specialized ghettos spans the range of academic disciplines. English professors, who see novels as divorced from society, speak in the obscure vocabulary of deconstructionism, disempowering and emasculating the very works they study.


pages: 303 words: 74,206

GDP: The World’s Most Powerful Formula and Why It Must Now Change by Ehsan Masood

Alan Greenspan, anti-communist, bank run, banking crisis, biodiversity loss, Bob Geldof, Bretton Woods, centre right, clean water, colonial rule, coronavirus, COVID-19, Credit Default Swap, decarbonisation, deindustrialization, Diane Coyle, energy security, European colonialism, financial engineering, government statistician, happiness index / gross national happiness, income inequality, indoor plumbing, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, job satisfaction, Kickstarter, Mahbub ul Haq, mass immigration, means of production, Meghnad Desai, Mohammed Bouazizi, Robert Solow, Ronald Reagan, Sheryl Sandberg, Silicon Valley, Simon Kuznets, Skype, statistical model, the scientific method, The Spirit Level, Washington Consensus, wealth creators, zoonotic diseases

Only then would the bank know if it was safe to hand out a large loan. Now, armed with the formula, banks happily lent money to people in no position to repay their loans. They did so, reassured that the Gaussian copula was telling them the chances of default would be slim. By the end of 2001 the market in mortgage-backed securities, known as credit default swaps, was $920 billion. By the end of 2007 it had shot to $62 trillion. When the following year account holders did start to default on their loans, the banks lost trillions of dollars and governments had to step in to bail them out in what we now know to have been the globe’s most serious financial crisis since the 1930s.


pages: 263 words: 77,786

Tomorrow's Capitalist: My Search for the Soul of Business by Alan Murray

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, Alvin Toffler, Berlin Wall, Bernie Sanders, Big Tech, Black Lives Matter, blockchain, Boris Johnson, call centre, carbon footprint, commoditize, coronavirus, corporate governance, corporate raider, corporate social responsibility, COVID-19, creative destruction, Credit Default Swap, decarbonisation, digital divide, disinformation, disruptive innovation, do well by doing good, don't be evil, Donald Trump, Ferguson, Missouri, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, future of work, gentrification, George Floyd, global pandemic, Greta Thunberg, gun show loophole, impact investing, income inequality, intangible asset, invisible hand, Jeff Bezos, job automation, knowledge worker, lockdown, London Whale, low interest rates, Marc Benioff, Mark Zuckerberg, market fundamentalism, means of production, minimum wage unemployment, natural language processing, new economy, old-boy network, price mechanism, profit maximization, remote working, risk-adjusted returns, Ronald Reagan, Salesforce, scientific management, shareholder value, side hustle, Silicon Valley, social distancing, Social Responsibility of Business Is to Increase Its Profits, The Future of Employment, the payments system, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Washington Consensus, women in the workforce, work culture , working poor, zero-sum game

Greed-driven misbehavior always has been and always will be part of the business landscape. Many, if not most, of the companies mentioned in this book have been involved in activities that cast shadows over their more altruistic efforts. JPMorgan was home to the London Whale scandal, where a single trader accumulated outsized positions in credit default swaps that led to a $6 billion loss and called into question the bank’s risk management systems. Google, despite its initial “Don’t Be Evil” motto, has been dogged by accusations that its business has been built on its misappropriation of other people’s work, and that its search engine favors its own services over outside competitors.


pages: 1,336 words: 415,037

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

affirmative action, Alan Greenspan, Albert Einstein, anti-communist, AOL-Time Warner, Ayatollah Khomeini, barriers to entry, Bear Stearns, Black Monday: stock market crash in 1987, Bob Noyce, Bonfire of the Vanities, book value, Brownian motion, capital asset pricing model, card file, centralized clearinghouse, Charles Lindbergh, collateralized debt obligation, computerized trading, Cornelius Vanderbilt, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, do what you love, Donald Trump, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, Fairchild Semiconductor, Fillmore Auditorium, San Francisco, financial engineering, Ford Model T, Garrett Hardin, Glass-Steagall Act, global village, Golden Gate Park, Greenspan put, Haight Ashbury, haute cuisine, Honoré de Balzac, If something cannot go on forever, it will stop - Herbert Stein's Law, In Cold Blood by Truman Capote, index fund, indoor plumbing, intangible asset, interest rate swap, invisible hand, Isaac Newton, it's over 9,000, Jeff Bezos, John Bogle, John Meriwether, joint-stock company, joint-stock limited liability company, junk bonds, Larry Ellison, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, Marshall McLuhan, medical malpractice, merger arbitrage, Michael Milken, Mikhail Gorbachev, military-industrial complex, money market fund, moral hazard, NetJets, new economy, New Journalism, North Sea oil, paper trading, passive investing, Paul Samuelson, pets.com, Plato's cave, plutocrats, Ponzi scheme, proprietary trading, Ralph Nader, random walk, Ronald Reagan, Salesforce, Scientific racism, shareholder value, short selling, side project, Silicon Valley, Steve Ballmer, Steve Jobs, supply-chain management, telemarketer, The Predators' Ball, The Wealth of Nations by Adam Smith, Thomas Malthus, tontine, too big to fail, Tragedy of the Commons, transcontinental railway, two and twenty, Upton Sinclair, War on Poverty, Works Progress Administration, Y2K, yellow journalism, zero-coupon bond

Some investors did get nervous about the more obviously phony aspect of the way the market was operating and wanted to hedge their bets.6 They tapped into a market that had developed to bet on whether loan defaults would occur: the credit default swap. If a securitization lost value because loans defaulted, the issuer of the swap would have to pay. Protected by credit default swaps, investing in CDOs now appeared to contain no risk. “When money is free,” wrote Charles Morris later, “and lending is costless and riskless, the rational lender will keep on lending until there is no one left to lend to.”7 If it was pointed out that risk did not disappear, those who participated in the market would explain with a sigh that securitization and swap derivatives “spread” the risk to the far corners of the globe, where it would be absorbed by so many people that it could never hurt anyone.

Thus freed, the rational people of the mobile-home business had lowered down payments, making it much easier to get loans. As the real-estate market boomed, riskier types of home loans—along with commercial and business and student and other loans—spread like a cold virus in a kindergarten. These, like the mobile-home loans, were stripped, insured, “securitized,” and speculated on over and over through credit default swaps. Meanwhile, other, more exotic derivatives proliferated. In his 2002 shareholder letter, Buffett called derivatives “toxic,” and said they were “time bombs” that were expanding unchecked and could cause a chain reaction of financial disaster. At the shareholder meeting that year, Charlie Munger described the accounting incentives to exaggerate profits on derivatives, and concluded, “To say derivative accounting in America is a sewer is an insult to sewage.”

There was Buffett, stooping for cigar butts as if he were a child again. He took no joy from others’ pain, but in the business of life, everyone chooses a side to play. Times like these brought out his sharpest skills, the joy of doing what he loved most, true to himself. “We’re selling some credit default swaps [insurance against firms going bankrupt] in situations where it is underpriced. I’m sitting here with my newest daily paper that I read, the Bond Buyer, on my lap. Who the hell would have thought that I’d be reading the Bond Buyer every day? The Bond Buyer costs $2,400 a year. I felt like asking for a daily subscription rate.


The Concepts and Practice of Mathematical Finance by Mark S. Joshi

Black-Scholes formula, Brownian motion, correlation coefficient, Credit Default Swap, currency risk, delta neutral, discrete time, Emanuel Derman, financial engineering, fixed income, implied volatility, incomplete markets, interest rate derivative, interest rate swap, London Interbank Offered Rate, martingale, millennium bug, power law, quantitative trading / quantitative finance, risk free rate, short selling, stochastic process, stochastic volatility, the market place, time value of money, transaction costs, value at risk, volatility smile, yield curve, zero-coupon bond

For example, a corporate bond pays a premium above riskless bonds because of the risk of default. Thus one could regard a corporate bond as a riskless bond plus a risky asset which pays out an annual coupon and demands a payment in the event that the issuer defaults. This risky asset is now traded in its own right and is called a credit default swap. Note that it can be synthesized by going long a corporate bond and short a riskless bond. We can use similar replication and arbitrage arguments to price a forward contract on any asset. Indeed to price a forward contract on a stock, provided it does not pay a dividend, we can use the same argument just by setting the foreign interest rate to zero.

Index N, 65 N(0, 1), 57 N(µ, a2), 98 or-field, 458 accreting notional, 429 admissible exercise strategy, see exercise strategy, admissible almost, 257 almost surely, 99 American, 10 American option, see option, American amortising notional, 429 annualized rates, 302 annuity, 308 .anti-thetic sampling, 192 arbitrage, 19-20, 27-29,429 and bounding option prices, 29-39 arbitrage-free price, 45, 46 arbitrageur, 12-13, 18 Arrow-Debreu security, 152 at-the-forward, 31 at-the-money, 30, 66 auto cap, 429 bank, 12 barrier option, see option, barrier basis point, 429 basket option, 261 Bermudan option, see option, Bermudan Bermudan swaption, see swaption, Bermudan BGM, 429 implementation of, 450-453 BGM model, 322-355 automatic calibration to co-terminal swaptions, 342 long steps, 337 running a simulation, 337-342 BGM/J, 429 BGM/J model, see BGM model bid-offer spread, 21 Black formula, 173, 310-311 approximate linearity, 356 approximation for swaption pricing under BGM model, 341 Black-Scholes formula, see option, call, Black-Scholes formula for Black-Scholes density, 188 Black-Scholes equation, 69, 160, 161 for options on dividend-paying assets, 123 higher-dimensional, 271 informal derivation of, 114-116 rigorous derivation, 116-119 solution of, 119-121 with time-dependent parameters, 164 Black-Scholes formula, 65 Black-Scholes model, 74, 113, 430 Black-Scholes price, 19 Black-Scholes model, 76 bond, 4 6, 430 callable, 301 convertible, 7, 430 corporate, 7 government, 1 premium, 2 riskless, 5, 7 zero-coupon, 5, 24-26, 28, 302, 433 Brownian bridge, 230 Brownian motion, 97-100, 101, 107, 142, 260, 430 correlated, 263 higher-dimensional, 261-263 Buffett, Warren, 2 bushy tree, see tree, non-recombining calibration to vanilla options using jump-diffusion, 377 call, 301 call option, see option, call callable bond, see bond, callable cap, 309, 430 caplet, 309-311, 430 strike of, 309 caption, 326, 430 cash bond, 26, 430 Central Limit theorem, 56, 60 Central Limit Theorem, 64 Central Limit theorem, 278,463 central method, 238 533 Index 534 CEV, see constant elasticity of variance chain rule, 106 for stochastic calculus, 109 characteristic function, 408 Cholesky decomposition, 227 cliquet, 425, 430 call, 425 optional, 426 put, 425 CMS, see swap, constant maturity co-initial, 317, 340 co-terminal, 317, 340 commodities, 123 complete market, 152, 430 compound optionality, 426 conditional probability, 460 consol, 430 constant elasticity of variance, 113 constant elasticity of variance process, 355 constant maturity swap, see swap, constant maturity contingent claim, 152, 430 continuously compounding rate, 25, 26 control variate and pricing of Bermudan swaptions, 351 on a tree, 288 convenience yield, 123 convexity, 35-37, 81 as a function of spot price in a log-type model, 383 correlation, 466 between forward rates, 321, 335 correlation matrix, 268, 466 cost of carry, 123 coupon, 4, 301, 430 covariance, 466 covariance matrix, 466 and implementing BGM, 343 crash, 10, 86 credit default swap, 23 credit rating, 316, 430 cumulative distribution function, 461 cumulative normal function, 65, 435, 437 default, 1 deflated, 168 Delta, 76, 80,430 and static replication, 246, 248 Black-Scholes formula for call option, 80 integral expression for, 189 Delta hedging, see hedging, Delta dependent, 461 derivative, 10, 430 credit, 11 weather, 11 Derman-Kani implied tree, 381 deterministic future smile, 244, 426 digital, 430 digital option, see option, digital dimensionality, 224, 438 dimensionality reduction, 229 discount curve, 431 discretely compounding money market account, 324 displaced diffusion model, 355 distribution log-normal, see log-normal distribution diversifiable risk, 431 diversification, 8 dividend, 7, 431 scrip, 25 dividend rate, 25 dividends and the Black-Scholes equation, 121-123 drift, 60, 111 of a forward rate under BGM, 330 real-world, 64 Dupire model, 381 dynamic replication, see replication, dynamic early exercise, 68 equivalent martingale measure for a tree with jumps, 363 equivalent probability measures, see probability measure, equivalence European, 10 European contingent claim, 116 exercise, 10 exercise boundary, 289 exercise region, 289 exercise strategy admissible, 286 expectation, 431, 462 conditional, 155 fat tails, 85, 431, 464 Feynman-Kac theorem, 161 fickle, 377 filtration, 143, 154, 162 first variation, see variation, first fixed leg, 306 fixed rate, 431 floating, 300 floating leg, 306 floating rate, 431 floating smile, see smile, floating floor, 309,431 floorlet, 309, 431 floortion, 326, 431 forward contract, 9, 22, 181, 431 and risk-neutrality, 137 value of, 26 forward price, 26, 31 forward rates, 303-305 forward-rate agreement, 23, 304, 431 Fourier transform, 395, 408 FRA, see forward-rate agreement free boundary value problem, 290 Gamma, 77, 80, 431 and static replication, 246, 248 Black-Scholes formula for a call option, 80 non-negativity of, 384 Index Gamma distribution, 402 Gamma function, 402 incomplete, 405 Gaussian distribution, 57, 103 Gaussian random variable synthesis of, 191 gearing, 300 geometric Brownian motion, 111, 114 gilt, 314 Girsanov transformation, 214 Girsanov's theorem, 158, 166, 210-213, 368, 390, 431 higher-dimensional, 267-271 Greeks, 77-83, 431 and static replication, 246, 248 computation of on a tree, 186 of multi-look options, 236-238 heat equation, 119, 120-121 Heath, Jarrow & Morton, 322 hedger, 12-13, 18 hedging, 4, 8, 11, 67-68, 431, 441 and martingale pricing, 162-164 Delta, 18-19, 68, 73, 76, 115, 118, 162 exotic option under jump-diffusion, 535 Ito's Lemma, 106-110 application of, 111-114 multi-dimensional, 264 joint density function, 464 joint law of minimum and terminal value of a Brownian motion with drift, 213 without drift, 208 jump-diffusion model, 87, 364-381 and deterministic future smiles, 244 and replication of American options, 293 price of vanilla options as a function of jump intensity, 374 pricing by risk-neutral evaluation, 364-367 jump-diffusion process, 361 jumps, 86-88 jumps on a tree, 362 Kappa, 79 knock in, 202 knock out, 202 knock-in option, see option, barrier knock-out option, see option, barrier kurtosis, 85, 432, 464 375 Gamma, 77 in a one-step tree, 44-45 in a three-state model, 49 in a two-step model, 51 of exotic options, 424 vanilla options in a jump-diffusion world, 372 Vega, 79 hedging strategy, 17-18, 44, 76 stop-loss, 143 hedging, discrete, 76 HJM model, 322 homogeneity, 274, 281, 383 implied volatility, see volatility, implied importance sampling, 193 in-the-money, 30 incomplete, 431 incomplete market, 50, 361, 367-375, 389, 390 incomplete model, 89 incremental path generation, see path generation, incremental independent, 461 information, 2, 4, 113, 140-145, 162, 401 conditioning on, 145 insider trading, 3 insurance, 12 inverse cumulative normal function, 192, 435, 436 inverse floater, 359 Ito, 97 Ito calculus higher-dimensional, 261, 263-266 Ito process, 106, 154 law of large numbers, 69, 191, 462 law of the minimum of a Brownian motion drift, 215, 216 law of the unconscious statistician, 463 Leibniz rule, 110 leveraging, 300 LIBID, 432 LIBOR, 302, 315, 432 LIBOR market model, 322 LIBOR-in-arrears, 312-313 LIBOR-in-arrears caplet pricing by BGM, 326 LIBOR-in-arrears FRA pricing by BGM, 326 likelihood ratio, 195, 237 liquidity, 21 Lloyds, 6 log-normal distribution, 61 log-normal model, 58 approximation by a tree, see tree, approximating a log-normal model for stock price movements, 112 log-type model, 382-385 long, 21, 432 low-discrepancy numbers, 193 the pricing of exotic options, 445-447 lucky paths, 369 marginal distribution, 465 Margrabe option, see option, Margrabe market efficiency, 2-4 weak, 3, 4, 99 market maker, 74 market model, 432 market price of risk, 89, 112 Index 536 Markov property, 3, 98, 99 strong, 210 martingale, 129, 145, 432 and no arbitrage, 146 continuous, 154-160 discrete, 146 higher-dimensional, 267 martingale measure, 148 choice of, 376 uniqueness, 150 martingale pricing and time-dependent parameters, 164-165 based on the forward, 172-175 continuous, 157-160 discrete, 145-154 equivalence to PDE method, 161-162 with dividend-paying assets, 171 martingale representation theorem, 162 maturity, 5 maximal foresight, 296 mean-reverting process, 390 measure change, 368 model risk, 244 moment, 432 moment matching, 193 and pricing of Asian options, 231-233 money-market account, 26, 114, 430 moneyness, 385 monotonicity theorem, 27 Monte Carlo simulation, 69, 462 and price of exotic options using a jump-diffusion model, 379 and pricing of European options, 191 computation of Greeks, 194-195 variance reduction, 192 Moro, 435 mortgage, 301 multi-look option, see option, multi-look Name, 6 natural payoff, 330 NFLWVR, 132, 135 no free lunch principle, 19 no free lunch with vanishing risk, see NFLWVR no-arbitrage, 45 non-recombining tree, see tree, non-recombining normal distribution, see Gaussian distribution, 461 notional, 304 numeral e, 168, 174, 310, 312, 314, 324 change of, 167 numerical integration and pricing of European options, 187-190 option, 9-12 American, 68, 144, 284, 429 boundary conditions for PDE, 290 lower bounds by Monte Carlo, 293-295 PDE pricing, 289-291 pricing on a tree, 287-289 replication of, 291-293 seller's price, 297 theoretical price of, 287 upper bounds by Monte Carlo, 295-297 American digital, 219 American put, 219 Asian, 222, 429 pricing by PDE or tree, 233-234 static replication of, 249-251 barrier, 69, 429 definition, 202-204 price of down-and-out call, 217, 218 basket, 261, 429 Bermudan, 284,429 binary, 429 call, 10, 181, 430 American, 32 Black-Scholes formula for, 65, 160 down-and-in, 202 down-and-out, 202 formula for price in jump-diffusion model, 366, 367 pay-off, 29 perpetual American, 299 pricing under Black-Scholes, 114 chooser, 294 continuous barrier expectation pricing of, 207-208, 216-219 PDE pricing of, 205-207 static replication of, 244-247, 252-256 static replication of down-and-out put, 244-246 continuous double barrier static replication, 246-247 digital, 83, 257 call, 83 put, 83 digital call, 181 Black-Scholes formula for price of, 183 digital put, 181 Black-Scholes formula for price of, 183 discrete barrier, 222 static replication of, 247-249 double digital, 130 European, 431 exotic, 10, 87 Monte Carlo, 444445 pricing under jump-diffusion, 379-381 knock-in, 431 knock-out, 69, 432 Margrabe, 260, 273-275 model-independent bounds on price, 29-39 multi-look, 223 Parisian, 432 path-dependent, 223 and risk-neutral pricing, 223-225 static replication of, 249-251 power call, 182 put, 10, 181,432 Black-Scholes formula for, 65 pay-off, 30 Index quanto, 260, 275-280 static replication of up-and-in put with barrier at strike, 251-252 trigger, 433 vanilla, 10 with multiple exercise dates, 284 out-of-the-money, 30 path dependence weak, 225 path generation, 226-230 incremental, 228 using spectral theory, 228 path-dependent exotic option, see option, path-dependent pathwise method, 195, 236 PDE methods and the pricing of European options, 195-196 Poisson process, 364 positive semi-definite, 467 positivity, 7, 28 predictable, 162 predictor-corrector, 340 present valuing, 302 previsible, 370 pricing arbitrage-free, 22 principal, 5, 301 probability risk-neutral, see risk-neutral probability probability density function, 461 probability measure, 458 equivalence, 147 product rule for Ito processes, 110 pseudo-square root, 468 put option, see option, put put-call parity, 30, 65, 67 put-call symmetry, 252-256 quadratic variation, 100, see variation, quadratic quanto call, 277 quanto drift, 276 quanto forward, 277 quanto option, see option, quanto quasi Monte Carlo, 194 Radon-Nikodym, 214 Radon-Nikodym derivative, 213 random time, 88, 143 random variable, 459 real-world drift, see drift, real-world recombining trees implementing, 443 reflection principle, 208-210 replication, 23, 116 and dividends, 122 and the pricing of European options, 196-198 classification of methods, 257 dynamic, 198, 257 in a one-step tree, 48-49 537 in a three-state model, 50 semi-static and jump-diffusion models, 381 static, 198 feeble, 257 mezzo, 257 strong, 243, 257 weak, 243, 257 repo, 315 restricted stochastic-volatility model, see Dupire model reverse option, 320 reversing pair, 319 Rho, 79 rho, 432 risk, 1-2, 8, 9 diversifiable, 8-9 purity of, 9 risk neutral, 19 risk premium, 46, 60, 64, 111, 119,432 risk-neutral distribution, 64 risk-neutral density as second derivative of call price, 137 in Black-Scholes world, 139 risk-neutral expectation, 64 risk-neutral measure, 148, 432 completeness, 166 existence of, 129 uniqueness, 166 risk-neutral pricing, 64 65, 140 higher-dimensional, 267-271 risk-neutral probability, 47, 52, 54, 59, 128 risk-neutral valuation, 59 in a one-step tree, 45-48 in a three-state model, 50 in jump models, 86 two-step model, 52 riskless, 1 riskless asset, 28 Rogers method for upper bounds by Monte Carlo, 295, 350 sample space, 458 self-financing portfolio, 28, 116-117, 128, 163, 369 dynamic, 28 share, 6-7, 432 share split, 57 short, 432 short rate, 25, 433 short selling, 21 simplex method, 295 skew, 433, 464 smile, 74-77 displaced-diffusion, 356,420 equity, 421 floating, 88, 385, 407, 413-414 foreign exchange, 413 FX, 424 interest-rate, 355-357, 424 jump-diffusion, 378, 415 sticky, 88, 413-414 sticky-delta, 413 538 smile (cont.) stochastic volatility, 398, 416 time dependence, 414-415 Variance Gamma, 406,417 smile dynamics Deiman-Kani, 420 displaced-diffusion, 420 Dupire model, 420 equity, 421 FX, 424 interest-rate, 424 jump-diffusion, 415 market, 413-415 model, 415-421 stochastic volatility, 416 Variance Gamma, 417 smoothing operator, 120 spectral theory, 228 speculator, 12, 18 split share, see share split spot price, 31 square root of a matrix, 467 standard error, 191 standard deviation, 463 static replication, see replication, static stepping methods for Monte Carlo, 439 stochastic, 433 stochastic calculus, 97 stochastic differential equation, 105 for square of Brownian motion, 107 stochastic process, 102-106, 141 stochastic volatility, 88, 389 and risk-neutral pricing, 390-393 implied, 400 pricing by Monte Carlo, 391-394 pricing by PDE and transform methods, 395-398 stochastic volatility smiles, see smile, stochastic volatility stock, 6-7, 433 stop loss hedging strategy, 18 stopping time, 143, 286, 346 straddle, 182, 257 Index lower bound via local optimization, 347 lower bounds by BGM, 345-349 pricing by BGM, 325 upper bounds by BGM, 349-352 cash-settled, 327 European, 310 price of, 313-314 payer's, 309,432 pricing by BGM, 323 receiver's, 309, 432 swaptions rapid approximation to price in a BGM model, 340 Taylor's theorem, 67, 80, 108 term structure of implied volatilities, 334 terminal decorrelation, 339, 352 Theta, 79, 433 and static replication, 246, 248 time homogeneity, 33, 333 time value of money, 24-26 time-dependent volatility and pricing of multi-look options, 235 Tower Law, 155 trading volatility, see volatility, trading of trading volume, 401 transaction costs, 21, 76, 90, 91 trapezium method, 188 tree with multiple time steps, 50-55 and pricing of European options, 183-186 and time-dependent volatility, 184 approximating a log-normal model, 60-68 approximating a normal model, 55-58 higher-dimensional, 277-280 non-recombining, 184 one-step, 44-50 risk-neutral behaviour, 61 trinomial, 184 with interest rates, 58-59 trigger FRA, 318 trigger swap, 325 pricing by BGM, 325 trinomial tree, see tree, trinomial strike, 10, 433 strong static replication, see replication, static, strong sub-replication, 369-375 super-replication, 369-375 swap, 300, 305-309, 433 constant maturity, 328 payer's, 306, 432 pricing by BGM, 323 receiver's, 306, 432 value of, 308 swap rate, 433 swap-rate market model, 340 swaption, 301, 309, 433 Bermudan, 301, 310, 342 and factor reduction, 352-355 lower bound via global optimization, 347 underlying, 10 uniform distribution, 461 valuation risk-neutral, see risk-neutral valuation value at risk, 433 Vanna, 433 VAR, 433 variance, 433, 463 Variance Gamma mean rate, 402 variance rate, 403 Variance Gamma density, 408 Variance Gamma model, 88, 404-407 and deterministic future smiles, 244 Variance Gamma process, 401-403 Index variation, 157, 367 first, 99, 367, 409 quadratic, 368 second, see variation, quadratic Vega, 79, 82, 433 integral expression for, 189 Vega hedging, see hedging, Vega volatility, 60, 65, 66, 73-74, 111 Black-Scholes formula as linear function of, 66 forward, 426 implied, 73, 197 instantaneous curve, 320, 333 539 root-mean-square, 320 time-dependence and tree-pricing, 294 trading of, 73 volatility surface, 363 weak static replication, see replication, static, weak Wiener measure, 141, 142 yield, 5, 24, 433 annualized, 25 yield curve, 319, 433 zero-coupon bond, see bond, zero-coupon


pages: 829 words: 186,976

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

airport security, Alan Greenspan, Alvin Toffler, An Inconvenient Truth, availability heuristic, Bayesian statistics, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, book value, Broken windows theory, business cycle, buy and hold, Carmen Reinhart, Charles Babbage, classic study, 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, disinformation, 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, Ford Model T, Freestyle chess, fudge factor, Future Shock, George Akerlof, global pandemic, Goodhart's law, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, Japanese asset price bubble, John Bogle, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, Laplace demon, 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, Oklahoma City bombing, PageRank, pattern recognition, pets.com, Phillips curve, Pierre-Simon Laplace, Plato's cave, power law, prediction markets, Productivity paradox, proprietary trading, public intellectual, random walk, Richard Thaler, Robert Shiller, Robert Solow, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, SimCity, 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, Timothy McVeigh, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, Wayback Machine, wikimedia commons

In a conference call in March 2007, Lehman CFO Christopher O’Meara told investors that the recent “hiccup” in the markets did not concern him and that Lehman hoped to do some “bottom fishing” from others who were liquidating their positions prematurely.79 He explained that the credit quality in the mortgage market was “very strong”—a conclusion that could only have been reached by looking at the AAA ratings for the securities and not at the subprime quality of the collateral. Lehman had bought a lemon. One year later, as the housing bubble began to burst, Lehman was desperately trying to sell its position. But with the skyrocketing premiums that investors were demanding for credit default swaps—investments that pay you out in the event of a default and which therefore provide the primary means of insurance against one—they were only able to reduce their exposure by about 20 percent.80 It was too little and too late, and Lehman went bankrupt on September 14, 2008. Intermission: Fear Is the New Greed The precise sequence of events that followed the Lehman bankruptcy could fill its own book (and has been described in some excellent ones, like Too Big to Fail).

., 185–88, 254–55 Council of Economic Advisers, 40 Council on Foreign Relations, 435 Cramton, Steven, 292–93 creativity, 287–88, 289, 290, 291, 311 credit bubble, 68, 196 credit default option (CDO), 20–21, 21, 22, 24, 25, 26–30, 36, 43, 462 tranches of, 26–28, 28 credit default swap, 36 credit markets, 19 Crist, Charlie, 33 Cronkite, Walter, 207–8 Crowley, Monica, 48–49, 467 crystal methamphetamine, 221 Cuban Missile Crisis, 419, 433 Curb Your Enthusiasm, 111 cyclones, see hurricanes Czechoslovakia, 52 Daily Kos, 60 Damon, Matt, 317 Dark Winter, 437 Darwin, Charles, 375 data: in baseball, 79–80, 84 Big, 9–12, 197, 250, 253, 264, 289, 447, 452 distribution of, 164, 165 in economics, 80, 185, 193–94 in frequentism, 253 overfitting of, 163–71, 166, 168–71, 185, 191, 452n, 478 Pareto principle and, 313 data mining, 298 Daum, Robert, 224, 227, 229 David, Larry, 111 Davis, Ricky, 239, 257 De Bernardinis, Bernardo, 143 debt crisis, European, 198 Deep Blue, 10, 266, 268, 292, 493–94 bug in, 283, 285, 286, 288–89 creation of, 283–85 Kasparov’s final games against, 282–83 Kasparov’s first game against, 268, 270–79, 271, 274, 275, 276, 278 Kasparov’s second game against, 279–82, 280 rook moved for no apparent purpose by, 277–79, 278, 288 Deep Thought, 268, 284 default, 20–21, 22, 27–29, 184 defense, 90, 92, 106 Defense Department, U.S., terrorism prevention by, 273 defensive range, 96 de Groot, Adriaan, 272 Denver, Colo., 150 Denver Post, 176 depth, breadth vs., 271–73 determinism, 112, 113, 241, 242, 249, 448 Detroit Tigers, 77, 88, 94 difference engine, 263 Discover, 160 discrimination, calibration vs., 474 disease, see infectious disease diversification, 27 “Divine Benevolence” (Bayes), 241, 242 Djokovic, Novak, 496 Dodger Stadium, 79 Dokhoian, Yuri, 282 Domodedovo Airport, 440 dot-com boom, 346–48, 361 Dow Jones Industrial Average, 37, 339, 340, 343, 498, 503 Doyle, Arthur Conan, 307 Drake equation, 488 Druckenmiller, Stanley, 356 Dukakis, Michael, 68 Duke University, 359 Dutch book, 256n Dwan, Tom, 308–11, 313, 315, 318, 324, 328 dynamic systems, 16, 118, 120, 194 E*Trade, 339, 363, 498 earthquake forecasting, 149–54, 230 computers in, 289 failure of, 7, 11, 143, 147–49, 158–61, 168–71, 174, 249, 253, 346, 389 overfitting and, 168–71, 185 short-term, 174 time-dependent, 154 earthquakes, 16, 142–75, 476, 512 aftershocks to, 154, 161, 174, 476–77 in Anchorage, 149 causes of, 162 distribution across time and space of, 154–57, 155, 427 foreshocks to, 144, 154, 155–57, 476 Great Sumatra, 161, 171 in Haiti, 147n, 155–56, 156, 224 in Japan, 154, 155, 168–71, 172 in L’Aquila, 142–44, 148, 154–55, 157, 173 Lisbon, 145 list of deadliest, 147 Loma Prieta, 160 magnitude vs. frequency of, 151–53, 152, 153, 368n, 427, 432, 437–38, 441 near Reno, 156–57, 157 in New Zealand, 174 earthquake swarm, 143n, 173 Earth System Science Center, 408 East Germany, 52 eBay, 353 Ecclesiastes, 459 economic data, noise in, 193–94, 198 economic growth, 6, 6, 186n economic progress, 7, 112, 243 economics, predictions in, 33, 176–77, 230 actual GDP vs., 191–93, 192, 193, 194 Big Data and, 197 computers in, 289 consensus vs. individual, 197–98, 335 context ignored in, 43 an ever-changing economy, 189–93 economics, predictions in (Cont.)


pages: 270 words: 79,180

The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit by Marina Krakovsky

Affordable Care Act / Obamacare, Airbnb, Al Roth, Ben Horowitz, Benchmark Capital, Black Swan, buy low sell high, Chuck Templeton: OpenTable:, Credit Default Swap, cross-subsidies, crowdsourcing, deal flow, disintermediation, diversified portfolio, experimental economics, George Akerlof, Goldman Sachs: Vampire Squid, income inequality, index fund, information asymmetry, Jean Tirole, Joan Didion, John Zimmer (Lyft cofounder), Kenneth Arrow, Lean Startup, Lyft, Marc Andreessen, Mark Zuckerberg, market microstructure, Martin Wolf, McMansion, Menlo Park, Metcalfe’s law, moral hazard, multi-sided market, Network effects, patent troll, Paul Graham, Peter Thiel, pez dispenser, power law, real-name policy, ride hailing / ride sharing, Robert Metcalfe, Sand Hill Road, search costs, seminal paper, sharing economy, Silicon Valley, social graph, supply-chain management, TaskRabbit, the long tail, The Market for Lemons, the strength of weak ties, too big to fail, trade route, transaction costs, two-sided market, Uber for X, uber lyft, ultimatum game, Y Combinator

When we put middlemen and profiting from risk in the same sentence, you may picture the sort of middleman who enjoys all the gains from taking risks without any of the losses—the sort of “heads I win, tails you lose” risk taker who, of course, isn’t taking any risk at all. An egregious example of this parasitic type is AIG, the insurance giant that, deemed “too big to fail,” got an $85 billion bailout from US taxpayers after the company’s financial products unit, which had sold highly risky credit-default swap contracts, lost billions of dollars when the subprime mortgages crumbled.1 The company proved unable to pay all the highly speculative securities that it had insured.2 (You might recall from the Introduction that a study of the warmth and competence of famous brands found AIG to be among the most contemptible, perceived as both incompetent and not having other people’s interests at heart.)


pages: 294 words: 82,438

Simple Rules: How to Thrive in a Complex World by Donald Sull, Kathleen M. Eisenhardt

Affordable Care Act / Obamacare, Airbnb, Apollo 13, asset allocation, Atul Gawande, barriers to entry, Basel III, behavioural economics, Berlin Wall, carbon footprint, Checklist Manifesto, complexity theory, Craig Reynolds: boids flock, Credit Default Swap, Daniel Kahneman / Amos Tversky, democratizing finance, diversification, drone strike, en.wikipedia.org, European colonialism, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, Glass-Steagall Act, Golden age of television, haute cuisine, invention of the printing press, Isaac Newton, Kickstarter, late fees, Lean Startup, Louis Pasteur, Lyft, machine translation, Moneyball by Michael Lewis explains big data, Nate Silver, Network effects, obamacare, Paul Graham, performance metric, price anchoring, RAND corporation, risk/return, Saturday Night Live, seminal paper, sharing economy, Silicon Valley, Startup school, statistical model, Steve Jobs, TaskRabbit, The Signal and the Noise by Nate Silver, transportation-network company, two-sided market, Wall-E, web application, Y Combinator, Zipcar

abstract_id=2149908. [>] And of course the Internet: World Bank, “Data: Internet Users (Per 100 People),” accessed January 5, 2012, http://data.worldbank.org/indicator/IT.NET.USER.P2. [>] High default rates: Barry Eichengreen et al., “How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swaps,” Journal of International Money and Finance 31 (2012): 1299–1318. [>] In 1988 bankers: Andrew G. Haldane and Vasileios Madouros, “The Dog and the Frisbee” (speech given at the Federal Reserve Bank of Kansas City’s annual economic policy symposium, Jackson Hole, Wyoming, August 31, 2012), www.kansascityfed.org/publicat/sympos/2012/ah.pdf. [>] Its successor: Ibid., 8. [>] The policies governing: Arthur B.


pages: 281 words: 86,069

Do No Harm: Stories of Life, Death and Brain Surgery by Henry Marsh

collateralized debt obligation, country house hotel, Credit Default Swap, credit default swaps / collateralized debt obligations, fear of failure

Nor was it cheap, since PFI has proved to be a very expensive way of building second-rate public buildings. Some would consider PFI to be an economic crime, although nobody is to be held responsible for it. It is clear now that PFI was part of the same debt-crazed culture that gave us Collateralized Debt Obligations and Credit Default Swaps and all those other dishonest acronyms and financial derivatives that have brought us (though not the bankers) to the edge of ruin. Various parts of the design were lopped off, resulting in large and unusual balconies outside the wards. The hospital management did not see this as an opportunity for improving the patients’ experience of being in hospital and instead saw it only as a suicide risk.


pages: 301 words: 89,076

The Globotics Upheaval: Globalisation, Robotics and the Future of Work by Richard Baldwin

agricultural Revolution, Airbnb, AlphaGo, AltaVista, Amazon Web Services, Apollo 11, augmented reality, autonomous vehicles, basic income, Big Tech, bread and circuses, business process, business process outsourcing, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, commoditize, computer vision, Corn Laws, correlation does not imply causation, Credit Default Swap, data science, David Ricardo: comparative advantage, declining real wages, deep learning, DeepMind, deindustrialization, deskilling, Donald Trump, Douglas Hofstadter, Downton Abbey, Elon Musk, Erik Brynjolfsson, facts on the ground, Fairchild Semiconductor, future of journalism, future of work, George Gilder, Google Glasses, Google Hangouts, Hans Moravec, hiring and firing, hype cycle, impulse control, income inequality, industrial robot, intangible asset, Internet of things, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, Kevin Roose, knowledge worker, laissez-faire capitalism, Les Trente Glorieuses, low skilled workers, machine translation, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, manufacturing employment, Mark Zuckerberg, mass immigration, mass incarceration, Metcalfe’s law, mirror neurons, new economy, optical character recognition, pattern recognition, Ponzi scheme, post-industrial society, post-work, profit motive, remote working, reshoring, ride hailing / ride sharing, Robert Gordon, Robert Metcalfe, robotic process automation, Ronald Reagan, Salesforce, San Francisco homelessness, Second Machine Age, self-driving car, side project, Silicon Valley, Skype, Snapchat, social intelligence, sovereign wealth fund, standardized shipping container, statistical model, Stephen Hawking, Steve Jobs, supply-chain management, systems thinking, TaskRabbit, telepresence, telepresence robot, telerobotics, Thomas Malthus, trade liberalization, universal basic income, warehouse automation

Legal Work Automated In late 2016, JP Morgan’s AI software, COIN, automated the reading and interpretation of commercial loan agreements. Before COIN, the work cost an estimated 360,000 hours by lawyers and loan officers. Now it’s done much faster and with fewer errors by a system that never sleeps while reading through 12,000 or so contracts a year. Plans are afoot to use COIN for complex legal filings like credit-default swaps and custody agreements. In a refrain that is almost regulatory by now, JP Morgan’s chief information officer, Dana Deasy, asserts that COIN doesn’t eliminate jobs. It just frees up the lawyers and loan officers for better things. “People always talk about this stuff as displacement. I talk about it as freeing people to work on higher-value things, which is why it’s such a terrific opportunity for the firm.”30 That may be true for the high-end lawyers, but there are about a million people working in legal services in the US.


pages: 262 words: 83,548

The End of Growth by Jeff Rubin

Alan Greenspan, Anthropocene, Ayatollah Khomeini, Bakken shale, banking crisis, Bear Stearns, Berlin Wall, British Empire, business cycle, call centre, carbon credits, carbon footprint, carbon tax, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, decarbonisation, deglobalization, Easter island, energy security, eurozone crisis, Exxon Valdez, Eyjafjallajökull, Fall of the Berlin Wall, fiat currency, flex fuel, Ford Model T, full employment, ghettoisation, Glass-Steagall Act, global supply chain, Hans Island, happiness index / gross national happiness, housing crisis, hydraulic fracturing, illegal immigration, income per capita, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Jevons paradox, Kickstarter, low interest rates, McMansion, megaproject, Monroe Doctrine, moral hazard, new economy, Occupy movement, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, proprietary trading, quantitative easing, race to the bottom, reserve currency, rolling blackouts, Ronald Reagan, South China Sea, sovereign wealth fund, subprime mortgage crisis, The Chicago School, The Death and Life of Great American Cities, Thomas Malthus, Thorstein Veblen, too big to fail, traumatic brain injury, uranium enrichment, urban planning, urban sprawl, women in the workforce, working poor, Yom Kippur War, zero-sum game

The surprising thing is that if we look at it through a different lens, the end of growth will leave us all richer than we ever may have thought. [ SOURCE NOTES ] INTRODUCTION this page: A copious amount of ink has been spilled dissecting the US housing crisis and subsequent stock market crash in 2008. For a particularly lively account of the bubble that developed for collateralized debt obligations and the emergence of the credit default swap market, see The Big Short (2010) by Michael Lewis. CHAPTER 1: CHANGING THE ECONOMIC SPEED LIMIT this page: For a broader take on how Reaganomics fostered the culture of deregulation that still persists in the United States, see The Price of Civilization: Economics and Ethics After the Fall (2011) by Jeffrey Sachs, director of the Earth Institute at Colombia University.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

"World Economic Forum" Davos, Adam Curtis, air traffic controllers' union, Alan Greenspan, AOL-Time Warner, banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, Everybody Ought to Be Rich, falling living standards, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, job polarisation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, Larry Ellison, light touch regulation, Londongrad, Long Term Capital Management, low interest rates, low skilled workers, manufacturing employment, market bubble, Martin Wolf, Mary Meeker, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, proprietary trading, Right to Buy, rising living standards, Robert Shiller, Robert Solow, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

As the economist, José Gabriel Palma of Cambridge University has concluded, ‘If this glut were in fact the “smoking gun” of the current crisis, never in the history of finance would anything have had such a multiplier effect.’233 Each of these were important ingredients of the global implosion. The banks were certainly reckless. The regulators failed to understand the dangerous implications of the new derivative-linked financial instruments—collateralised debt obligations, credit default swaps and special investment vehicles—that helped drive up world liquidity rates while greatly raising the level of risk in the system. Amongst those individually responsible, those on watch in the US and the UK were more culpable than those in other nations. Asia’s ‘savings glut’ (Figure 6.4) 234 Nevertheless, these issues only tell part of a much bigger story.


pages: 283 words: 85,906

The Clock Mirage: Our Myth of Measured Time by Joseph Mazur

Albert Einstein, Alfred Russel Wallace, Arthur Eddington, computer age, Credit Default Swap, Danny Hillis, Drosophila, Eratosthenes, Henri Poincaré, Intergovernmental Panel on Climate Change (IPCC), invention of movable type, Isaac Newton, Jeff Bezos, job automation, Lewis Mumford, Mark Zuckerberg, mass immigration, Pepto Bismol, quantum entanglement, self-driving car, seminal paper, Stephen Hawking, time dilation, twin studies

It seems as if the habits of synchronization continue after photoreception sensitivity ends.6 INTERLUDE: TIME ON THE TRADING FLOOR A New York hedge fund trader once told me that time is money. “Hedge funds are just cheap bets on credit,” he admitted. “Every day, I put money—millions of dollars—on futures and credit-default swaps. It’s a legal crapshoot, but you gotta know what you’re doing. I can lose a bundle in one second, and make lots of money in the next.” I thought about what that trader meant by that last sentence, and then imagined the amounts Bill Gates, Jeff Bezos, Mark Zuckerberg, George Soros, Michael Bloomberg, and Warren Buffett gained or lost in just fifteen seconds.


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Big Tech, bitcoin, bond market vigilante , Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, capitalist realism, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, democratizing finance, Donald Trump, emotional labour, eurozone crisis, Extinction Rebellion, extractivism, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, green new deal, Greenspan put, housing crisis, Hyman Minsky, impact investing, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Jeremy Corbyn, job polarisation, junk bonds, Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low interest rates, low skilled workers, market clearing, means of production, Modern Monetary Theory, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Phillips curve, Ponzi scheme, Post-Keynesian economics, post-war consensus, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, Robert Solow, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

The ratings agencies agreed to continue to give US MBSs and CDOs high ratings — similar to those they granted to US government debt — even as the quality of these securities deteriorated. This process was reinforced by the insurance industry. Companies like AIG allowed the owners of these securities to hedge against a potential default by the mortgage-holder by taking out infamous “credit default swaps”. If the value of the security fell, the owners would be due an insurance pay-out. The government, securitisers, rating agencies, and insurance industries collaborated to make it seem as though they were making huge amounts of money without having taken any real risk. And as long as house prices kept rising and securities kept being issued, their gamble paid off.


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

airline deregulation, airport security, Alan Greenspan, Alvin Toffler, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Bear Stearns, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, bond market vigilante , book value, Bretton Woods, business cycle, central bank independence, centralized clearinghouse, classic study, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Dr. Strangelove, energy security, equity premium, fiat currency, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, Future Shock, Glass-Steagall Act, Greenspan put, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", junk bonds, Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Lewis Mumford, Long Term Capital Management, low interest rates, low skilled workers, market bubble, market clearing, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, Neil Armstrong, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, Phillips curve, plutocrats, popular capitalism, price stability, RAND corporation, Reminiscences of a Stock Operator, rent-seeking, Robert Shiller, Robert Solow, rolodex, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, secular stagnation, short selling, stock buybacks, subprime mortgage crisis, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tipper Gore, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, We are all Keynesians now, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

Robert Rubin and Jacob Weisberg, In an Uncertain World: Tough Choices from Wall Street to Washington (New York: Random House, 2003), 287–88. 9. It is sometimes pointed out that Born’s concerns related mainly to interest-rate swaps, not to the credit-default swaps that proved dangerous when the insurer AIG failed in 2008. But if Born’s instincts on central clearing and margin requirements had been adopted for interest-rate swaps, the same principles would presumably have been applied to credit-default swaps as that market developed in the next decade. Further, it is true that Born did not present a fully fleshed-out proposal; rather, the CFTC issued a “concept release,” consisting of a laundry list of discussion points, and Timothy Geithner, then at the Treasury, recalls her ideas as “mostly impenetrable.”

Michael Hirsh, Capital Offense: How Washington’s Wise Men Turned America’s Future over to Wall Street (Hoboken, NJ: Wiley, 2010), 13. 17. Looking back, Greenspan raised the possibility that concentrating risk in derivatives clearinghouses might backfire, an argument that was credibly revived by some experts after the 2008 crisis. (See, for example, Credit Default Swaps, Clearing Houses, and Exchanges, Squam Lake Working Group on Financial Regulation, July 2009.) However, while clearinghouses are not without risk, they are on balance less threatening to systemic stability than opaque webs of over-the-counter transactions, a point that Greenspan does not contest with any vigor.


pages: 285 words: 86,853

What Algorithms Want: Imagination in the Age of Computing by Ed Finn

Airbnb, Albert Einstein, algorithmic bias, algorithmic management, algorithmic trading, AlphaGo, Amazon Mechanical Turk, Amazon Web Services, bitcoin, blockchain, business logic, Charles Babbage, Chuck Templeton: OpenTable:, Claude Shannon: information theory, commoditize, Computing Machinery and Intelligence, Credit Default Swap, crowdsourcing, cryptocurrency, data science, DeepMind, disruptive innovation, Donald Knuth, Donald Shoup, Douglas Engelbart, Douglas Engelbart, Elon Musk, Evgeny Morozov, factory automation, fiat currency, Filter Bubble, Flash crash, game design, gamification, Google Glasses, Google X / Alphabet X, Hacker Conference 1984, High speed trading, hiring and firing, Ian Bogost, industrial research laboratory, invisible hand, Isaac Newton, iterative process, Jaron Lanier, Jeff Bezos, job automation, John Conway, John Markoff, Just-in-time delivery, Kickstarter, Kiva Systems, late fees, lifelogging, Loebner Prize, lolcat, Lyft, machine readable, Mother of all demos, Nate Silver, natural language processing, Neal Stephenson, Netflix Prize, new economy, Nicholas Carr, Nick Bostrom, Norbert Wiener, PageRank, peer-to-peer, Peter Thiel, power law, Ray Kurzweil, recommendation engine, Republic of Letters, ride hailing / ride sharing, Satoshi Nakamoto, self-driving car, sharing economy, Silicon Valley, Silicon Valley billionaire, Silicon Valley ideology, Silicon Valley startup, SimCity, Skinner box, Snow Crash, social graph, software studies, speech recognition, statistical model, Steve Jobs, Steven Levy, Stewart Brand, supply-chain management, tacit knowledge, TaskRabbit, technological singularity, technological solutionism, technoutopianism, the Cathedral and the Bazaar, The Coming Technological Singularity, the scientific method, The Signal and the Noise by Nate Silver, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, Turing machine, Turing test, Uber and Lyft, Uber for X, uber lyft, urban planning, Vannevar Bush, Vernor Vinge, wage slave

The coins, pieces of paper, or cowrie shells may not have much intrinsic value as physical objects, but they are markers of a symbolic system that financial writer and activist Brett Scott described as analogous to the machine code of capitalism—a foundational abstraction so far removed from the baklava layers of bonds, boutique high-frequency securities trades, and credit default swaps as to be unquestioned and invisible.28 Money works because we all believe in it at the same time, even though history is rife with incidents of hyperinflation, financial collapse, and gross corruption where that faith can vanish overnight. State currencies and central banks added a second layer of trust and directed management to the equation, backing the value of a coin or note with the authority of the state, what in the United States is sometimes called the “full faith and credit” of the federal government.29 Currencies could be supported intrinsically, like Isaac Newton weighing and tracking the precious metals in each British coin, or extrinsically, like a government maintaining a reserve of gold bullion to anchor the value of its paper currency.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

activist fund / activist shareholder / activist investor, Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black Swan, bond market vigilante , bonus culture, Bretton Woods, business climate, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, Cornelius Vanderbilt, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial engineering, financial innovation, financial intermediation, Fractional reserve banking, full employment, Glass-Steagall Act, God and Mammon, Golden arches theory, Gordon Gekko, greed is good, Hyman Minsky, income inequality, industrial research laboratory, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, plutocrats, price stability, principal–agent problem, profit motive, proprietary trading, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

Andrew Haldane of the Bank of England has estimated that the share of the major global banks’ assets held in their trading books doubled between 2000 and 2007 from 20 per cent to 40 per cent. The growth especially of trading in derivative instruments and structured products such as collateralised debt obligations and credit default swaps has been spectacular. In the first decade of the new millennium, much of this dealing in what the investor Warren Buffett calls ‘financial weapons of mass destruction’ took place not on organised exchanges, but in opaque over-the-counter markets where transactions take place on computer screens and over the telephone between individual banks and companies.


pages: 345 words: 92,849

Equal Is Unfair: America's Misguided Fight Against Income Inequality by Don Watkins, Yaron Brook

3D printing, Affordable Care Act / Obamacare, Apple II, barriers to entry, Berlin Wall, Bernie Madoff, blue-collar work, business process, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, collective bargaining, colonial exploitation, Cornelius Vanderbilt, corporate governance, correlation does not imply causation, creative destruction, Credit Default Swap, crony capitalism, David Brooks, deskilling, Edward Glaeser, Elon Musk, en.wikipedia.org, financial deregulation, immigration reform, income inequality, indoor plumbing, inventory management, invisible hand, Isaac Newton, Jeff Bezos, Jony Ive, laissez-faire capitalism, Louis Pasteur, low skilled workers, means of production, minimum wage unemployment, Naomi Klein, new economy, obamacare, Peter Singer: altruism, Peter Thiel, profit motive, rent control, Ronald Reagan, Silicon Valley, Skype, Solyndra, statistical model, Steve Jobs, Steve Wozniak, The Spirit Level, too big to fail, trickle-down economics, Uber for X, urban renewal, War on Poverty, wealth creators, women in the workforce, working poor, zero-sum game

When a company goes public, it allows many individuals to buy ownership shares in the belief that they’ll receive returns (through dividends and/or through selling the shares at a higher price in the future), and it allows companies to raise enormous amounts of capital to fund growth, and hopefully earn more money than they would if they remained privately owned. Risk mitigation involves tools like derivatives, futures contracts, credit default swaps, and any number of other instruments that allow people to guard against unpredictable hazards. The most common form of risk mitigation is insurance. Absent financiers, we would all have to be self-insured, covering unexpected costs using our own savings. Insurance allows us to pay a fixed cost up front in order to shield ourselves from unknown and potentially catastrophic costs in the future.


pages: 309 words: 91,581

The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It by Timothy Noah

air traffic controllers' union, Alan Greenspan, assortative mating, autonomous vehicles, Bear Stearns, blue-collar work, Bonfire of the Vanities, Branko Milanovic, business cycle, call centre, carbon tax, collective bargaining, compensation consultant, computer age, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, Deng Xiaoping, easy for humans, difficult for computers, Erik Brynjolfsson, Everybody Ought to Be Rich, feminist movement, Ford Model T, Frank Levy and Richard Murnane: The New Division of Labor, Gini coefficient, government statistician, Gunnar Myrdal, income inequality, independent contractor, industrial robot, invisible hand, It's morning again in America, job automation, Joseph Schumpeter, longitudinal study, low skilled workers, lump of labour, manufacturing employment, moral hazard, oil shock, pattern recognition, Paul Samuelson, performance metric, positional goods, post-industrial society, postindustrial economy, proprietary trading, purchasing power parity, refrigerator car, rent control, Richard Feynman, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, Stephen Hawking, Steve Jobs, subprime mortgage crisis, The Spirit Level, too big to fail, trickle-down economics, Tyler Cowen, Tyler Cowen: Great Stagnation, union organizing, upwardly mobile, very high income, Vilfredo Pareto, War on Poverty, We are the 99%, women in the workforce, Works Progress Administration, Yom Kippur War

“They just wanted a nice house in Greenwich and maybe a sailboat.” What spoiled everything, Trillin argued, was “when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street” to craft derivatives. “Do you think our guys could have invented, say, credit default swaps? Give me a break! They couldn’t have done the math.” Warren Buffett would seem to agree that genius and finance are a lethal combination. He reportedly once proposed (presumably in jest) firing any financial manager found to have an IQ above 115.29 Trillin didn’t know when he wrote his op-ed that his comical speculation was well grounded in the latest academic research.


pages: 325 words: 90,659

Narconomics: How to Run a Drug Cartel by Tom Wainwright

"World Economic Forum" Davos, Airbnb, barriers to entry, bitcoin, business process, call centre, carbon credits, collateralized debt obligation, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, failed state, financial innovation, illegal immigration, Mark Zuckerberg, microcredit, price elasticity of demand, price mechanism, RAND corporation, Ronald Reagan, Sam Peltzman, Skype, TED Talk, vertical integration

In the tech business, new services and inventions created by the likes of Google and Facebook present legal and moral dilemmas about privacy and data protection faster than courts can rule on them. In the banking industry, the pace of financial innovation in the run-up to the meltdown of 2007 made it hard for the authorities to notice that the pileup of credit-default swaps, collateralized-debt obligations, and other inventive products represented an accident waiting to happen. Even now, the regulators lag far behind the financial innovators. The Dodd-Frank Act, a mammoth piece of legislation designed to prevent bankers from taking the kinds of risks that nearly capsized the world economy in 2007, had still not been fully implemented five years after it was passed in 2010.


pages: 327 words: 91,351

Traders at Work: How the World's Most Successful Traders Make Their Living in the Markets by Tim Bourquin, Nicholas Mango

algorithmic trading, automated trading system, backtesting, buy and hold, commodity trading advisor, Credit Default Swap, Elliott wave, financial engineering, fixed income, global macro, Long Term Capital Management, managed futures, Market Wizards by Jack D. Schwager, paper trading, pattern recognition, prediction markets, risk tolerance, Small Order Execution System, statistical arbitrage, The Wisdom of Crowds, transaction costs, zero-sum game

Because you’re following the ECB and other central banks, are you trading currency futures at all? Berger: No. I don’t trade currency futures. And the main reason I stick with the asset classes I mentioned is because I think it gets too difficult to keep track of things. As I said earlier, I used to be a fixed-income guy and traded a lot of credit default swaps, corporate bonds, and even sovereign bonds, but it’s just too much to keep track of. Nowadays, with the advent of ETFs, if I want to get a general trade on, say, the euro or the Australian dollar, I can trade that using ETFs. Of course, I’m giving up some fees here and there, but I’m happy to just take it as a macro trade and not have to worry about the intricacies of dealing with foreign exchange and corporate bonds, because I’d then need different brokers and every­thing else.


The Unknowers: How Strategic Ignorance Rules the World by Linsey McGoey

Alan Greenspan, An Inconvenient Truth, anti-globalists, antiwork, battle of ideas, behavioural economics, Big Tech, Black Lives Matter, Branko Milanovic, British Empire, Cambridge Analytica, carbon tax, Cass Sunstein, Clive Stafford Smith, conceptual framework, Corn Laws, corporate governance, corporate raider, Credit Default Swap, David Ricardo: comparative advantage, Donald Trump, drone strike, en.wikipedia.org, European colonialism, fake news, Frances Oldham Kelsey, hiring and firing, Howard Zinn, income inequality, it is difficult to get a man to understand something, when his salary depends on his not understanding it, joint-stock company, junk bonds, knowledge economy, market fundamentalism, mass incarceration, Michael Milken, minimum wage unemployment, Naomi Klein, new economy, Nick Leeson, p-value, Paul Samuelson, Peter Thiel, plutocrats, post-truth, public intellectual, race to the bottom, randomized controlled trial, rent-seeking, road to serfdom, Robert Mercer, Ronald Reagan, Scientific racism, selective serotonin reuptake inhibitor (SSRI), Social Justice Warrior, Steven Pinker, Suez crisis 1956, The Chicago School, The Wealth of Nations by Adam Smith, union organizing, Upton Sinclair, W. E. B. Du Bois, Washington Consensus, wealth creators

Investment banks were saved not because of blamelessness, but because their recklessness was on such a massive scale that measuring the full risk created by the banks’ exposure to their own bad loans was impossible. As one insider put it: There’s no limit to the risk in the market. A bank with a market capitalization of one billion dollars might have one trillion dollars’ worth of credit default swaps outstanding. No one knows how many there are! And no one knows where they are!4 A similar remark was made by the economist Anna Schwartz, co-author with Milton Friedman of A Monetary History of the United States, 1867 to 1960, a book that has been influential on regulatory policy in the United States over recent decades.


pages: 318 words: 91,957

The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America—and How to Undo His Legacy by David Gelles

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 3D printing, accounting loophole / creative accounting, Adam Neumann (WeWork), air traffic controllers' union, Alan Greenspan, Andrei Shleifer, Bear Stearns, benefit corporation, Bernie Sanders, Big Tech, big-box store, Black Monday: stock market crash in 1987, Boeing 737 MAX, call centre, carbon footprint, Carl Icahn, collateralized debt obligation, Colonization of Mars, company town, coronavirus, corporate governance, corporate raider, corporate social responsibility, COVID-19, Credit Default Swap, credit default swaps / collateralized debt obligations, disinformation, Donald Trump, financial deregulation, financial engineering, fulfillment center, gig economy, global supply chain, Gordon Gekko, greed is good, income inequality, inventory management, It's morning again in America, Jeff Bezos, junk bonds, Kaizen: continuous improvement, Kickstarter, Lean Startup, low interest rates, Lyft, manufacturing employment, Mark Zuckerberg, Michael Milken, Neil Armstrong, new economy, operational security, profit maximization, profit motive, public intellectual, QAnon, race to the bottom, Ralph Nader, remote working, Robert Bork, Ronald Reagan, Rutger Bregman, self-driving car, shareholder value, side hustle, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, Steve Ballmer, stock buybacks, subprime mortgage crisis, TaskRabbit, technoutopianism, Travis Kalanick, Uber and Lyft, uber lyft, warehouse robotics, Watson beat the top human players on Jeopardy!, We are the 99%, WeWork, women in the workforce

GE Capital had become the very opposite of what it was meant to be, knocking the middle class down instead of building it up. Even beyond GE’s own role in the crisis, the primal forces that led so much risk to be amassed by so few reflected the Welchian worldview. The appetite for endless growth—no matter the risk—was ripped straight from the GE playbook. The embrace of financial complexity—credit default swaps, collateralized debt obligations, and mortgage-backed securities—was an extension of the black box culture that GE Capital helped create. And investors’ enduring faith that the markets could always go up—even the housing market—was nurtured over the years by Welch’s quest for consistent earnings growth.


pages: 436 words: 98,538

The Upside of Inequality by Edward Conard

affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Alan Greenspan, Albert Einstein, assortative mating, bank run, Berlin Wall, book value, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Climatic Research Unit, cloud computing, corporate governance, creative destruction, Credit Default Swap, crony capitalism, disruptive innovation, diversified portfolio, Donald Trump, en.wikipedia.org, Erik Brynjolfsson, Fall of the Berlin Wall, full employment, future of work, Gini coefficient, illegal immigration, immigration reform, income inequality, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invention of the telephone, invisible hand, Isaac Newton, Jeff Bezos, Joseph Schumpeter, Kenneth Rogoff, Kodak vs Instagram, labor-force participation, Larry Ellison, liquidity trap, longitudinal study, low interest rates, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass immigration, means of production, meta-analysis, new economy, offshore financial centre, paradox of thrift, Paul Samuelson, pushing on a string, quantitative easing, randomized controlled trial, risk-adjusted returns, Robert Gordon, Ronald Reagan, Second Machine Age, secular stagnation, selection bias, Silicon Valley, Simon Kuznets, Snapchat, Steve Jobs, survivorship bias, The Rise and Fall of American Growth, total factor productivity, twin studies, Tyler Cowen, Tyler Cowen: Great Stagnation, University of East Anglia, upwardly mobile, War on Poverty, winner-take-all economy, women in the workforce, working poor, working-age population, zero-sum game

In the aftermath of the financial crisis, the economy has dialed back risk-taking to compensate for the now-recognized inherent instability of banking and the damage it causes. Unfortunately, political leaders—on both the left and the right—have successfully persuaded the public to blame Wall Street, the Community Reinvestment Act, Fannie Mae and Freddie Mac, loose monetary policy, a laissez-faire regulatory philosophy, credit default swaps, the failure to save Lehman Brothers, and anyone and anything else they can for the inherent instability of banking. For political gain, lawmakers have done little to address the situation logically. Instead, lawmakers have undermined the low-cost alternative to a panic by weakening the Fed’s ability to act swiftly and without political interference in a bank run.


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Asian financial crisis, bank run, banking crisis, Bear Stearns, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, classic study, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, endogenous growth, eurozone crisis, export processing zone, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, industrial cluster, information asymmetry, joint-stock company, Kenneth Rogoff, land reform, liberal capitalism, light touch regulation, Long Term Capital Management, low interest rates, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, Multi Fibre Arrangement, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, Paul Samuelson, precautionary principle, price stability, profit maximization, race to the bottom, regulatory arbitrage, Savings and loan crisis, savings glut, Silicon Valley, special drawing rights, special economic zone, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

Moss, “An Ounce of Prevention: Financial regulation, moral hazard, and the end of ‘too big to fail,’” Harvard Magazine (September–October 2009) (http://harvardmagazine.com/2009/09/ financial-risk-management-plan?page=0,1). 22 Enrque G. Mendoza and Vincenzo Quadrini, “Did Financial Globalisation Make the US Crisis Worse?” VoxEU.org, November 14, 2009 (http://voxeu.org/index.php?q=node/4206). 23 And not just financial havens. The reason that AIG’s credit-default swap operations were based in London is that this was a much less heavily regulated environment than New York. 24 Simon Johnson, “The Quiet Coup,” The Atlantic (May 2008) (http://www.theatlantic.com/doc/ 200905/imf-advice). 25 Johnson and I had often taken stands on the opposite sides of the argument, while remaining friends and respectful of each other’s views.


pages: 353 words: 98,267

The Price of Everything: And the Hidden Logic of Value by Eduardo Porter

Alan Greenspan, Alvin Roth, AOL-Time Warner, Asian financial crisis, Ayatollah Khomeini, banking crisis, barriers to entry, behavioural economics, Berlin Wall, British Empire, capital controls, carbon tax, Carmen Reinhart, Cass Sunstein, clean water, Credit Default Swap, Deng Xiaoping, Easter island, Edward Glaeser, European colonialism, Fall of the Berlin Wall, financial deregulation, financial engineering, flying shuttle, Ford paid five dollars a day, full employment, George Akerlof, Glass-Steagall Act, Gordon Gekko, guest worker program, happiness index / gross national happiness, housing crisis, illegal immigration, immigration reform, income inequality, income per capita, informal economy, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jean Tirole, John Maynard Keynes: technological unemployment, Joshua Gans and Andrew Leigh, junk bonds, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, longitudinal study, loss aversion, low skilled workers, Martin Wolf, means of production, Menlo Park, Mexican peso crisis / tequila crisis, Michael Milken, Monkeys Reject Unequal Pay, new economy, New Urbanism, peer-to-peer, pension reform, Peter Singer: altruism, pets.com, placebo effect, precautionary principle, price discrimination, price stability, rent-seeking, Richard Thaler, rising living standards, risk tolerance, Robert Shiller, Ronald Reagan, search costs, Silicon Valley, stem cell, Steve Jobs, Stewart Brand, superstar cities, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, transatlantic slave trade, ultimatum game, unpaid internship, urban planning, Veblen good, women in the workforce, World Values Survey, Yom Kippur War, young professional, zero-sum game

By 2005, the share of workers in the finance industry with a college education exceeded that of other industries by nearly 20 percent. These smart financiers turned their creativity on, inventing junk bonds in the 1980s and moving on, in the last few years, to residential mortgage-backed securities and credit default swaps. By 2006, pay in the financial sector was again 70 percent higher than wages elsewhere in the private sector. Then the financial industry blew up. Since the end of 2008, when the demise of the investment bank Lehman Brothers sent financial markets into a tailspin around the world, bankers have argued insistently against regulatory efforts to limit their remuneration packages, observing that curtailing financial activity will hamstring their ability to hire the best of the best.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, bank run, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, buy and hold, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, deal flow, Deng Xiaoping, diversification, diversified portfolio, Dr. Strangelove, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, Great Leap Forward, guns versus butter model, high net worth, income inequality, interest rate derivative, it's over 9,000, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, power law, price mechanism, price stability, private sector deleveraging, proprietary trading, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, short squeeze, sovereign wealth fund, special drawing rights, special economic zone, subprime mortgage crisis, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, vertical integration, War on Poverty, Washington Consensus, zero-sum game

We needed people who, in the immortal words of legendary banker John Gutfreund, were ready “to bite the ass off a bear” when it came to trading currencies, stocks and derivatives. There was no lack of testosterone among the uniformed military or the spies in the room, but they knew no more about destroying a country with credit default swaps than the average stock trader knew about the firing sequence for an ICBM. If this project was going to succeed, I had to persuade Defense to let me recruit some of my peers to make the game more realistic and more valuable for them. At the October session, I gave a presentation on futures and derivatives to explain how these leveraged instruments could be used to manipulate underlying physical markets, including those in strategic commodities such as oil, uranium, copper and gold.


pages: 317 words: 106,130

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

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

By the mid 1990s, globalization had led to the development of new forms of emerging market securities, new commodity products, as well as new forms of non-exchange traded financial products such as swaps to manage investor unique risks not fulfilled by more general exchange based products. The development of these non-exchange traded products culminated in the growth of various fixed income products (e.g., credit default swaps), which helped manage not only the exposure to interest rates but also the credit risk as well. The evolution, if not revolution, in the market structure and trading also impacted the way practitioners and academics viewed the asset pricing process. Concerns over the deviations from the strict CAPM process led to new research focused on issues that have been expanded under the topic “behavioral economics,” which offers for some a more plausible picture of investor behavior.


pages: 363 words: 98,024

Keeping at It: The Quest for Sound Money and Good Government by Paul Volcker, Christine Harper

Alan Greenspan, anti-communist, Ayatollah Khomeini, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Bretton Woods, business cycle, central bank independence, corporate governance, Credit Default Swap, Donald Trump, fiat currency, financial engineering, financial innovation, fixed income, floating exchange rates, forensic accounting, full employment, Glass-Steagall Act, global reserve currency, income per capita, inflation targeting, liquidationism / Banker’s doctrine / the Treasury view, low interest rates, margin call, money market fund, Nixon shock, oil-for-food scandal, Paul Samuelson, price stability, proprietary trading, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Ronald Reagan, Rosa Parks, Savings and loan crisis, secular stagnation, Sharpe ratio, Silicon Valley, special drawing rights, too big to fail, traveling salesman, urban planning

“It just moves around the [economic] rents* in the financial system. Besides it’s a lot of fun.” (Later, at dinner, he suggested the possibility of small ways in which economic welfare could be advanced, but I felt I had already gotten the gist of his thinking.) One aspect of financial engineering soon took off. Credit default swaps, originally designed to provide banks with an efficient way to insure their own loan portfolios, proliferated as trading instruments. The use of tradable derivatives supported the so-called securitization of loans, including the bundling of packages of risky “subprime” mortgages, subdividing the risk for sale to investors.


pages: 311 words: 94,732

The Rapture of the Nerds by Cory Doctorow, Charles Stross

"World Economic Forum" Davos, 3D printing, Alan Greenspan, Ayatollah Khomeini, butterfly effect, cognitive dissonance, combinatorial explosion, complexity theory, Credit Default Swap, dematerialisation, Drosophila, epigenetics, Extropian, financial engineering, Future Shock, gravity well, greed is good, haute couture, heat death of the universe, hive mind, margin call, mirror neurons, negative equity, phenotype, plutocrats, rent-seeking, Richard Feynman, telepresence, Turing machine, Turing test, union organizing

He stares past the doctor at the peeling white paint on the wall of this sorry excuse for a medical center. “What have they got to do with—?” “Carbon traders.” Doc nods as he rams the blunt end of the quarter-inch needle against Huw’s jugular. Machines whine and click, and the side of Huw’s neck goes numb. “Once the children of Mammon started floating credit-default swaps against carbon remediation bonds, the whole planet became worth more if it was on fire than if it was fulla trees. So now you’ve got all these trillion-dollar bets that’ll go bust if the polar caps don’t melt, and it wasn’t long afore the polar caps were worth more melted than intact, and well, the market provided the incentives.


pages: 417 words: 97,577

The Myth of Capitalism: Monopolies and the Death of Competition by Jonathan Tepper

"Friedman doctrine" OR "shareholder theory", Affordable Care Act / Obamacare, air freight, Airbnb, airline deregulation, Alan Greenspan, bank run, barriers to entry, Berlin Wall, Bernie Sanders, Big Tech, big-box store, Bob Noyce, Boston Dynamics, business cycle, Capital in the Twenty-First Century by Thomas Piketty, citizen journalism, Clayton Christensen, collapse of Lehman Brothers, collective bargaining, compensation consultant, computer age, Cornelius Vanderbilt, corporate raider, creative destruction, Credit Default Swap, crony capitalism, diversification, don't be evil, Donald Trump, Double Irish / Dutch Sandwich, Dunbar number, Edward Snowden, Elon Musk, en.wikipedia.org, eurozone crisis, Fairchild Semiconductor, Fall of the Berlin Wall, family office, financial innovation, full employment, gentrification, German hyperinflation, gig economy, Gini coefficient, Goldman Sachs: Vampire Squid, Google bus, Google Chrome, Gordon Gekko, Herbert Marcuse, income inequality, independent contractor, index fund, Innovator's Dilemma, intangible asset, invisible hand, Jeff Bezos, Jeremy Corbyn, Jevons paradox, John Nash: game theory, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Rogoff, late capitalism, London Interbank Offered Rate, low skilled workers, Mark Zuckerberg, Martin Wolf, Maslow's hierarchy, means of production, merger arbitrage, Metcalfe's law, multi-sided market, mutually assured destruction, Nash equilibrium, Network effects, new economy, Northern Rock, offshore financial centre, opioid epidemic / opioid crisis, passive investing, patent troll, Peter Thiel, plutocrats, prediction markets, prisoner's dilemma, proprietary trading, race to the bottom, rent-seeking, road to serfdom, Robert Bork, Ronald Reagan, Sam Peltzman, secular stagnation, shareholder value, Sheryl Sandberg, Silicon Valley, Silicon Valley billionaire, Skype, Snapchat, Social Responsibility of Business Is to Increase Its Profits, SoftBank, Steve Jobs, stock buybacks, tech billionaire, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, undersea cable, Vanguard fund, vertical integration, very high income, wikimedia commons, William Shockley: the traitorous eight, you are the product, zero-sum game

This did not include any lower-level posts, which were also filled with Goldman Sachs employees.83 Henry Paulson joined Goldman Sachs in 1974 and later became its chairman and CEO in 1999. When the 2007–2008 financial crisis happened, Paulson decided which banks would be rescued and which would not. Naturally Goldman Sachs survived. Critically, he approved an $85 billion bailout to insurance giant AIG. AIG in response paid Goldman the $13 billion it owed them from credit default swaps.84 The revolving door paid off spectacularly for Goldman Sachs See Figure 8.4. Figure 8.4 Revolving Door between Goldman Sachs and the Federal Government SOURCE: https://steemit.com/corporatism/@geke/gekevenn-goldman-sachs-updated. Even after the crisis, when Timothy Geithner became Treasury Secretary under President Obama, he spoke daily with the CEO of Goldman Sachs, according to logs obtained under the Freedom of Information Act.


pages: 493 words: 98,982

The Tyranny of Merit: What’s Become of the Common Good? by Michael J. Sandel

affirmative action, Affordable Care Act / Obamacare, anti-communist, Berlin Wall, Bernie Sanders, Boris Johnson, Brexit referendum, Capital in the Twenty-First Century by Thomas Piketty, centre right, coronavirus, COVID-19, Credit Default Swap, Deng Xiaoping, Donald Trump, ending welfare as we know it, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, global supply chain, helicopter parent, High speed trading, immigration reform, income inequality, Khan Academy, laissez-faire capitalism, meritocracy, meta-analysis, Nate Silver, new economy, obamacare, Occupy movement, open immigration, Paris climate accords, plutocrats, prosperity theology / prosperity gospel / gospel of success, Rishi Sunak, Ronald Reagan, smart grid, social distancing, Steve Jobs, Steven Levy, the market place, The Wealth of Nations by Adam Smith, W. E. B. Du Bois, Washington Consensus, Yochai Benkler

This minuscule edge was worth hundreds of millions of dollars to high-speed traders. 60 But it is hard to claim that speeding up such transactions from the blink of an eye to something even faster contributes anything of value to the economy. High-speed trading is not the only financial innovation of dubious economic value; credit default swaps that enable speculators to bet on future prices without investing in any productive activity are hard to distinguish from casino gambling. One party wins and the other loses, money changes hands, but no investment occurs along the way. When companies use profits to buy back shares instead of investing in research and development, or in new equipment, shareholders gain but the productive capacity of the company does not.


pages: 345 words: 100,989

The Pyramid of Lies: Lex Greensill and the Billion-Dollar Scandal by Duncan Mavin

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Adam Neumann (WeWork), air freight, banking crisis, Bernie Madoff, Big Tech, Boeing 737 MAX, Boris Johnson, Brexit referendum, British Empire, carbon footprint, coronavirus, corporate governance, COVID-19, Credit Default Swap, democratizing finance, Donald Trump, Eyjafjallajökull, financial engineering, fixed income, global pandemic, global supply chain, Gordon Gekko, Greensill Capital, high net worth, Kickstarter, lockdown, Long Term Capital Management, low interest rates, Masayoshi Son, means of production, Menlo Park, mittelstand, move fast and break things, NetJets, Network effects, Ponzi scheme, private military company, proprietary trading, remote working, rewilding, Rishi Sunak, rolodex, Silicon Valley, skunkworks, SoftBank, sovereign wealth fund, supply chain finance, Tim Haywood, Vision Fund, WeWork, work culture

There, for a time, Solo was a star and protégé of the top management. He helped resolve the mess left behind by UBS’s ill-fated investment in the hedge fund Long-Term Capital Management, whose near-collapse in 1998 sparked genuine fears of a global financial meltdown. He was also at the forefront of the development of the market for credit default swaps, a kind of financial contract that offers protection against the possibility a borrower will default on loan payments. A 2008 column in the Financial Times by the journalist John Gapper describes a meeting with Solo where he began drawing diagrams of how ‘loans might be priced like swaps and options and be traded by banks and investors . . .


pages: 376 words: 101,759

Shorting the Grid: The Hidden Fragility of Our Electric Grid by Meredith. Angwin

airline deregulation, California energy crisis, carbon credits, carbon footprint, congestion pricing, corporate governance, Credit Default Swap, crony capitalism, David Brooks, decarbonisation, demand response, distributed generation, electricity market, en.wikipedia.org, energy security, green new deal, Hans Rosling, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jones Act, Just-in-time delivery, load shedding, market clearing, Michael Shellenberger, Negawatt, off-the-grid, performance metric, plutocrats, renewable energy credits, rolling blackouts, Silicon Valley, smart grid, smart meter, the map is not the territory, Tragedy of the Commons, uranium enrichment, vertical integration, washing machines reduced drudgery, zero-sum game

What We Can Do Acknowledgments Glossary Endnotes Index About the Author TABLE OF FIGURES Figure 1: Electricity use on the New England grid Figure 2: Duck curve on the California grid Figure 3: RTO areas of North America Figure 4: Fuel mix moves to oil during the cold snap Figure 5: Days of oil stored at a power plant as cold snap progresses Figure 6: Comparison of regulated and RTO states Figure 7: Electricity prices in Texas, deregulated and regulated areas Figure 8: Revenue streams for different types of plants Figure 9: Annual value of New England wholesale electricity markets Figure 10: Transmission planning regions Figure 11: New England wholesale electricity costs, showing rise of transmission costs Figure 12: Graphs of actual demand on the ISO-NE system Figure 13: Fuel mix charts for all fuels and for renewables only Figure 14: August 1, 2016 rally in New York State, celebrating the ZEC Figure 15: New England wholesale electricity costs Figure 16: The ISO-NE queue: 11,000 MW wind and 3,000 MW natural gas Figure 17: Consumer and prosumer Figure 18: Births per woman vs GDP per capita Figure 19: Wind and solar curtailment totals by month ANGELIC MIRACLES AND EASY PROBLEMS CHAPTER 1 THE BIG SHORT The Grid and I I JUST FINISHED REREADING a frightening book, The Big Short,1 which describes the financial meltdown of 2008 and the few people who saw it coming. The book followed how these insightful people placed bets (“shorts”) on the fall of complex credit instruments, including credit-default swaps. Some of the people who bet against the credit instruments made hundreds of millions of dollars. The credit system had little oversight, and it propped up an overheated housing market. “Liar loans” were common: in these loans, the borrower did not have to include any documentation. The overheated housing market, in turn, propped up the wider economy.


The Permanent Portfolio by Craig Rowland, J. M. Lawson

Alan Greenspan, Andrei Shleifer, asset allocation, automated trading system, backtesting, bank run, banking crisis, Bear Stearns, Bernie Madoff, buy and hold, capital controls, correlation does not imply causation, Credit Default Swap, currency risk, diversification, diversified portfolio, en.wikipedia.org, fixed income, Flash crash, high net worth, High speed trading, index fund, inflation targeting, junk bonds, low interest rates, margin call, market bubble, money market fund, new economy, passive investing, Ponzi scheme, prediction markets, risk tolerance, stocks for the long run, survivorship bias, technology bubble, transaction costs, Vanguard fund

For instance, investors in some bond funds used in popular college savings plans were badly burned: The Oppenheimer Core Bond fund, (Ticker: OPIGX) offered by 529 plans in Oregon, Texas, Maine, and New Mexico, fell 36% last year, vs. a loss of about 5% for the average intermediate-term bond fund, according to Morningstar, an investment research firm. The losses stemmed from the management team's decision to take big bets on mortgage-backed securities and credit default swaps, Morningstar said.4 Investors in these funds were forced to absorb losses that they never even considered were possible. But here's the good news: If you own your Treasury bonds directly you need not worry about any of these issues with bond fund management. Owning Treasury bonds directly means you are in control and aren't going to be taking unnecessary risks with your bond holdings.


pages: 416 words: 106,532

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, Alan Greenspan, altcoin, Alvin Toffler, asset allocation, asset-backed security, autonomous vehicles, Bear Stearns, bitcoin, Bitcoin Ponzi scheme, blockchain, Blythe Masters, book value, business cycle, business process, buy and hold, capital controls, carbon tax, 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, Dogecoin, Donald Trump, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, fixed income, Future Shock, general purpose technology, George Gilder, Google Hangouts, high net worth, hype cycle, information security, initial coin offering, it's over 9,000, Jeff Bezos, Kenneth Rogoff, Kickstarter, Leonard Kleinrock, litecoin, low interest rates, 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, quantum cryptography, RAND corporation, random walk, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ross Ulbricht, Salesforce, Satoshi Nakamoto, seminal paper, Sharpe ratio, Silicon Valley, Simon Singh, Skype, smart contracts, social web, South Sea Bubble, Steve Jobs, transaction costs, tulip mania, Turing complete, two and twenty, Uber for X, Vanguard fund, Vitalik Buterin, WikiLeaks, Y2K

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.


pages: 364 words: 99,897

The Industries of the Future by Alec Ross

"World Economic Forum" Davos, 23andMe, 3D printing, Airbnb, Alan Greenspan, algorithmic bias, algorithmic trading, AltaVista, Anne Wojcicki, autonomous vehicles, banking crisis, barriers to entry, Bernie Madoff, bioinformatics, bitcoin, Black Lives Matter, blockchain, Boston Dynamics, Brian Krebs, British Empire, business intelligence, call centre, carbon footprint, clean tech, cloud computing, collaborative consumption, connected car, corporate governance, Credit Default Swap, cryptocurrency, data science, David Brooks, DeepMind, Demis Hassabis, disintermediation, Dissolution of the Soviet Union, distributed ledger, driverless car, Edward Glaeser, Edward Snowden, en.wikipedia.org, Erik Brynjolfsson, Evgeny Morozov, fiat currency, future of work, General Motors Futurama, global supply chain, Google X / Alphabet X, Gregor Mendel, industrial robot, information security, Internet of things, invention of the printing press, Jaron Lanier, Jeff Bezos, job automation, John Markoff, Joi Ito, Kevin Roose, Kickstarter, knowledge economy, knowledge worker, lifelogging, litecoin, low interest rates, M-Pesa, machine translation, Marc Andreessen, Mark Zuckerberg, Max Levchin, Mikhail Gorbachev, military-industrial complex, mobile money, money: store of value / unit of account / medium of exchange, Nelson Mandela, new economy, off-the-grid, offshore financial centre, open economy, Parag Khanna, paypal mafia, peer-to-peer, peer-to-peer lending, personalized medicine, Peter Thiel, precision agriculture, pre–internet, RAND corporation, Ray Kurzweil, recommendation engine, ride hailing / ride sharing, Rubik’s Cube, Satoshi Nakamoto, selective serotonin reuptake inhibitor (SSRI), self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart cities, social graph, software as a service, special economic zone, supply-chain management, supply-chain management software, technoutopianism, TED Talk, The Future of Employment, Travis Kalanick, underbanked, unit 8200, Vernor Vinge, Watson beat the top human players on Jeopardy!, women in the workforce, work culture , Y Combinator, young professional

They currently have a lot of trouble doing that because they’re working across so many legacy systems that they have trouble rolling up their analytics to one central view. No wonder they’ve had some troubles!” “They aren’t managing their data well,” Zac adds, “and that should scare people. A bank is a little more than data. They are big data companies! You can call them fancy things like securitized subprime mortgages or credit default swaps or whatever, but a bank is basically a giant ledger of contracts that have future positive and negative cash flows. A bank’s entire income is based on how the present value of those cash flows changes moment to moment yet they can’t get the basic accounting of who owes what to whom correctly.”


pages: 471 words: 109,267

The Verdict: Did Labour Change Britain? by Polly Toynbee, David Walker

Alan Greenspan, An Inconvenient Truth, banking crisis, Big bang: deregulation of the City of London, blood diamond, Bob Geldof, Boris Johnson, call centre, central bank independence, congestion charging, Corn Laws, Credit Default Swap, Crossrail, decarbonisation, deglobalization, deindustrialization, Etonian, failed state, first-past-the-post, Frank Gehry, gender pay gap, Gini coefficient, high net worth, hiring and firing, illegal immigration, income inequality, Intergovernmental Panel on Climate Change (IPCC), knowledge economy, labour market flexibility, market bubble, mass immigration, military-industrial complex, millennium bug, moral panic, North Sea oil, Northern Rock, offshore financial centre, pension reform, plutocrats, Ponzi scheme, profit maximization, purchasing power parity, Right to Buy, shareholder value, Skype, smart meter, social distancing, stem cell, The Spirit Level, too big to fail, University of East Anglia, working-age population, Y2K

It turned out that the finance sector’s largesse was temporary. Labour had swallowed an ideology. That was the word used by Adair Turner, chairman of the Financial Services Authority, to describe the assertion that liberalization of short-term capital flows was both necessary and benign. Market intelligence was dumb. In 2007, the crash imminent, the credit default swap market was ‘revealing’ that the risk of a major bank defaulting had hit its lowest ever level, a message backed up by banks’ share price. Labour never got it, nor the point made by American economist Joseph Stiglitz. He argued that the banks practised ersatz capitalism: when they had become ‘too big to fail’ they had stopped being genuine commercial entities.


pages: 354 words: 110,570

Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World by Tom Wright, Bradley Hope

"World Economic Forum" Davos, Asian financial crisis, Bear Stearns, Bernie Madoff, Boeing 747, collapse of Lehman Brothers, colonial rule, corporate social responsibility, Credit Default Swap, Donald Trump, failed state, family office, financial engineering, forensic accounting, Frank Gehry, Global Witness, high net worth, junk bonds, low interest rates, Michael Milken, middle-income trap, Nick Leeson, offshore financial centre, Oscar Wyatt, Ponzi scheme, Right to Buy, risk tolerance, Savings and loan crisis, Snapchat, South China Sea, sovereign wealth fund, Virgin Galactic

In a meeting room in the Mandarin Oriental he gave a pitch about Malaysia to a high-powered client meeting put together by Blankfein. Malaysia was so important for Goldman that Blankfein had roped in some of the biggest names in U.S. finance to attend. Still on a postelection high, Najib extolled Malaysia’s economy. The attendees included John Paulson, the hedge-fund owner who pocketed $4 billion trading credit-default swaps during the crisis; and David Bonderman, founder of TPG Capital, the private equity firm. Najib’s daughter, Nooryana, had joined TPG in London after Georgetown, and was now working for them in Hong Kong. Leissner had been working hard to keep a lockdown on the Malaysia business, following Najib and Rosmah around the world.


pages: 375 words: 105,067

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

Alan Greenspan, American ideology, asset allocation, Bear Stearns, behavioural economics, Bernie Madoff, buy and hold, Cass Sunstein, Credit Default Swap, David Brooks, delayed gratification, diversification, diversified portfolio, Donald Trump, Elliott wave, en.wikipedia.org, estate planning, financial engineering, financial innovation, Flash crash, game design, greed is good, high net worth, impulse control, income inequality, index fund, John Bogle, Kevin Roose, London Whale, longitudinal study, low interest rates, Mark Zuckerberg, Mary Meeker, money market fund, mortgage debt, multilevel marketing, oil shock, payday loans, pension reform, Ponzi scheme, post-work, prosperity theology / prosperity gospel / gospel of success, quantitative easing, Ralph Nader, RAND corporation, random walk, Richard Thaler, Ronald Reagan, Saturday Night Live, Stanford marshmallow experiment, stocks for the long run, The 4% rule, too big to fail, transaction costs, Unsafe at Any Speed, upwardly mobile, Vanguard fund, wage slave, women in the workforce, working poor, éminence grise

Take a look at an article like “10 Stocks to Buy Now,” in Fortune’s 2007 Investor’s Guide. The magazine’s first pick? Insurance giant American International Group, better known as AIG. “It’s clear that AIG was no Enron,” wrote Fortune glowingly. Well…yes. After all, the United States government let Enron go under. Not so AIG, which, after its improvident sales of credit default swaps almost led to a worldwide economic cataclysm in the fall of 2008, had to be bailed out by federal taxpayer funds, and whose stock is now trading for less than half of what it was when Fortune deemed its growth prospects “attractive.” As if this was not bad enough, some financially oriented magazines may have actually crossed the line from enabler to shill, as Jonathan Reuter at the University of Oregon (now at Boston College) and Eric Zitzewitz at Stanford University (now at Dartmouth) discovered when they studied how advertising correlated with various money-matters features.


pages: 385 words: 101,761

Creative Intelligence: Harnessing the Power to Create, Connect, and Inspire by Bruce Nussbaum

"World Economic Forum" Davos, 3D printing, Airbnb, Albert Einstein, Berlin Wall, Black Swan, Chuck Templeton: OpenTable:, clean water, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Danny Hillis, declining real wages, demographic dividend, disruptive innovation, Elon Musk, en.wikipedia.org, Eugene Fama: efficient market hypothesis, fail fast, Fall of the Berlin Wall, follow your passion, game design, gamification, gentrification, housing crisis, Hyman Minsky, industrial robot, invisible hand, James Dyson, Jane Jacobs, Jeff Bezos, jimmy wales, John Gruber, John Markoff, Joseph Schumpeter, Kevin Roose, Kickstarter, Larry Ellison, lone genius, longitudinal study, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, Max Levchin, Minsky moment, new economy, Paul Graham, Peter Thiel, QR code, race to the bottom, reality distortion field, reshoring, Richard Florida, Ronald Reagan, shareholder value, Sheryl Sandberg, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, SimCity, six sigma, Skype, SoftBank, Steve Ballmer, Steve Jobs, Steve Wozniak, supply-chain management, Tesla Model S, The Chicago School, The Design of Experiments, the High Line, The Myth of the Rational Market, thinkpad, TikTok, Tim Cook: Apple, too big to fail, tulip mania, Tyler Cowen, We are the 99%, Y Combinator, young professional, Zipcar

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform, as reported in the New York Times. Greenspan was criticized for opposing greater oversight of the trillion-dollar subprime mortgage market in credit default swaps, which were supposed to reduce risk but were misused to leverage risk to historic levels. In response, he said that “this modern risk-management paradigm held sway for decades.” But “the whole intellectual edifice, however, collapsed in the summer of last year.” By the middle of 2012, even the bankers themselves were admitting the model was a failure.


pages: 385 words: 111,807

A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

"there is no alternative" (TINA), Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, antiwork, AOL-Time Warner, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, Charles Babbage, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, corporate raider, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial engineering, financial innovation, flying shuttle, Ford Model T, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, Glass-Steagall Act, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, Great Leap Forward, greed is good, Gunnar Myrdal, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, information asymmetry, intangible asset, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land bank, land reform, liberation theology, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Neal Stephenson, Nelson Mandela, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, Pareto efficiency, Paul Samuelson, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, proprietary trading, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, scientific management, Scramble for Africa, search costs, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Vilfredo Pareto, Washington Consensus, working-age population, World Values Survey

The most ‘senior’ tranche would be made safer by, say, the guarantee that its owners will be asked to bear losses the last (that is, only after the owners of all other, more ‘junior’, tranches have absorbed their losses), should any loss occur. In this way, a very safe financial product could be created out of a pool of relatively unsafe assets – that was at least the theory.* A derivative product called a credit default swap (CDS) was created to supposedly protect you from default on the CDOs by acting as an insurance policy against the risk of default of particular CDOs (I will discuss what the ‘swap’ is a bit later). Pooling and structuring simply shift and obscure risk, not eliminate it All of this was deemed to have reduced risk for the financial products concerned – first through safety in numbers (pooling), and then through the deliberate creation of safety zones within that pool (structuring).


pages: 371 words: 109,320

News and How to Use It: What to Believe in a Fake News World by Alan Rusbridger

airport security, basic income, Bellingcat, Big Tech, Black Lives Matter, Bletchley Park, Boris Johnson, Brexit referendum, call centre, Cambridge Analytica, Chelsea Manning, citizen journalism, Climategate, cognitive dissonance, coronavirus, correlation does not imply causation, COVID-19, Credit Default Swap, crisis actor, cross-subsidies, crowdsourcing, disinformation, Dominic Cummings, Donald Trump, Edward Snowden, end-to-end encryption, fake news, Filter Bubble, future of journalism, George Floyd, ghettoisation, global pandemic, Google Earth, green new deal, hive mind, housing crisis, Howard Rheingold, illegal immigration, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, Jeffrey Epstein, Jeremy Corbyn, Johann Wolfgang von Goethe, Julian Assange, Kickstarter, lockdown, Mark Zuckerberg, Murray Gell-Mann, Narrative Science, Neil Kinnock, Nelson Mandela, New Journalism, Nicholas Carr, ocean acidification, offshore financial centre, post-truth, profit motive, public intellectual, publication bias, Seymour Hersh, Snapchat, social distancing, Social Justice Warrior, Steve Bannon, tech baron, the scientific method, TikTok, universal basic income, WikiLeaks, yellow journalism

This sounds worrying: cue news headlines warning ‘Careless Pork Costs Lives’ – but in practice it means that a cancer rate of 5 people in every 100 getting colorectal cancer (the absolute risk) would rise to 6 in 100 if every one of those 100 people ate three rashers of extra bacon every day. Numbers have grown more complex. One reporter on the Guardian admitted: ‘I live in constant fear of making a whopping error because I don’t truly understand credit default swaps, the mechanics of a bond auction, etc.’ The speed of modern journalism doesn’t help. But public trust is easily lost. And you can, alas, measure that. O OMBUDSPERSON Most modern organisations believe in some form of customer service. If their product or service is deficient, a good company or institution usually wants to hear about it because: 1) It’s the right thing to do 2) You can only learn from your mistakes if you know about them 3) It’s better – especially in an age of social media – to have a satisfied customer than one who will use all available means to slag you off.


pages: 382 words: 105,166

The Reckoning: Financial Accountability and the Rise and Fall of Nations by Jacob Soll

accounting loophole / creative accounting, bank run, Bear Stearns, Bonfire of the Vanities, British Empire, collapse of Lehman Brothers, computer age, corporate governance, creative destruction, Credit Default Swap, delayed gratification, demand response, discounted cash flows, double entry bookkeeping, financial independence, Frederick Winslow Taylor, Glass-Steagall Act, God and Mammon, High speed trading, Honoré de Balzac, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, new economy, New Urbanism, Nick Leeson, Plato's cave, Ponzi scheme, Ralph Waldo Emerson, scientific management, Scientific racism, South Sea Bubble, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade route

A monument of American and world capitalism, Lehman was suddenly exposed now as little more than a mirage. Just as Louis had held onto his power through snuffing out good accounting in his government, so U.S. investment banks had made untold riches, even as they destroyed their own institutions by cooking their books through trading overvalued bundles of worthless subprime mortgages and credit default swaps. A financial system, which had been deemed healthy by accountants and regulators alike, now revealed itself as dysfunctional by design. If Louis preferred not to know, so, too, it seemed, Wall Street and its regulators had chosen to overlook the rot threatening the entire financial system.


pages: 380 words: 109,724

Don't Be Evil: How Big Tech Betrayed Its Founding Principles--And All of US by Rana Foroohar

"Susan Fowler" uber, "World Economic Forum" Davos, accounting loophole / creative accounting, Airbnb, Alan Greenspan, algorithmic bias, algorithmic management, AltaVista, Andy Rubin, autonomous vehicles, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Bernie Sanders, Big Tech, bitcoin, Black Lives Matter, book scanning, Brewster Kahle, Burning Man, call centre, Cambridge Analytica, cashless society, clean tech, cloud computing, cognitive dissonance, Colonization of Mars, computer age, corporate governance, creative destruction, Credit Default Swap, cryptocurrency, data is the new oil, data science, deal flow, death of newspapers, decentralized internet, Deng Xiaoping, digital divide, digital rights, disinformation, disintermediation, don't be evil, Donald Trump, drone strike, Edward Snowden, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Etonian, Evgeny Morozov, fake news, Filter Bubble, financial engineering, future of work, Future Shock, game design, gig economy, global supply chain, Gordon Gekko, Great Leap Forward, greed is good, income inequality, independent contractor, informal economy, information asymmetry, intangible asset, Internet Archive, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, junk bonds, Kenneth Rogoff, life extension, light touch regulation, low interest rates, Lyft, Mark Zuckerberg, Marshall McLuhan, Martin Wolf, Menlo Park, military-industrial complex, move fast and break things, Network effects, new economy, offshore financial centre, PageRank, patent troll, Paul Volcker talking about ATMs, paypal mafia, Peter Thiel, pets.com, price discrimination, profit maximization, race to the bottom, recommendation engine, ride hailing / ride sharing, Robert Bork, Sand Hill Road, search engine result page, self-driving car, shareholder value, sharing economy, Sheryl Sandberg, Shoshana Zuboff, side hustle, Sidewalk Labs, Silicon Valley, Silicon Valley startup, smart cities, Snapchat, SoftBank, South China Sea, sovereign wealth fund, Steve Bannon, Steve Jobs, Steven Levy, stock buybacks, subscription business, supply-chain management, surveillance capitalism, TaskRabbit, tech billionaire, tech worker, TED Talk, Telecommunications Act of 1996, The Chicago School, the long tail, the new new thing, Tim Cook: Apple, too big to fail, Travis Kalanick, trickle-down economics, Uber and Lyft, Uber for X, uber lyft, Upton Sinclair, warehouse robotics, WeWork, WikiLeaks, zero-sum game

But it’s alarming nonetheless. More alarming still is how some of the flow charts in the Treasury paper outlining how platform players and banks might work together to share consumers’ financial information in order to offer “personalized” products and services remind me of the complex illustrations of credit default swaps that we saw in the wake of the 2008 crisis. Both are Rube Goldberg–style studies in risk. Complexity of that sort always makes me nervous, as it leaves so much room for the party with more information to obfuscate. Call me a Luddite, but I’ve always agreed with former Fed chair Paul Volcker that the ATM has been the most useful “innovation” in finance in the past few decades.


pages: 361 words: 107,461

How I Built This: The Unexpected Paths to Success From the World's Most Inspiring Entrepreneurs by Guy Raz

Airbnb, AOL-Time Warner, Apple II, barriers to entry, Bear Stearns, Ben Horowitz, Big Tech, big-box store, Black Monday: stock market crash in 1987, Blitzscaling, business logic, call centre, Clayton Christensen, commoditize, Cornelius Vanderbilt, Credit Default Swap, crowdsourcing, data science, East Village, El Camino Real, Elon Musk, fear of failure, glass ceiling, growth hacking, housing crisis, imposter syndrome, inventory management, It's morning again in America, iterative process, James Dyson, Jeff Bezos, Justin.tv, Kickstarter, low cost airline, Lyft, Marc Andreessen, Mark Zuckerberg, move fast and break things, Nate Silver, Paul Graham, Peter Thiel, pets.com, power law, rolodex, Ronald Reagan, Ruby on Rails, Salesforce, Sam Altman, Sand Hill Road, side hustle, Silicon Valley, software as a service, South of Market, San Francisco, Steve Jobs, Steve Wozniak, subprime mortgage crisis, TED Talk, The Signal and the Noise by Nate Silver, Tony Hsieh, Uber for X, uber lyft, Y Combinator, Zipcar

At the same time, he had already worked alongside a quartet of future luminaries: a young Mitt Romney; a thirtysomething Benjamin Netanyahu; the soon-to-be-legendary business school professor and author Clayton Christensen, whose seminal work, The Innovator’s Dilemma, helped shape twenty-first-century entrepreneurship; and future hedge fund billionaire John Paulson, who would make his fortune virtually overnight betting against the subprime lending market with credit default swaps some twenty-five years later. Jim Koch was no slouch either. He’s triple Harvard (BA, JD, MBA), and to anyone who was paying attention—which included BCG’s founder, its current CEO, and the man who would be next in line—the sky was the limit for this kid from the east side of Cincinnati. “It was a great job for a while,” Jim said with trademark understatement.


pages: 460 words: 107,454

Stakeholder Capitalism: A Global Economy That Works for Progress, People and Planet by Klaus Schwab, Peter Vanham

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 3D printing, additive manufacturing, agricultural Revolution, air traffic controllers' union, Anthropocene, Apple II, Asian financial crisis, Asperger Syndrome, basic income, Berlin Wall, Big Tech, biodiversity loss, bitcoin, Black Lives Matter, blockchain, blue-collar work, Branko Milanovic, Bretton Woods, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, car-free, carbon footprint, carbon tax, centre right, clean tech, clean water, cloud computing, collateralized debt obligation, collective bargaining, colonial rule, company town, contact tracing, contact tracing app, Cornelius Vanderbilt, coronavirus, corporate governance, corporate social responsibility, COVID-19, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, cuban missile crisis, currency peg, cyber-physical system, decarbonisation, demographic dividend, Deng Xiaoping, Diane Coyle, digital divide, don't be evil, European colonialism, Fall of the Berlin Wall, family office, financial innovation, Francis Fukuyama: the end of history, future of work, gender pay gap, general purpose technology, George Floyd, gig economy, Gini coefficient, global supply chain, global value chain, global village, Google bus, green new deal, Greta Thunberg, high net worth, hiring and firing, housing crisis, income inequality, income per capita, independent contractor, industrial robot, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Khan Academy, Kickstarter, labor-force participation, lockdown, low interest rates, low skilled workers, Lyft, manufacturing employment, Marc Benioff, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, Martin Wolf, means of production, megacity, microplastics / micro fibres, Mikhail Gorbachev, mini-job, mittelstand, move fast and break things, neoliberal agenda, Network effects, new economy, open economy, Peace of Westphalia, Peter Thiel, precariat, Productivity paradox, profit maximization, purchasing power parity, race to the bottom, reserve currency, reshoring, ride hailing / ride sharing, Ronald Reagan, Salesforce, San Francisco homelessness, School Strike for Climate, self-driving car, seminal paper, shareholder value, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, social distancing, Social Responsibility of Business Is to Increase Its Profits, special economic zone, Steve Jobs, Steve Wozniak, synthetic biology, TaskRabbit, The Chicago School, The Future of Employment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the scientific method, TikTok, Tim Cook: Apple, trade route, transfer pricing, Uber and Lyft, uber lyft, union organizing, universal basic income, War on Poverty, We are the 99%, women in the workforce, working poor, working-age population, Yom Kippur War, young professional, zero-sum game

Technology firms in recent years had gone from being hailed as the vanguards of progress and democratizers of information to being a part of the problem that the global economy was facing. Marc Benioff, CEO of Salesforce, and like Snabe, a member of the World Economic Forum's Board of Trustees, had said as much at Davos in 2018. “I mentioned tech in the same breath as credit default swaps, sugar, cigarettes—harmful products that companies had been allowed to peddle to customers, unconstrained by regulations,” he recalled in his most recent book.4 “Our industry had been given a regulatory pass for years, and when CEOs wouldn't take responsibility,” he said, “I thought you'd have no choice but for the government to come in.”


pages: 460 words: 107,454

Stakeholder Capitalism: A Global Economy That Works for Progress, People and Planet by Klaus Schwab

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 3D printing, additive manufacturing, agricultural Revolution, air traffic controllers' union, Anthropocene, Apple II, Asian financial crisis, Asperger Syndrome, basic income, Berlin Wall, Big Tech, biodiversity loss, bitcoin, Black Lives Matter, blockchain, blue-collar work, Branko Milanovic, Bretton Woods, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, car-free, carbon footprint, carbon tax, centre right, clean tech, clean water, cloud computing, collateralized debt obligation, collective bargaining, colonial rule, company town, contact tracing, contact tracing app, Cornelius Vanderbilt, coronavirus, corporate governance, corporate social responsibility, COVID-19, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, cuban missile crisis, currency peg, cyber-physical system, decarbonisation, demographic dividend, Deng Xiaoping, Diane Coyle, digital divide, don't be evil, European colonialism, Fall of the Berlin Wall, family office, financial innovation, Francis Fukuyama: the end of history, future of work, gender pay gap, general purpose technology, George Floyd, gig economy, Gini coefficient, global supply chain, global value chain, global village, Google bus, green new deal, Greta Thunberg, high net worth, hiring and firing, housing crisis, income inequality, income per capita, independent contractor, industrial robot, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Khan Academy, Kickstarter, labor-force participation, lockdown, low interest rates, low skilled workers, Lyft, manufacturing employment, Marc Benioff, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, Martin Wolf, means of production, megacity, microplastics / micro fibres, Mikhail Gorbachev, mini-job, mittelstand, move fast and break things, neoliberal agenda, Network effects, new economy, open economy, Peace of Westphalia, Peter Thiel, precariat, Productivity paradox, profit maximization, purchasing power parity, race to the bottom, reserve currency, reshoring, ride hailing / ride sharing, Ronald Reagan, Salesforce, San Francisco homelessness, School Strike for Climate, self-driving car, seminal paper, shareholder value, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, social distancing, Social Responsibility of Business Is to Increase Its Profits, special economic zone, Steve Jobs, Steve Wozniak, synthetic biology, TaskRabbit, The Chicago School, The Future of Employment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the scientific method, TikTok, Tim Cook: Apple, trade route, transfer pricing, Uber and Lyft, uber lyft, union organizing, universal basic income, War on Poverty, We are the 99%, women in the workforce, working poor, working-age population, Yom Kippur War, young professional, zero-sum game

Technology firms in recent years had gone from being hailed as the vanguards of progress and democratizers of information to being a part of the problem that the global economy was facing. Marc Benioff, CEO of Salesforce, and like Snabe, a member of the World Economic Forum's Board of Trustees, had said as much at Davos in 2018. “I mentioned tech in the same breath as credit default swaps, sugar, cigarettes—harmful products that companies had been allowed to peddle to customers, unconstrained by regulations,” he recalled in his most recent book.4 “Our industry had been given a regulatory pass for years, and when CEOs wouldn't take responsibility,” he said, “I thought you'd have no choice but for the government to come in.”


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

activist fund / activist shareholder / activist investor, asset-backed security, backtesting, barriers to entry, Bear Stearns, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, fear of failure, financial engineering, financial innovation, fixed income, flag carrier, full employment, Greenspan put, index fund, intangible asset, invisible hand, Joseph Schumpeter, junk bonds, land bank, locking in a profit, Long Term Capital Management, low cost airline, low interest rates, Michael Milken, moral hazard, mortgage debt, Myron Scholes, prudent man rule, Right to Buy, risk free rate, risk-adjusted returns, risk/return, secular stagnation, shareholder value, stock buybacks, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, zero-coupon bond

Ultimately, the Japanese market collapsed, and my then employer, along with many other U.S. investors, profited handsomely as the puts soared in value. More recently, the derivatives market in asset-backed securities of subprime mortgages offered a similarly distorted risk-reward equation in the form of credit default swaps (CDSs). These securities are a series of puts on bonds backed by subprime mortgages on residential property. When the bonds were issued, they were viewed by both investors and the rating agencies as safe (that is, investment grade) because of the assumptions about how these mortgages would perform.

., 316 Consolidated Edison Company of New York, 94, 244n, 444n Consolidated Gas Company of New York, 94, 444n Consolidated Oil Corporation, 466n, 635 Consolidated reports, 443–452 allowance for nonconsolidated profits and losses and, 445–446 degree of consolidation and, 444 earnings distortion by parent-subsidiary relationships and, 447–449 former and current practices and, 444 special dividends paid by subsidiaries and, 447 subsidiaries’ losses and, 449–452 Consolidated Textile Corporation, 314n Consolidated Traction Company of New Jersey, 227 Contagion, real estate bonds and, 217 Continental Baking Corporation, 480, 652 Continental Can Company, 91, 461 Continental Motors Corporation, 523n Continental Oil Company, 468 Continental Steel, 245, 663–664, 666 Convertible issues, 313–322 combination with stock purchase, 321 convertible at option of company, 319 convertible into other bonds, 320 convertible into preferred stock, 318–319 delayed, 321–322 dilution and, 313–315 with original market value in excess of par, 320–321 price behavior of, 306–307 sliding scales to accelerate conversion and, 315–318 Corn Products Refining Company, 160n, 201n, 606, 607, 611–613 Corporate pyramiding, 644–653 alternative methods of creating speculative capital structure and, 652–653 evils of, 647–651 holding companies not guilty of, 651–652 legal restraints on, 652–653 Corporation Records Service (Standard Statistics), 93n Costa Rica, 175 Cottle, Sidney, 123 Coty, Inc., 485 Coudersport, PA, 274 Counsel as investment advice source, 261 Court-Livingston Corporation, 113n Cowles, Alfred, III, 362n, 527n Cox Communications, 274 Cram’s Auto Service, 57, 95 Crash of 1929, Graham’s position and, 16 Credit default swaps (CDSs), 622 Credit risk, Oaktree Capital Management investment methodology and, 132 Critical Path, 267 Crucible Steel, 330 Cuba, 175 Cuban Atlantic Sugar Company, 584n Cudahy Packing Company, 129, 148–149, 460n Currency risk, 716–717 Current-asset value, 553–554, 559–574 liquidating value and, 559 realizable value of assets and, 560–562 stocks selling below liquidating value and (see Sub-liquidating value common stocks) Curtis Publishing, 689n Cushman’s Sons, Inc., 450–451 Czecho-Slovakia, 175 D Daekyo Corp., 51 Davis, William Milton, 275 Davis Coal and Coke Company, 529n, 532n, 568, 584n Dawes Loan, 173n Dawson Railway and Coal, 320n Day v.


pages: 395 words: 116,675

The Evolution of Everything: How New Ideas Emerge by Matt Ridley

"World Economic Forum" Davos, adjacent possible, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Alfred Russel Wallace, AltaVista, altcoin, An Inconvenient Truth, anthropic principle, anti-communist, bank run, banking crisis, barriers to entry, bitcoin, blockchain, Boeing 747, Boris Johnson, British Empire, Broken windows theory, carbon tax, Columbian Exchange, computer age, Corn Laws, cosmological constant, cotton gin, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, cryptocurrency, David Ricardo: comparative advantage, demographic transition, Deng Xiaoping, discovery of DNA, Donald Davies, double helix, Downton Abbey, driverless car, Eben Moglen, Edward Glaeser, Edward Lorenz: Chaos theory, Edward Snowden, endogenous growth, epigenetics, Ethereum, ethereum blockchain, facts on the ground, fail fast, falling living standards, Ferguson, Missouri, financial deregulation, financial innovation, flying shuttle, Frederick Winslow Taylor, Geoffrey West, Santa Fe Institute, George Gilder, George Santayana, Glass-Steagall Act, Great Leap Forward, Greenspan put, Gregor Mendel, Gunnar Myrdal, Henri Poincaré, Higgs boson, hydraulic fracturing, imperial preference, income per capita, indoor plumbing, information security, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jane Jacobs, Japanese asset price bubble, Jeff Bezos, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Khan Academy, knowledge economy, land reform, Lao Tzu, long peace, low interest rates, Lyft, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, means of production, meta-analysis, military-industrial complex, mobile money, Money creation, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, Necker cube, obamacare, out of africa, packet switching, peer-to-peer, phenotype, Pierre-Simon Laplace, precautionary principle, price mechanism, profit motive, RAND corporation, random walk, Ray Kurzweil, rent-seeking, reserve currency, Richard Feynman, rising living standards, road to serfdom, Robert Solow, Ronald Coase, Ronald Reagan, Satoshi Nakamoto, scientific management, Second Machine Age, sharing economy, smart contracts, South Sea Bubble, Steve Jobs, Steven Pinker, Stuart Kauffman, tacit knowledge, TED Talk, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, twin studies, uber lyft, women in the workforce

These invariably gave the institutions a clean bill of health right up till the moment they declared them in need of bail-out. The Independent National Mortgage Corporation, which collapsed in 2008, costing $11 billion to the FDIC plus losses to depositors and creditors, had hosted up to forty government examiners on site, all of whom gave Indymac high ratings. AIG, whose credit default swaps almost killed the world economy the same year, had been, in Gilder’s words, ‘supervised and pettifogged by federal, state, local, and global beadles galore, in fifty states and more than a hundred countries’. My own experience as chairman of a bank was of endless reassurance from intrusive and detailed regulation right up till the point when it all went wrong.


pages: 437 words: 113,173

Age of Discovery: Navigating the Risks and Rewards of Our New Renaissance by Ian Goldin, Chris Kutarna

"World Economic Forum" Davos, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, Airbnb, Albert Einstein, AltaVista, Asian financial crisis, asset-backed security, autonomous vehicles, banking crisis, barriers to entry, battle of ideas, Bear Stearns, Berlin Wall, bioinformatics, bitcoin, Boeing 747, Bonfire of the Vanities, bread and circuses, carbon tax, clean water, collective bargaining, Colonization of Mars, Credit Default Swap, CRISPR, crowdsourcing, cryptocurrency, Dava Sobel, demographic dividend, Deng Xiaoping, digital divide, Doha Development Round, double helix, driverless car, Edward Snowden, Elon Musk, en.wikipedia.org, epigenetics, experimental economics, Eyjafjallajökull, failed state, Fall of the Berlin Wall, financial innovation, full employment, Galaxy Zoo, general purpose technology, Glass-Steagall Act, global pandemic, global supply chain, Higgs boson, Hyperloop, immigration reform, income inequality, indoor plumbing, industrial cluster, industrial robot, information retrieval, information security, Intergovernmental Panel on Climate Change (IPCC), intermodal, Internet of things, invention of the printing press, Isaac Newton, Islamic Golden Age, Johannes Kepler, Khan Academy, Kickstarter, Large Hadron Collider, low cost airline, low skilled workers, Lyft, Mahbub ul Haq, Malacca Straits, mass immigration, Max Levchin, megacity, Mikhail Gorbachev, moral hazard, Nelson Mandela, Network effects, New Urbanism, non-tariff barriers, Occupy movement, On the Revolutions of the Heavenly Spheres, open economy, Panamax, Paris climate accords, Pearl River Delta, personalized medicine, Peter Thiel, post-Panamax, profit motive, public intellectual, quantum cryptography, rent-seeking, reshoring, Robert Gordon, Robert Metcalfe, Search for Extraterrestrial Intelligence, Second Machine Age, self-driving car, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Skype, smart grid, Snapchat, special economic zone, spice trade, statistical model, Stephen Hawking, Steve Jobs, Stuxnet, synthetic biology, TED Talk, The Future of Employment, too big to fail, trade liberalization, trade route, transaction costs, transatlantic slave trade, uber lyft, undersea cable, uranium enrichment, We are the 99%, We wanted flying cars, instead we got 140 characters, working poor, working-age population, zero day

This, essentially, is what mortgage lenders did: a process called securitization.49 By securitizing mortgages and immediately selling them on to institutional investors, rather than holding those loans and default risks on their own books, mortgage lenders lost the incentive to scrutinize would-be homeowners’ ability to repay. Mortgage quality declined, but neither the rating agencies nor the institutions that purchased these complicated products had the analytic powers or motivation to untangle this truth. Some funds insured themselves against the risk of default by buying insurance (called credit default swaps [CDSs]), but this practice only spread the danger to new sectors. Insurers were equally in the dark about the underlying mortgage risk, and pension funds were now additionally in the dark about the (in)solvency of the insurance companies whose swaps they bought.**** Like a pandemic pathogen, toxic debts originated in a small backwater (subprime mortgage lending) and spread quickly through intertwined balance sheets to threaten the global financial system.50 From the top down and bottom up, the financial sector’s tangled complexity muddled the vision of those standing in its midst.


Hopes and Prospects by Noam Chomsky

air traffic controllers' union, Alan Greenspan, Albert Einstein, banking crisis, Bear Stearns, Berlin Wall, Bretton Woods, British Empire, capital controls, colonial rule, corporate personhood, Credit Default Swap, cuban missile crisis, David Ricardo: comparative advantage, deskilling, en.wikipedia.org, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Firefox, Glass-Steagall Act, high-speed rail, Howard Zinn, Hyman Minsky, invisible hand, liberation theology, market fundamentalism, Martin Wolf, Mikhail Gorbachev, Monroe Doctrine, moral hazard, Nelson Mandela, new economy, nuremberg principles, one-state solution, open borders, Plutonomy: Buying Luxury, Explaining Global Imbalances, public intellectual, Ralph Waldo Emerson, RAND corporation, Robert Solow, Ronald Reagan, Savings and loan crisis, Seymour Hersh, structural adjustment programs, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, trade liberalization, uranium enrichment, Washington Consensus

Placing financial policy in the hands of Rubin and Summers is “a bit like turning to Osama Bin Laden for aid in the war on terrorism,” Baker adds.27 Another achievement of Rubin and Summers (together with Greenspan) was to prevent Brooksley Born, the head of the Commodity Futures Trading Commission, from regulating credit default swaps in 1998—more WMD. “The best example of politics thwarting effective regulation,” Baker writes. Obama’s appointment for treasury secretary, Timothy Geithner, a close associate of Summers, elicited a favorable reaction from Wall Street, which may be “hoping that little will change with Geithner at Treasury,” Tim Canova observes: “Supporters of President-elect Obama will be tempted to embrace the experience argument, and it is true that Geithner and Summers have lots of experience at crisis management and doling out bailout funds to their Wall Street clientele.”


pages: 385 words: 118,314

Cities Are Good for You: The Genius of the Metropolis by Leo Hollis

Airbnb, Alvin Toffler, banking crisis, Berlin Wall, Big Tech, Boris Johnson, Broken windows theory, Buckminster Fuller, call centre, car-free, carbon footprint, cellular automata, classic study, clean water, cloud computing, complexity theory, congestion charging, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, Deng Xiaoping, digital divide, digital map, Disneyland with the Death Penalty, Donald Shoup, East Village, Edward Glaeser, Elisha Otis, Enrique Peñalosa, export processing zone, Firefox, Frank Gehry, General Motors Futurama, Geoffrey West, Santa Fe Institute, Gini coefficient, Google Earth, Great Leap Forward, Guggenheim Bilbao, haute couture, Hernando de Soto, high-speed rail, housing crisis, illegal immigration, income inequality, informal economy, Internet of things, invisible hand, Jane Jacobs, Jevons paradox, Kickstarter, knowledge economy, knowledge worker, Leo Hollis, Lewis Mumford, Long Term Capital Management, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, Masdar, mass immigration, megacity, negative equity, Neil Armstrong, new economy, New Urbanism, Occupy movement, off-the-grid, openstreetmap, packet switching, Panopticon Jeremy Bentham, place-making, power law, Quicken Loans, Ray Oldenburg, Richard Florida, sharing economy, Silicon Valley, Skype, smart cities, smart grid, spice trade, Steve Jobs, technoutopianism, the built environment, The Chicago School, The Death and Life of Great American Cities, The Great Good Place, the High Line, The Spirit Level, the strength of weak ties, The Wisdom of Crowds, Thomas Malthus, trade route, traveling salesman, urban planning, urban renewal, urban sprawl, walkable city, white flight, Y2K, Yom Kippur War

The great cities of the world – London, New York and Tokyo – have become ‘one transterritorial marketplace’.13 There are, therefore, consequences of this worldwide network of cities; for the metropolis is not just a mixture of cultures but a vector of markets. Take the relationship between a house foreclosure in Florida and ramifications of the toxic credit default swap – an incomprehensible financial instrument created to hedge the subprime mortgage market – in banks around the world. A family arranged a loan to buy their own home, to become part of their community. Yet this promise of repayment and the payment schedule were bundled together with similar promises from other families, businesses and institutions, and then sold off once again in packages that supposedly balanced out the riskier bets with more safe investments.


pages: 429 words: 120,332

Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens by Nicholas Shaxson

Asian financial crisis, asset-backed security, bank run, battle of ideas, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, collapse of Lehman Brothers, computerized trading, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, Double Irish / Dutch Sandwich, export processing zone, failed state, financial deregulation, financial engineering, financial innovation, Fractional reserve banking, full employment, Glass-Steagall Act, Global Witness, Golden arches theory, high net worth, income inequality, Kenneth Rogoff, laissez-faire capitalism, land reform, land value tax, light touch regulation, Londongrad, Long Term Capital Management, low interest rates, Martin Wolf, Money creation, money market fund, New Journalism, Northern Rock, offshore financial centre, oil shock, old-boy network, out of africa, passive income, plutocrats, Ponzi scheme, race to the bottom, regulatory arbitrage, reserve currency, Ronald Reagan, shareholder value, Suez crisis 1956, The Spirit Level, too big to fail, transfer pricing, vertical integration, Washington Consensus

McClatchy’s, the only mainstream media organization to investigate the deal’s offshore nature, found 148 such deals by Goldman Sachs in the Cayman Islands over a seven-year period.44 In fact, every big Wall Street player used the Caymans for this business. These deals “became key links in a chain of exotic insurance-like bets called credit-default swaps that worsened the global economic collapse by enabling major financial institutions to take bigger and bigger risks without counting them on their balance sheets . . . sheltered by the Caymans’ opaque regulatory apparatus.” It was not so much the Caymans’ opacity that attracted these large players—though that helped—as its “flexibility.”


pages: 464 words: 116,945

Seventeen Contradictions and the End of Capitalism by David Harvey

accounting loophole / creative accounting, Alvin Toffler, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business climate, California gold rush, call centre, central bank independence, Charles Babbage, classic study, clean water, cloud computing, collapse of Lehman Brothers, colonial rule, company town, cotton gin, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, death from overwork, deindustrialization, demographic dividend, Deng Xiaoping, deskilling, drone strike, end world poverty, falling living standards, fiat currency, first square of the chessboard, first square of the chessboard / second half of the chessboard, Food sovereignty, Frank Gehry, future of work, gentrification, global reserve currency, Great Leap Forward, Guggenheim Bilbao, Gunnar Myrdal, Herbert Marcuse, income inequality, informal economy, invention of the steam engine, invisible hand, Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Just-in-time delivery, knowledge worker, low skilled workers, Mahatma Gandhi, market clearing, Martin Wolf, means of production, microcredit, military-industrial complex, Money creation, Murray Bookchin, new economy, New Urbanism, Occupy movement, peak oil, phenotype, planned obsolescence, plutocrats, Ponzi scheme, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, Savings and loan crisis, scientific management, short selling, Silicon Valley, special economic zone, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, wages for housework, Wall-E, women in the workforce, working poor, working-age population

The result of investment flows into these fields was a general rise in asset values – everything from land and property, and natural resources (oil in particular of course) to urban debt and the art market. This was paralleled by the creation of wholly new asset markets within the financial system itself – currency futures, credit default swaps, CDOs and a whole range of other financial instruments that were supposed to spread risk but which in fact heightened risks in a way that made the volatility of short-term trading a field for smart speculative gains. This was fictitious capital feeding off and generating even more fictitious capital without any concern for the social value basis of the trading.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

accounting loophole / creative accounting, affirmative action, Alan Greenspan, An Inconvenient Truth, bank run, banking crisis, behavioural economics, Berlin Wall, bonus culture, Branko Milanovic, BRICs, business cycle, call centre, carbon tax, Cass Sunstein, central bank independence, classic study, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, different worldview, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, general purpose technology, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Paradox of Choice, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Robert Solow, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, social contagion, South Sea Bubble, Steven Pinker, tacit knowledge, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, the strength of weak ties, Tragedy of the Commons, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, vertical integration, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

The complaints about capitalism voiced so stridently during the past few years are at heart about the accompanying cultural and social change, not about what has in fact been stupendously impressive delivery on the economic promise. The financial crisis of 2007–8, and the recession it caused, has grabbed lots of attention. But whether it’s tulips or credit default swaps, there’s nothing new about financial crises or about their causes, greed and selfishness. The crisis doesn’t lay bare a fundamental economic problem so much as a social and political crisis. Just as at previous times when technological progress reordered the economy and society, the political and social sustainability of capitalism comes under strain.


pages: 399 words: 114,787

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

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

But unlike a normal factory, this one churned out products that were designed to fail. Lippmann’s team and a cluster of elite hedge funds selected mortgage securities made up of the worst, most likely to default home loans—some sourced from MortgageIT—and then used a type of derivative called credit default swaps to gamble that the instruments would lose money. “I’m short your house!!!” was the slogan on the T-shirts that Lippmann’s squad giddily handed out to folks who were in on the bet. Sure enough, when the housing market cratered, Deutsche earned many hundreds of millions of dollars in profits.


pages: 573 words: 115,489

Prosperity Without Growth: Foundations for the Economy of Tomorrow by Tim Jackson

"World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, banks create money, Basel III, basic income, biodiversity loss, bonus culture, Boris Johnson, business cycle, carbon footprint, Carmen Reinhart, Cass Sunstein, choice architecture, circular economy, collapse of Lehman Brothers, creative destruction, credit crunch, Credit Default Swap, critique of consumerism, David Graeber, decarbonisation, degrowth, dematerialisation, en.wikipedia.org, energy security, financial deregulation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, Glass-Steagall Act, green new deal, Growth in a Time of Debt, Hans Rosling, Hyman Minsky, impact investing, income inequality, income per capita, intentional community, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, liberal capitalism, low interest rates, Mahatma Gandhi, mass immigration, means of production, meta-analysis, Money creation, moral hazard, mortgage debt, Murray Bookchin, Naomi Klein, negative emissions, new economy, ocean acidification, offshore financial centre, oil shale / tar sands, open economy, paradox of thrift, peak oil, peer-to-peer lending, Philip Mirowski, Post-Keynesian economics, profit motive, purchasing power parity, quantitative easing, retail therapy, Richard Thaler, road to serfdom, Robert Gordon, Robert Solow, Ronald Reagan, science of happiness, secular stagnation, short selling, Simon Kuznets, Skype, smart grid, sovereign wealth fund, Steve Jobs, TED Talk, The Chicago School, The Great Moderation, The Rise and Fall of American Growth, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Tragedy of the Commons, universal basic income, Works Progress Administration, World Values Survey, zero-sum game

Why on earth would we leave it to ‘collective imagination’ to prevent financial disaster? What were the invisible causes of the financial crisis? A little hindsight is a valuable thing. The proximate cause of collapse of Lehman Brothers is usually taken to be subprime lending in the US housing market. Some have highlighted the unmanageability of the ‘credit default swaps’ used to parcel up ‘toxic debts’ and hide them from scrutiny. Others have pointed the finger of blame at greedy speculators and unscrupulous investors intent on making a killing at the expense of vulnerable institutions. A particularly sanguine take on the set of circumstances leading to the crisis is provided in the documentary film Inside Job, which catalogues an extraordinary series of failures of governance that allowed a small minority of already rather rich and powerful people to profit massively from financial collapse by betting cleverly against investments that they themselves had systematically overrated, and by lobbying vociferously against regulation that might have prevented all this.6 This clearly wasn’t all that was going on.


pages: 400 words: 124,678

The Investment Checklist: The Art of In-Depth Research by Michael Shearn

accelerated depreciation, AOL-Time Warner, Asian financial crisis, barriers to entry, Bear Stearns, book value, business cycle, call centre, Carl Icahn, Clayton Christensen, collective bargaining, commoditize, compensation consultant, compound rate of return, Credit Default Swap, currency risk, do what you love, electricity market, estate planning, financial engineering, Henry Singleton, intangible asset, Jeff Bezos, Larry Ellison, London Interbank Offered Rate, margin call, Mark Zuckerberg, money market fund, Network effects, PalmPilot, pink-collar, risk tolerance, shareholder value, six sigma, Skype, Steve Jobs, stock buybacks, subscription business, supply-chain management, technology bubble, Teledyne, time value of money, transaction costs, urban planning, women in the workforce, young professional

For example, if you had asked most investors in insurance firm American International Group (AIG) how the firm generated earnings, they would have given you vague answers. Even the top managers of the business had difficulty understanding each of the different pieces of the business and how they contributed to the total earnings of the firm. As AIG moved from its core insurance business into esoteric financial instruments (such as credit default swaps), it became more opaque, offering little visibility into its future earnings. New businesses, such as International Lease Finance and the Financial Products group were not easy to understand. Most investors bought into the past reputation of AIG and its historical performance, without understanding how these new business lines contributed to the earnings and risk of the business.


pages: 409 words: 125,611

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"World Economic Forum" Davos, accelerated depreciation, accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Alan Greenspan, Asian financial crisis, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, carried interest, classic study, clean water, collapse of Lehman Brothers, collective bargaining, company town, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, gentrification, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, Glass-Steagall Act, global macro, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Robert Solow, Ronald Reagan, Savings and loan crisis, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, subprime mortgage crisis, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

This would have gone a long way toward protecting us. If he didn’t have the tools, he could have gone to Congress and asked for them. Of course, the current problems with our financial system are not solely the result of bad lending. The banks have made mega-bets with one another through complicated instruments such as derivatives, credit-default swaps, and so forth. With these, one party pays another if certain events happen—for instance, if Bear Stearns goes bankrupt, or if the dollar soars. These instruments were originally created to help manage risk—but they can also be used to gamble. Thus, if you felt confident that the dollar was going to fall, you could make a big bet accordingly, and if the dollar indeed fell, your profits would soar.


pages: 482 words: 122,497

The Wrecking Crew: How Conservatives Rule by Thomas Frank

"Hurricane Katrina" Superdome, affirmative action, Alan Greenspan, anti-communist, barriers to entry, Berlin Wall, Bernie Madoff, British Empire, business cycle, classic study, collective bargaining, corporate governance, Credit Default Swap, David Brooks, disinformation, edge city, financial deregulation, full employment, George Gilder, guest worker program, Ida Tarbell, income inequality, invisible hand, job satisfaction, Michael Milken, Mikhail Gorbachev, Mont Pelerin Society, mortgage debt, Naomi Klein, Nelson Mandela, new economy, P = NP, plutocrats, Ponzi scheme, Ralph Nader, rent control, Richard Florida, road to serfdom, rolodex, Ronald Reagan, school vouchers, shareholder value, Silicon Valley, stem cell, stock buybacks, Strategic Defense Initiative, Telecommunications Act of 1996, the scientific method, too big to fail, Triangle Shirtwaist Factory, union organizing, War on Poverty

There is no evidence that the peanut company in question fielded lobbyists or bribed legislators, but its story is emblematic of the conservative era nonetheless. Deregulation, the economics and law professor William K. Black says, is often “criminogenic,” and when I hear that word I think not so much of clean electronic credit-default swaps, but of all the mold and filth that inspectors found in that peanut plant in Georgia. Our ancestors understood that capitalism requires supervision; when you take it away—or when you defund the supervisors, or make them answer to the supervised, or replace them with a “voluntary compliance” program—suddenly you’ve got diseased factories shipping salmonella-laced peanut butter throughout the country.


pages: 444 words: 138,781

Evicted: Poverty and Profit in the American City by Matthew Desmond

affirmative action, Cass Sunstein, crack epidemic, Credit Default Swap, deindustrialization, desegregation, dumpster diving, ending welfare as we know it, fixed income, food desert, gentrification, ghettoisation, glass ceiling, Gunnar Myrdal, housing crisis, housing justice, informal economy, Jane Jacobs, jobless men, Kickstarter, late fees, Lewis Mumford, mass incarceration, New Urbanism, payday loans, price discrimination, profit motive, rent control, statistical model, superstar cities, The Chicago School, The Death and Life of Great American Cities, thinkpad, upwardly mobile, working poor, young professional

They ended up losing them, but the thing is they need to be policed a little bit more….Wasn’t nobody saying, ‘Johnny, pay your mortgage!’ They just may not have been mentally capable.” They say the foreclosure crisis started on Wall Street, with men in power ties trading toxic assets and engineering credit default swaps. But in the ghetto, all you needed was a rapid rescore coach and a low-income tenant hungry for a shot at the American Dream. When Doreen and Sherrena met in the courthouse, Sherrena was not in the best of moods. The conversation with Chelsea had annoyed her, and on top of that, the day before the city had pulled almost $20,000 in water bills and taxes from her bank account.


pages: 476 words: 134,735

The Unpersuadables: Adventures With the Enemies of Science by Will Storr

Albert Einstein, Atul Gawande, battle of ideas, Big bang: deregulation of the City of London, bread and circuses, British Empire, call centre, cognitive bias, cognitive dissonance, Credit Default Swap, David Attenborough, David Brooks, death of newspapers, full employment, George Santayana, Intergovernmental Panel on Climate Change (IPCC), Jon Ronson, meta-analysis, Milgram experiment, placebo effect, randomized controlled trial, Simon Singh, Stanford prison experiment, Steven Pinker, sugar pill, the scientific method, theory of mind, twin studies

What happened was, people began to believe that because it was so heavily regulated, they could put their money into whatever financial instrument they chose and it would be safe.’ ‘So all that regulation gave everyone false confidence?’ ‘Absolutely. Entirely false sense of security. The result was that the banks then began messing around doing all these complicated credit-default swaps and you see what happened.’ Another crucial event that was taking place during Lord Monckton’s time in government was the miners’ strike. One of his recollections of those tense days begins with him sitting in his office in Downing Street as future cabinet minister Oliver Letwin came running in.


pages: 515 words: 126,820

Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World by Don Tapscott, Alex Tapscott

"World Economic Forum" Davos, Airbnb, altcoin, Alvin Toffler, asset-backed security, autonomous vehicles, barriers to entry, behavioural economics, bitcoin, Bitcoin Ponzi scheme, blockchain, Blythe Masters, Bretton Woods, business logic, business process, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, carbon footprint, clean water, cloud computing, cognitive dissonance, commoditize, commons-based peer production, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crowdsourcing, cryptocurrency, currency risk, decentralized internet, digital capitalism, disintermediation, disruptive innovation, distributed ledger, do well by doing good, Donald Trump, double entry bookkeeping, driverless car, 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, Future Shock, Galaxy Zoo, general purpose technology, George Gilder, glass ceiling, Google bus, GPS: selective availability, Hacker News, Hernando de Soto, Higgs boson, holacracy, income inequality, independent contractor, informal economy, information asymmetry, information security, 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, Neal Stephenson, 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, radical decentralization, ransomware, Ray Kurzweil, renewable energy credits, rent-seeking, ride hailing / ride sharing, Ronald Coase, Ronald Reagan, Salesforce, Satoshi Nakamoto, search costs, Second Machine Age, seigniorage, self-driving car, sharing economy, Silicon Valley, Skype, smart contracts, smart grid, Snow Crash, social graph, social intelligence, social software, standardized shipping container, Stephen Hawking, Steve Jobs, Steve Wozniak, Stewart Brand, supply-chain management, systems thinking, TaskRabbit, TED Talk, The Fortune at the Bottom of the Pyramid, The Nature of the Firm, The Soul of a New Machine, The Wisdom of Crowds, transaction costs, Turing complete, Turing test, Tyler Cowen, Uber and Lyft, uber lyft, unbanked and underbanked, underbanked, unorthodox policies, vertical integration, Vitalik Buterin, wealth creators, X Prize, Y2K, Yochai Benkler, Zipcar

Consider prediction markets on the outcomes of corporate actions—earnings reports, mergers, acquisitions, and changes in management. Prediction markets would inform the insurance of value and the hedging of risk, potentially even displacing esoteric financial instruments like options, interest rate swaps and credit default swaps. Of course, not everything needs a prediction market. Enough people need to care to make it liquid enough to attract attention. Still, the potential is vast, the opportunity significant, and access available to all. ROAD MAP FOR THE GOLDEN EIGHT Blockchain technologies will impact every form and function of the financial services industry—from retail banking and capital markets to accounting and regulation.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

Abraham Wald, activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, book value, business cycle, capital asset pricing model, carbon tax, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, currency risk, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, fail fast, fear index, financial engineering, financial innovation, global macro, illegal immigration, implied volatility, independent contractor, index fund, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market clearing, market fundamentalism, market microstructure, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, power law, pre–internet, proprietary trading, quantitative trading / quantitative finance, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stock buybacks, stocks for the long run, tail risk, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

They tried to take over the economy without using money, and they nearly succeeded. People write it off today as a bubble, but I think it was an opening battle in the war for derivatives to replace paper money. Only a few years later, people tried again, this time with literal derivatives—securitized loans and credit default swaps. The last big chunk of the list that got there without money is the hedge fund billionaires. This is literal derivative trading. The top 100 list is rounded out by decidedly less colorful and innovative people, mostly bankers and heirs who inherited fortunes and multiplied them. None of these lived recently.


Adam Smith: Father of Economics by Jesse Norman

active measures, Alan Greenspan, Andrei Shleifer, balance sheet recession, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Berlin Wall, Black Swan, Branko Milanovic, Bretton Woods, British Empire, Broken windows theory, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, cognitive dissonance, collateralized debt obligation, colonial exploitation, Corn Laws, Cornelius Vanderbilt, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, David Ricardo: comparative advantage, deindustrialization, electricity market, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Fellow of the Royal Society, financial engineering, financial intermediation, frictionless, frictionless market, future of work, George Akerlof, Glass-Steagall Act, Hyman Minsky, income inequality, incomplete markets, information asymmetry, intangible asset, invention of the telescope, invisible hand, Isaac Newton, Jean Tirole, John Nash: game theory, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, lateral thinking, loss aversion, low interest rates, market bubble, market fundamentalism, Martin Wolf, means of production, mirror neurons, money market fund, Mont Pelerin Society, moral hazard, moral panic, Naomi Klein, negative equity, Network effects, new economy, non-tariff barriers, Northern Rock, Pareto efficiency, Paul Samuelson, Peter Thiel, Philip Mirowski, price mechanism, principal–agent problem, profit maximization, public intellectual, purchasing power parity, random walk, rent-seeking, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, scientific worldview, seigniorage, Socratic dialogue, South Sea Bubble, special economic zone, speech recognition, Steven Pinker, The Chicago School, The Myth of the Rational Market, The Nature of the Firm, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, time value of money, transaction costs, transfer pricing, Veblen good, Vilfredo Pareto, Washington Consensus, working poor, zero-sum game

These are then used to create the risk-allocation models that underlie banks’ balance sheets, investors’ portfolios, corporate and bond credit ratings and regulators’ rules and interventions. And out of financial analysis has come financial engineering, and so the pricing of such exotic modern instruments as derivatives, collateralized debt obligations (securities backed by mortgages or other assets) and credit default swaps (a kind of loan loss insurance). Thousands of banks and institutional investors around the world use models that rely on the workings of the Efficient Market Hypothesis every day, whether they know it or not—and so do the regulators, who also demand such models from banks and investors in order to do their work.


How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Bear Stearns, Black-Scholes formula, Bob Litterman, Bonfire of the Vanities, book value, Bretton Woods, Brownian motion, business cycle, business process, butter production in bangladesh, buy and hold, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, commoditize, computerized markets, corporate governance, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency risk, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, full employment, George Akerlof, global macro, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, Ivan Sutherland, John Bogle, John von Neumann, junk bonds, linear programming, Loma Prieta earthquake, Long Term Capital Management, machine readable, margin call, market friction, market microstructure, martingale, merger arbitrage, Michael Milken, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, pensions crisis, performance metric, prediction markets, profit maximization, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Richard Feynman, Richard Stallman, risk free rate, risk-adjusted returns, risk/return, seminal paper, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, subscription business, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

Instead, after a few months of feeling each other out, we reached the conclusion that we could work together, which started the most productive research partnership I have ever had. Over the course of the ensuing couple of years we wrote about a dozen research papers together, covering topics ranging from option pricing with transaction costs to credit default swap pricing. A lasting legacy of the partnership was the positive interest framework (a.k.a. the Flesaker-Hughston model), where we laid out necessary and sufficient conditions to ensure positive interest rates in HJM models, and in the process developed a new martingale characterization of arbitrage-free multicurrency interest rate processes.


pages: 520 words: 129,887

Power Hungry: The Myths of "Green" Energy and the Real Fuels of the Future by Robert Bryce

Abraham Maslow, addicted to oil, An Inconvenient Truth, Apollo 11, Bernie Madoff, carbon credits, carbon footprint, carbon tax, Cesare Marchetti: Marchetti’s constant, clean tech, collateralized debt obligation, corporate raider, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, decarbonisation, Deng Xiaoping, disinformation, electricity market, en.wikipedia.org, energy security, energy transition, flex fuel, Ford Model T, Glass-Steagall Act, greed is good, Hernando de Soto, hydraulic fracturing, hydrogen economy, Indoor air pollution, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, James Watt: steam engine, Jevons paradox, Menlo Park, Michael Shellenberger, new economy, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, purchasing power parity, RAND corporation, Ronald Reagan, Silicon Valley, smart grid, Stewart Brand, Ted Nordhaus, Thomas L Friedman, uranium enrichment, Whole Earth Catalog, WikiLeaks

The sports pages were full of news about cheaters, from Major League Baseball players such as Mark Mc-Gwire and Barry Bonds to the ongoing doping scandals at the Tour de France. And we saw the carnage created by the pirates on Wall Street who engineered a multitrillion-dollar mess of toxic derivatives—from collateralized debt obligations to credit default swaps—that would have made even a privateer such as Enron’s Jeffrey Skilling blush in embarrassment.8 We cannot, must not, be Enroned when it comes to energy and energy policy. We must understand—as business author Jim Collins makes clear—that facts are better than dreams. Americans must reject the notion that energy should be scarce and expensive.


pages: 489 words: 132,734

A History of Future Cities by Daniel Brook

Berlin Wall, British Empire, business process, business process outsourcing, call centre, carbon footprint, Celtic Tiger, collateralized debt obligation, collective bargaining, company town, Credit Default Swap, credit default swaps / collateralized debt obligations, Deng Xiaoping, desegregation, Edward Glaeser, Fall of the Berlin Wall, financial innovation, glass ceiling, high-speed rail, indoor plumbing, joint-stock company, land reform, Mikhail Gorbachev, New Urbanism, open economy, Parag Khanna, Pearl River Delta, Potemkin village, profit motive, rent control, Shenzhen special economic zone , SimCity, sovereign wealth fund, special economic zone, starchitect, Suez canal 1869, trade route, urban planning, urban renewal, working poor

Like its historic sister cities, the Gulf’s instant global metropolis had implemented the West’s latest architectural and intellectual fashions in the most extreme manner on its blank slate. While cities the world over gorged on debt-financed real estate speculation, ostensibly made safe through the financial innovations of collateralized debt obligations and credit-default swaps, Dubai topped them all. At the most insane heights of the bubble, Dubai was, to a large extent, a casino posing as a city: owner-occupied units accounted for just 30 percent of its housing market. When the music stopped, Dubai had the farthest to fall. Only an emergency $10 billion bailout by its oil-rich neighboring emirate Abu Dhabi saved Dubai Inc.’s real estate arm from defaulting on its bonds.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, behavioural economics, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, classic study, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial engineering, financial innovation, financial intermediation, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Glass-Steagall Act, Great Leap Forward, Hyman Minsky, inflation targeting, invisible hand, Japanese asset price bubble, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, low interest rates, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, no-fly zone, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Solow, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

Many, if not most, companies benefit from similar transactions.32 During the crisis more complicated derivative instruments, as well as bundles of underlying assets packaged up and sold as ‘securitised’ instruments, acquired a certain notoriety because the failure to understand their true nature brought down banks and even AIG, a large American insurance company. These included credit default swaps (CDS, where the seller agrees to compensate the buyer in the event of default of some named party), mortgage-backed securities (MBS, a claim on the payments made on a bundle of many hundreds of mortgages, sold to the market by the originator of the mortgages, often a bank), and collateralised debt obligations (CDO, a claim on the cash flows from a set of bonds or other assets that is divided into tranches so that the lower tranches absorb losses first and the higher last, with investors able to choose in which tranches to invest).


pages: 476 words: 139,761

Kleptopia: How Dirty Money Is Conquering the World by Tom Burgis

active measures, Anton Chekhov, banking crisis, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Boris Johnson, Brexit referendum, British Empire, collapse of Lehman Brothers, coronavirus, corporate governance, COVID-19, credit crunch, Credit Default Swap, cryptocurrency, disinformation, do-ocracy, Donald Trump, energy security, Etonian, failed state, fake news, Gordon Gekko, high net worth, Honoré de Balzac, illegal immigration, invisible hand, Julian Assange, liberal capitalism, light touch regulation, lockdown, Mark Zuckerberg, Martin Wolf, Michael Milken, Mikhail Gorbachev, Mohammed Bouazizi, Northern Rock, offshore financial centre, Right to Buy, Ronald Reagan, Skype, sovereign wealth fund, trade route, WikiLeaks

He had positioned one of the wheezy armchairs with its back to the large window, so that the clear light before dusk would stream over his shoulder as he sat down, opened a single bottle of ale – Old Speckled Hen, usually – and commenced the evening’s reading. Naturally, he understood the mortgage-backed securities and the credit default swaps. He grasped that the many would be sacrificed for the few. He knew that after the panic, the search for the past would begin, to discern the tale that could be traced from the wreckage of money. Plenty of people, some almost as clever as Nigel, had fathomed this much. But what Nigel started to realise as 2008 got going was that everyone would be digging for the past in the wrong place.


pages: 524 words: 130,909

The Contrarian: Peter Thiel and Silicon Valley's Pursuit of Power by Max Chafkin

3D printing, affirmative action, Airbnb, anti-communist, bank run, Bernie Sanders, Big Tech, bitcoin, Black Lives Matter, Black Monday: stock market crash in 1987, Blitzscaling, Boeing 747, borderless world, Cambridge Analytica, charter city, cloud computing, cognitive dissonance, Cornelius Vanderbilt, coronavirus, COVID-19, Credit Default Swap, cryptocurrency, David Brooks, David Graeber, DeepMind, digital capitalism, disinformation, don't be evil, Donald Trump, driverless car, Electric Kool-Aid Acid Test, Elon Musk, Ethereum, Extropian, facts on the ground, Fairchild Semiconductor, fake news, Ferguson, Missouri, Frank Gehry, Gavin Belson, global macro, Gordon Gekko, Greyball, growth hacking, guest worker program, Hacker News, Haight Ashbury, helicopter parent, hockey-stick growth, illegal immigration, immigration reform, Internet Archive, Jeff Bezos, John Markoff, Kevin Roose, Kickstarter, Larry Ellison, life extension, lockdown, low interest rates, Lyft, Marc Andreessen, Mark Zuckerberg, Maui Hawaii, Max Levchin, Menlo Park, military-industrial complex, moral panic, move fast and break things, Neal Stephenson, Nelson Mandela, Network effects, off grid, offshore financial centre, oil shale / tar sands, open borders, operational security, PalmPilot, Paris climate accords, Patri Friedman, paypal mafia, Peter Gregory, Peter Thiel, pets.com, plutocrats, Ponzi scheme, prosperity theology / prosperity gospel / gospel of success, public intellectual, QAnon, quantitative hedge fund, quantitative trading / quantitative finance, randomized controlled trial, regulatory arbitrage, Renaissance Technologies, reserve currency, ride hailing / ride sharing, risk tolerance, Robinhood: mobile stock trading app, Ronald Reagan, Sam Altman, Sand Hill Road, self-driving car, sharing economy, Sheryl Sandberg, Silicon Valley, Silicon Valley billionaire, Silicon Valley ideology, Silicon Valley startup, skunkworks, social distancing, software is eating the world, sovereign wealth fund, Steve Bannon, Steve Jobs, Steven Levy, Stewart Brand, surveillance capitalism, TaskRabbit, tech billionaire, tech worker, TechCrunch disrupt, techlash, technology bubble, technoutopianism, Ted Kaczynski, TED Talk, the new new thing, the scientific method, Tim Cook: Apple, transaction costs, Travis Kalanick, Tyler Cowen, Uber and Lyft, uber lyft, Upton Sinclair, Vitalik Buterin, We wanted flying cars, instead we got 140 characters, Whole Earth Catalog, WikiLeaks, William Shockley: the traitorous eight, Y Combinator, Y2K, yellow journalism, Zenefits

A deep recession followed in which regular people lost their jobs and, having been locked into mortgages they couldn’t afford, lost their homes. The fund managers who’d anticipated this pain and found trades to exploit it got ridiculously rich. Most famously, John Paulson made $4 billion buying credit default swaps as the market collapsed, which inspired Gregory Zuckerman’s book The Greatest Trade Ever. An obscure hedge fund manager, Steve Eisman, made a similar bet that would be made famous by Michael Lewis’s The Big Short. But Thiel did not get rich—precisely because he could not convert his big idea into a trading strategy.


pages: 514 words: 152,903

The Best Business Writing 2013 by Dean Starkman

Alvin Toffler, Asperger Syndrome, bank run, Basel III, Bear Stearns, call centre, carbon tax, clean water, cloud computing, collateralized debt obligation, Columbine, computer vision, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Erik Brynjolfsson, eurozone crisis, Evgeny Morozov, Exxon Valdez, Eyjafjallajökull, factory automation, fixed income, fulfillment center, full employment, Future Shock, gamification, Goldman Sachs: Vampire Squid, hiring and firing, hydraulic fracturing, Ida Tarbell, income inequality, jimmy wales, job automation, John Markoff, junk bonds, Kickstarter, late fees, London Whale, low interest rates, low skilled workers, Mahatma Gandhi, market clearing, Maui Hawaii, Menlo Park, Occupy movement, oil shale / tar sands, One Laptop per Child (OLPC), Parag Khanna, Pareto efficiency, price stability, proprietary trading, Ray Kurzweil, San Francisco homelessness, Silicon Valley, Skype, sovereign wealth fund, stakhanovite, Stanford prison experiment, Steve Jobs, Stuxnet, synthetic biology, tail risk, technological determinism, the payments system, too big to fail, Vanguard fund, wage slave, warehouse automation, warehouse robotics, Y2K, zero-sum game

You want to hedge your risk that things will go horribly pear-shaped and lots of your borrowers don’t pay you back. (You can handle some regular number of them not paying you back—you’re a bank, that’s your job—but if things are worse than expected and a lot of them go belly-up that’s a problem for you.) One thing that you could do is just buy massive quantities of something called CDS, for “credit default swaps,” which function to a first approximation like insurance on corporate debt and pay off if a particular corporation defaults. You could buy CDS on every company you lend to in the amounts that you lend, but (1) this would eat up all your profits and (2) you can’t really, it doesn’t trade for all of them.


pages: 527 words: 147,690

Terms of Service: Social Media and the Price of Constant Connection by Jacob Silverman

"World Economic Forum" Davos, 23andMe, 4chan, A Declaration of the Independence of Cyberspace, Aaron Swartz, Airbnb, airport security, Amazon Mechanical Turk, augmented reality, basic income, Big Tech, Brian Krebs, California gold rush, Californian Ideology, call centre, cloud computing, cognitive dissonance, commoditize, company town, context collapse, correlation does not imply causation, Credit Default Swap, crowdsourcing, data science, deep learning, digital capitalism, disinformation, don't be evil, driverless car, drone strike, Edward Snowden, Evgeny Morozov, fake it until you make it, feminist movement, Filter Bubble, Firefox, Flash crash, game design, global village, Google Chrome, Google Glasses, Higgs boson, hive mind, Ian Bogost, income inequality, independent contractor, informal economy, information retrieval, Internet of things, Jacob Silverman, Jaron Lanier, jimmy wales, John Perry Barlow, Kevin Kelly, Kevin Roose, Kickstarter, knowledge economy, knowledge worker, Larry Ellison, late capitalism, Laura Poitras, license plate recognition, life extension, lifelogging, lock screen, Lyft, machine readable, Mark Zuckerberg, Mars Rover, Marshall McLuhan, mass incarceration, meta-analysis, Minecraft, move fast and break things, national security letter, Network effects, new economy, Nicholas Carr, Occupy movement, off-the-grid, optical character recognition, payday loans, Peter Thiel, planned obsolescence, postindustrial economy, prediction markets, pre–internet, price discrimination, price stability, profit motive, quantitative hedge fund, race to the bottom, Ray Kurzweil, real-name policy, recommendation engine, rent control, rent stabilization, RFID, ride hailing / ride sharing, Salesforce, self-driving car, sentiment analysis, shareholder value, sharing economy, Sheryl Sandberg, Silicon Valley, Silicon Valley ideology, Snapchat, social bookmarking, social graph, social intelligence, social web, sorting algorithm, Steve Ballmer, Steve Jobs, Steven Levy, systems thinking, TaskRabbit, technological determinism, technological solutionism, technoutopianism, TED Talk, telemarketer, transportation-network company, Travis Kalanick, Turing test, Uber and Lyft, Uber for X, uber lyft, universal basic income, unpaid internship, women in the workforce, Y Combinator, yottabyte, you are the product, Zipcar

Longer examinations look under the hood at the mechanisms and personnel that helped engineer the content’s sensational accumulation of views and attention. For a consumer, it’s all drained of meaning, isn’t it? It’s pure metadata, running through the circulatory system of networked capitalism. The underlying material is interchangeable. We might as well call viral videos widgets or credit default swaps. Maybe that’s a reason why we feel so detached from them as people, even as we consume them so readily. It may also be why, even though a disproportionate number of viral human-interest stories seem to be about people suffering from mental illness, we rarely consider the humanity, and the personal challenges, of those whose stories we laugh at and share.


pages: 524 words: 155,947

More: The 10,000-Year Rise of the World Economy by Philip Coggan

accounting loophole / creative accounting, Ada Lovelace, agricultural Revolution, Airbnb, airline deregulation, Alan Greenspan, Andrei Shleifer, anti-communist, Apollo 11, assortative mating, autonomous vehicles, bank run, banking crisis, banks create money, basic income, Bear Stearns, Berlin Wall, Black Monday: stock market crash in 1987, Bletchley Park, Bob Noyce, Boeing 747, bond market vigilante , Branko Milanovic, Bretton Woods, Brexit referendum, British Empire, business cycle, call centre, capital controls, carbon footprint, carbon tax, Carl Icahn, Carmen Reinhart, Celtic Tiger, central bank independence, Charles Babbage, Charles Lindbergh, clean water, collective bargaining, Columbian Exchange, Columbine, Corn Laws, cotton gin, credit crunch, Credit Default Swap, crony capitalism, cross-border payments, currency peg, currency risk, debt deflation, DeepMind, Deng Xiaoping, discovery of the americas, Donald Trump, driverless car, Easter island, Erik Brynjolfsson, European colonialism, eurozone crisis, Fairchild Semiconductor, falling living standards, financial engineering, financial innovation, financial intermediation, floating exchange rates, flying shuttle, Ford Model T, Fractional reserve banking, Frederick Winslow Taylor, full employment, general purpose technology, germ theory of disease, German hyperinflation, gig economy, Gini coefficient, Glass-Steagall Act, global supply chain, global value chain, Gordon Gekko, Great Leap Forward, greed is good, Greenspan put, guns versus butter model, Haber-Bosch Process, Hans Rosling, Hernando de Soto, hydraulic fracturing, hydroponic farming, Ignaz Semmelweis: hand washing, income inequality, income per capita, independent contractor, indoor plumbing, industrial robot, inflation targeting, Isaac Newton, James Watt: steam engine, job automation, John Snow's cholera map, joint-stock company, joint-stock limited liability company, Jon Ronson, Kenneth Arrow, Kula ring, labour market flexibility, land reform, land tenure, Lao Tzu, large denomination, Les Trente Glorieuses, liquidity trap, Long Term Capital Management, Louis Blériot, low cost airline, low interest rates, low skilled workers, lump of labour, M-Pesa, Malcom McLean invented shipping containers, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Mikhail Gorbachev, mittelstand, Modern Monetary Theory, moral hazard, Murano, Venice glass, Myron Scholes, Nelson Mandela, Network effects, Northern Rock, oil shale / tar sands, oil shock, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, popular capitalism, popular electronics, price stability, principal–agent problem, profit maximization, purchasing power parity, quantitative easing, railway mania, Ralph Nader, regulatory arbitrage, road to serfdom, Robert Gordon, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, savings glut, scientific management, Scramble for Africa, Second Machine Age, secular stagnation, Silicon Valley, Simon Kuznets, South China Sea, South Sea Bubble, special drawing rights, spice trade, spinning jenny, Steven Pinker, Suez canal 1869, TaskRabbit, techlash, Thales and the olive presses, Thales of Miletus, 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 Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, Tragedy of the Commons, transaction costs, transatlantic slave trade, transcontinental railway, Triangle Shirtwaist Factory, universal basic income, Unsafe at Any Speed, Upton Sinclair, V2 rocket, Veblen good, War on Poverty, Washington Consensus, Watson beat the top human players on Jeopardy!, women in the workforce, world market for maybe five computers, Yom Kippur War, you are the product, zero-sum game

The individual loans might be risky but issuers assured investors that it was unlikely lots of homeowners would default at once. Another financial instrument that emerged was designed to insure investors against the risk of a bond defaulting; in return for a premium, the investors would effectively be repaid the face value of the bond. These contracts were known as credit default swaps (CDS) and were themselves bundled together and sold to investors. In other words, an entire pyramid of instruments was created on the willingness and ability of borrowers to repay mortgages. The total value of credit derivatives (as the instruments were called) went from $5trn in 2004 to $20trn in 2006.7 In 2005 and 2006 it was possible to believe that this was not a serious problem.


pages: 506 words: 151,753

The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze by Laura Shin

"World Economic Forum" Davos, 4chan, Airbnb, altcoin, bike sharing, bitcoin, blockchain, Burning Man, cloud computing, complexity theory, Credit Default Swap, cryptocurrency, DevOps, digital nomad, distributed ledger, Dogecoin, Donald Trump, Dutch auction, Edward Snowden, emotional labour, en.wikipedia.org, Ethereum, ethereum blockchain, fake news, family office, fiat currency, financial independence, Firefox, general-purpose programming language, gravity well, hacker house, Hacker News, holacracy, independent contractor, initial coin offering, Internet of things, invisible hand, Johann Wolfgang von Goethe, Julian Assange, Kickstarter, litecoin, low interest rates, Mark Zuckerberg, minimum viable product, off-the-grid, performance metric, Potemkin village, prediction markets, QR code, ride hailing / ride sharing, risk tolerance, risk/return, Satoshi Nakamoto, sharing economy, side project, Silicon Valley, Skype, smart contracts, social distancing, software as a service, Steve Jobs, Turing complete, Vitalik Buterin, Wayback Machine, WikiLeaks

Better still, even if Alice were in Afghanistan and Bob in Zimbabwe, he could have the money in ten minutes, and Alice would have paid a fee of just a fraction of a cent rather than exorbitant fees of $30, $50, or more for an international wire transfer that could take a week. Making all this possible was a blend of technologies called a blockchain. Technologists quickly understood that a blockchain could be applied beyond Bitcoin. In the aftermath of credit default swaps and banks’ confusion over which balance books held bad mortgages, even stodgy, marble-halled incumbents, perhaps mindful of the Occupy Wall Street protesters who had once camped out a stone’s throw from the former headquarters of Merrill Lynch and Lehman Brothers, could see how novel a blockchain was.


pages: 522 words: 162,310

Fantasyland: How America Went Haywire: A 500-Year History by Kurt Andersen

affirmative action, Alan Greenspan, Albert Einstein, animal electricity, anti-communist, Any sufficiently advanced technology is indistinguishable from magic, augmented reality, back-to-the-land, Bernie Sanders, British Empire, Burning Man, California gold rush, Celebration, Florida, centre right, cognitive dissonance, Columbine, corporate governance, cotton gin, Credit Default Swap, David Brooks, delayed gratification, dematerialisation, disinformation, disintermediation, disruptive innovation, Donald Trump, Donner party, Downton Abbey, Easter island, Edward Snowden, Electric Kool-Aid Acid Test, failed state, fake news, Ferguson, Missouri, God and Mammon, Gordon Gekko, greed is good, Herman Kahn, high net worth, illegal immigration, invisible hand, Isaac Newton, John von Neumann, Kickstarter, large denomination, Mark Zuckerberg, market fundamentalism, McMansion, Mikhail Gorbachev, military-industrial complex, Minecraft, moral panic, mutually assured destruction, new economy, New Urbanism, Norman Mailer, off-the-grid, Oklahoma City bombing, placebo effect, post-truth, pre–internet, prosperity theology / prosperity gospel / gospel of success, Ralph Waldo Emerson, RAND corporation, reality distortion field, Ronald Reagan, Silicon Valley, smart meter, Snapchat, South Sea Bubble, Steve Jobs, sugar pill, Ted Kaczynski, the scientific method, Thomas Kuhn: the structure of scientific revolutions, Timothy McVeigh, trade route, transcontinental railway, urban renewal, We are all Keynesians now, Whole Earth Catalog, WikiLeaks, Y2K, young professional

“It was more like what anthropologists and psychologists call magical thinking—the tendency to believe that wishing it so makes it so.” Americans clung to the conviction that you can have outsize returns with little risk, leverage without recoil. This is what the clever financiers claimed that their inventions could do. Their colleagues and clients wanted to believe them. They all wanted to believe that their credit-default swaps could continue to insure against debt defaults…. Magical thinking enables you to see good where there may be only bad. The financiers were a mixture of Cynics and Believers. When their faith in the financialized magic ended in 2008, they promptly chucked those wishful beliefs, of course, and defaulted to pure, reality-based Cynicism.


pages: 526 words: 158,913

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America by Greg Farrell

"World Economic Forum" Davos, Airbus A320, Apple's 1984 Super Bowl advert, bank run, banking crisis, Bear Stearns, Black Monday: stock market crash in 1987, bonus culture, call centre, Captain Sullenberger Hudson, collapse of Lehman Brothers, collateralized debt obligation, compensation consultant, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial engineering, financial innovation, fixed income, glass ceiling, Glass-Steagall Act, high net worth, junk bonds, Ken Thompson, Long Term Capital Management, mass affluent, Mexican peso crisis / tequila crisis, Michael Milken, Nelson Mandela, plutocrats, Ronald Reagan, six sigma, sovereign wealth fund, technology bubble, too big to fail, US Airways Flight 1549, yield curve

Thain thought the projection was a bit severe, but ultimately agreed to work with Cotty’s numbers. One source of Merrill’s worsening losses was a series of positions known as “basis trades” in its fixed-income book. In these trades, some of which had been entered into by Osman Semerci’s team in 2006 and early 2007, Merrill Lynch bought long-term bonds and matched these bonds with credit default swaps that guaranteed their value. The tiny difference between what Merrill paid to hedge its position and the income that the underlying assets generated added incrementally to the firm’s revenues but clogged its balance sheet. In most circumstances, the trades reliably generated a risk-free return, but under certain severe economic conditions—like what the market was going through in the fourth quarter of 2008—the correlations became uncorrelated and Merrill’s positions began bleeding losses.


The Origins of the Urban Crisis by Sugrue, Thomas J.

affirmative action, business climate, classic study, collective bargaining, correlation coefficient, creative destruction, Credit Default Swap, deindustrialization, desegregation, Detroit bankruptcy, Ford paid five dollars a day, gentrification, George Gilder, ghettoisation, Gunnar Myrdal, hiring and firing, housing crisis, income inequality, indoor plumbing, informal economy, invisible hand, job automation, jobless men, Joseph Schumpeter, labor-force participation, low-wage service sector, manufacturing employment, mass incarceration, military-industrial complex, New Urbanism, oil shock, pink-collar, postindustrial economy, Quicken Loans, rent control, restrictive zoning, Richard Florida, Ronald Reagan, side project, Silicon Valley, strikebreaker, technological determinism, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, union organizing, upwardly mobile, urban planning, urban renewal, War on Poverty, white flight, working-age population, Works Progress Administration

In 2005, Kilpatrick approved the largest municipal pension restructuring in the United States to date. A “veritable army” of financial professionals from the nation’s top investment banks and insurance companies put together a $1.44 billion deal to fund the city’s pension obligations using innovative but complex and highly risky derivatives and credit-default swaps. Led by the investment bank UBS, the parties to the deal included Citigroup Global Markets Inc., Merrill Lynch & Co., Siebert, Brandford, Shank & Co., Loop Capital Markets, and Morgan Stanley, as well as massive insurance firms including Financial Guaranty Insurance Co. and XL Capital Assurance.18 The blue-ribbon team that put together the deal included the most influential firms in the American financial services industry.


pages: 782 words: 187,875

Big Debt Crises by Ray Dalio

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, break the buck, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, capital controls, central bank independence, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, declining real wages, equity risk premium, European colonialism, fiat currency, financial engineering, financial innovation, foreign exchange controls, German hyperinflation, global macro, housing crisis, implied volatility, intangible asset, it's over 9,000, junk bonds, Kickstarter, land bank, large denomination, low interest rates, manufacturing employment, margin call, market bubble, market fundamentalism, military-industrial complex, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, Ponzi scheme, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, refrigerator car, reserve currency, risk free rate, Savings and loan crisis, short selling, short squeeze, sovereign wealth fund, subprime mortgage crisis, too big to fail, transaction costs, universal basic income, uptick rule, value at risk, yield curve

In December 2000, Congress clarified that as long as these over the counter contracts (OTC) were between “sophisticated parties,” they did not have to be regulated as futures or securities—effectively shielding OTC derivatives from virtually all oversight.18 Over the next seven years, the OTC market grew quickly. By June 2008, the notional value of these contracts was $672.6 trillion. A key derivative that would play a major role in the financial crisis was the credit default swap (CDS). A CDS plays a role that is similar to insurance. When an issuer sells a CDS, they promise to insure the buyer against potential defaults from a particular exposure (such as defaults creating losses from mortgage-backed securities) in exchange for a regular stream of payments. CDS’s allow purchasers of mortgage-backed securities (and other assets) to transfer default risk to the party selling the CDS.


pages: 603 words: 182,826

Owning the Earth: The Transforming History of Land Ownership by Andro Linklater

agricultural Revolution, Alan Greenspan, anti-communist, Anton Chekhov, Ayatollah Khomeini, Bear Stearns, Big bang: deregulation of the City of London, British Empire, business cycle, colonial rule, Corn Laws, Cornelius Vanderbilt, corporate governance, creative destruction, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, electricity market, facts on the ground, flying shuttle, Ford Model T, Francis Fukuyama: the end of history, full employment, Gini coefficient, Glass-Steagall Act, Google Earth, Great Leap Forward, income inequality, invisible hand, James Hargreaves, James Watt: steam engine, John Perry Barlow, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kibera, Kickstarter, land reform, land tenure, light touch regulation, market clearing, means of production, megacity, Mikhail Gorbachev, Mohammed Bouazizi, Monkeys Reject Unequal Pay, mortgage debt, Northern Rock, Peace of Westphalia, Pearl River Delta, plutocrats, Ponzi scheme, profit motive, quantitative easing, Ralph Waldo Emerson, refrigerator car, Right to Buy, road to serfdom, Robert Shiller, Ronald Reagan, spinning jenny, Suez canal 1869, The Chicago School, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, three-masted sailing ship, too big to fail, trade route, transatlantic slave trade, transcontinental railway, ultimatum game, wage slave, WikiLeaks, wikimedia commons, working poor

Once a mortgage became not just an accountancy asset with an equivalent item on the debit column but a trading asset that increased the capital value of the lender, it became logical for the sales forces working for any kind of lending institution to create as much debt as possible. Even the notorious “Ninja” loans to borrowers with “no income, no job, and no assets” became valuable. By March 2007, the value of subprime mortgages was estimated to be $1.3 trillion. The same process converted credit default swaps, the insurance issued against such transactions going wrong, into capital assets, and the insurance on foreign exchange trades underwent the same process. So long as investment traders agreed, anything could become money. This was the fundamental flaw in Austrian economic theory that Greenspan failed to see.


pages: 819 words: 181,185

Derivatives Markets by David Goldenberg

Black-Scholes formula, Brownian motion, capital asset pricing model, commodity trading advisor, compound rate of return, conceptual framework, correlation coefficient, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, financial engineering, financial innovation, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, law of one price, locking in a profit, London Interbank Offered Rate, Louis Bachelier, margin call, market microstructure, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, price mechanism, random walk, reserve currency, risk free rate, risk/return, riskless arbitrage, Sharpe ratio, short selling, stochastic process, stochastic volatility, time value of money, transaction costs, volatility smile, Wiener process, yield curve, zero-coupon bond, zero-sum game

A similar argument could be given from the point of view of the seller of jet fuel forward contracts. If the spot price rises above the agreed upon 3-month forward price, then the seller of the forward contract has an incentive to default. In case any of this appears to be academic, note that over the counter (OTC) markets tend to have this feature of counterparty risk. The credit default swaps market is a notable example, allegedly playing a role in the 2007–2008 financial crisis. This suggests that market organization is important. A financial instrument can play an important and useful risk management role, but the way the market is organized can create havoc. How can counterparty risk be controlled?


pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, Cass Sunstein, classic study, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, Cornelius Vanderbilt, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, equity risk premium, financial engineering, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, land bank, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, means of production, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, public intellectual, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, subprime mortgage crisis, Suez canal 1869, Suez crisis 1956, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, tontine, too big to fail, trade liberalization, trade route, transatlantic slave trade, tulip mania, wage slave

An insurance company was launched in Hamburg in July, and it fueled the same fears of rampant speculation.6 The windhandel trade of 1720 gave the world something of enduring value, however. Together with its two British cousins, the Royal Exchange Assurance and the London Assurance companies, it created a new model for pooling risks at sea and tapping public capital to cover those risks. Until the twenty-first century dreamed up new risks for insurance companies to take on—credit default swaps and complex mortgage-backed securities—the corporate model of the insurance trade would prove socially and economically useful. THE ART OF INVESTOR FOLLY The lessons of the great crash extend well beyond financial architecture. Despite the transformations of the corporation that took place in 1720, the crash is most often remembered as an episode in human folly.


pages: 650 words: 204,878

Reminiscences of a Stock Operator by Edwin Lefèvre, William J. O'Neil

activist fund / activist shareholder / activist investor, bank run, behavioural economics, Black Monday: stock market crash in 1987, book value, British Empire, business process, buttonwood tree, buy and hold, buy the rumour, sell the news, clean water, Cornelius Vanderbilt, cotton gin, Credit Default Swap, Donald Trump, fiat currency, Ford Model T, gentleman farmer, Glass-Steagall Act, Hernando de Soto, margin call, Monroe Doctrine, new economy, pattern recognition, Ponzi scheme, price stability, refrigerator car, Reminiscences of a Stock Operator, reserve currency, short selling, short squeeze, technology bubble, tontine, trade route, transcontinental railway, traveling salesman, Upton Sinclair, yellow journalism

But I think my highest and best purpose in my professional life is to make as much money as I possibly can and give it away in a very targeted fashion to have a lasting and important social and environmental impact. That is why I still work today. Q: To what extent do you think that private and/or private/ government cliques still attempt to manipulate equity and commodity markets? Crude oil in the first half of 2008 might be an example, or the run on banks’ credit default swaps and equity in the winter of 2008. If so, how are current methods of manipulation different from the 1890s to 1920s? Jones: Generally speaking, the markets at a micro level are much freer and less subject to manipulation than in the days of Livermore. There is a veritable alphabet soup of global regulatory agencies providing a significant deterrence against the type of pump-and-dump schemes that were so rampant in the 1920s.


pages: 716 words: 192,143

The Enlightened Capitalists by James O'Toole

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, Abraham Maslow, activist fund / activist shareholder / activist investor, anti-communist, Ayatollah Khomeini, benefit corporation, Bernie Madoff, Bletchley Park, book value, British Empire, business cycle, business logic, business process, California gold rush, carbon footprint, City Beautiful movement, collective bargaining, company town, compensation consultant, Cornelius Vanderbilt, corporate governance, corporate social responsibility, Credit Default Swap, crowdsourcing, cryptocurrency, desegregation, do well by doing good, Donald Trump, double entry bookkeeping, end world poverty, equal pay for equal work, Frederick Winslow Taylor, full employment, garden city movement, germ theory of disease, glass ceiling, God and Mammon, greed is good, high-speed rail, hiring and firing, income inequality, indoor plumbing, inventory management, invisible hand, James Hargreaves, job satisfaction, joint-stock company, Kickstarter, knowledge worker, Lao Tzu, Larry Ellison, longitudinal study, Louis Pasteur, Lyft, Marc Benioff, means of production, Menlo Park, North Sea oil, passive investing, Ponzi scheme, profit maximization, profit motive, Ralph Waldo Emerson, rolodex, Ronald Reagan, Salesforce, scientific management, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, Socratic dialogue, sovereign wealth fund, spinning jenny, Steve Jobs, Steve Wozniak, stock buybacks, stocks for the long run, stocks for the long term, The Fortune at the Bottom of the Pyramid, The Wealth of Nations by Adam Smith, Tim Cook: Apple, traveling salesman, Uber and Lyft, uber lyft, union organizing, Vanguard fund, white flight, women in the workforce, young professional

It is evident why the public is concerned about finance industry ethics: In 2007, the excesses of “Wall Street” put the mortgages of millions of homeowners at risk, and led to foreclosures for tens of thousands. Understandably, the public is deeply worried that it could happen again. But financial shenanigans are not limited to risky mortgages, credit default swaps, and derivatives, or even to such blatantly unethical actions as the millions of false customer accounts fabricated at Wells Fargo. The Enron scandal, followed by Bernie Madoff’s Ponzi scheme, has highlighted the fact that more ethical misbehavior occurs in finance than in any other industry or in any other aspect of corporate management.


pages: 843 words: 223,858

The Rise of the Network Society by Manuel Castells

air traffic controllers' union, Alan Greenspan, Apple II, Asian financial crisis, barriers to entry, Big bang: deregulation of the City of London, Bob Noyce, borderless world, British Empire, business cycle, capital controls, classic study, complexity theory, computer age, Computer Lib, computerized trading, content marketing, creative destruction, Credit Default Swap, declining real wages, deindustrialization, delayed gratification, dematerialisation, deskilling, digital capitalism, digital divide, disintermediation, double helix, Douglas Engelbart, Douglas Engelbart, edge city, experimental subject, export processing zone, Fairchild Semiconductor, financial deregulation, financial independence, floating exchange rates, future of work, gentrification, global village, Gunnar Myrdal, Hacker Ethic, hiring and firing, Howard Rheingold, illegal immigration, income inequality, independent contractor, Induced demand, industrial robot, informal economy, information retrieval, intermodal, invention of the steam engine, invention of the telephone, inventory management, Ivan Sutherland, James Watt: steam engine, job automation, job-hopping, John Markoff, John Perry Barlow, Kanban, knowledge economy, knowledge worker, labor-force participation, laissez-faire capitalism, Leonard Kleinrock, longitudinal study, low skilled workers, manufacturing employment, Marc Andreessen, Marshall McLuhan, means of production, megacity, Menlo Park, military-industrial complex, moral panic, new economy, New Urbanism, offshore financial centre, oil shock, open economy, packet switching, Pearl River Delta, peer-to-peer, planetary scale, popular capitalism, popular electronics, post-Fordism, post-industrial society, Post-Keynesian economics, postindustrial economy, prediction markets, Productivity paradox, profit maximization, purchasing power parity, RAND corporation, Recombinant DNA, Robert Gordon, Robert Metcalfe, Robert Solow, seminal paper, Shenzhen special economic zone , Shoshana Zuboff, Silicon Valley, Silicon Valley startup, social software, South China Sea, South of Market, San Francisco, special economic zone, spinning jenny, statistical model, Steve Jobs, Steve Wozniak, Strategic Defense Initiative, tacit knowledge, technological determinism, Ted Nelson, the built environment, the medium is the message, the new new thing, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, total factor productivity, trade liberalization, transaction costs, urban renewal, urban sprawl, vertical integration, work culture , zero-sum game

Third, the securitization of every economic organization, activity, or asset, making financial valuation the paramount standard to assess the value of firms, governments, and even entire economies. Furthermore new financial technologies made possible the invention of numerous exotic financial products, as derivatives, futures, options, and securitized insurance (such as credit default swaps) became increasingly complex and intertwined, ultimately virtualizing capital and eliminating any semblance of transparency in the markets so that accounting procedures became meaningless. Fourth, the imbalance between capital accumulation in newly industrializing countries, such as China and oil-producing countries, and capital borrowing in the richest economies, such as the United States, led to a wave of adventurous lending to a crowd of consumers used to living on the edge of debt, exposing the lenders far beyond their financial capabilities.


pages: 825 words: 228,141

MONEY Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins

"World Economic Forum" Davos, 3D printing, active measures, activist fund / activist shareholder / activist investor, addicted to oil, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, backtesting, Bear Stearns, behavioural economics, bitcoin, Black Monday: stock market crash in 1987, buy and hold, Carl Icahn, clean water, cloud computing, corporate governance, corporate raider, correlation does not imply causation, Credit Default Swap, currency risk, Dean Kamen, declining real wages, diversification, diversified portfolio, Donald Trump, estate planning, fear of failure, fiat currency, financial independence, fixed income, forensic accounting, high net worth, index fund, Internet of things, invention of the wheel, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jeff Bezos, John Bogle, junk bonds, Kenneth Rogoff, lake wobegon effect, Lao Tzu, London Interbank Offered Rate, low interest rates, Marc Benioff, market bubble, Michael Milken, money market fund, mortgage debt, Neil Armstrong, new economy, obamacare, offshore financial centre, oil shock, optical character recognition, Own Your Own Home, passive investing, profit motive, Ralph Waldo Emerson, random walk, Ray Kurzweil, Richard Thaler, risk free rate, risk tolerance, riskless arbitrage, Robert Shiller, Salesforce, San Francisco homelessness, self-driving car, shareholder value, Silicon Valley, Skype, Snapchat, sovereign wealth fund, stem cell, Steve Jobs, subscription business, survivorship bias, tail risk, TED Talk, telerobotics, The 4% rule, The future is already here, the rule of 72, thinkpad, tontine, transaction costs, Upton Sinclair, Vanguard fund, World Values Survey, X Prize, Yogi Berra, young professional, zero-sum game

Before his days as the rock star of institutional investing, Swensen worked on Wall Street for bond powerhouse Salomon Brothers. Many credit him with structuring the world’s first currency swap, a trade between IBM and the World Bank, which in effect led to the creation of the interest rate and ultimately credit-default swap markets, representing over $1 trillion in assets today. But don’t hold that against him! I had the privilege of sitting down with Swensen at his Yale office, and before I ventured up the hallowed halls of that storied institution, I did what any good student would do: I spent the night before cramming.


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

accounting loophole / creative accounting, air freight, Albert Einstein, Alvin Roth, An Inconvenient Truth, assortative mating, banking crisis, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, cognitive load, compensation consultant, computer vision, Cornelius Vanderbilt, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Demis Hassabis, Donald Trump, end world poverty, endowment effect, Exxon Valdez, fake it until you make it, financial engineering, first-price auction, Ford Model T, Frederick Winslow Taylor, fudge factor, Garrett Hardin, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, IKEA effect, Jean Tirole, job satisfaction, John Perry Barlow, Kenneth Arrow, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, name-letter effect, new economy, operational security, Pepsi Challenge, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, search costs, second-price auction, Shai Danziger, shareholder value, Silicon Valley, Skinner box, Skype, social contagion, software as a service, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, ultimatum game, Upton Sinclair, Walter Mischel, young professional

If being one step removed from money liberates people from their moral shackles, what will happen as more and more banking is done online? What will happen to our personal and social morality as financial products become more obscure and less recognizably related to money (think, for example, about stock options, derivatives, and credit default swaps)? Some Companies Already Know This! As scientists, we took great care to carefully document, measure, and examine the influence of being one step removed from money. But I suspect that some companies intuitively understand this principle and use it to their advantage. Consider, for example, this letter that I received from a young consultant: Dear Dr.


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

accelerated depreciation, activist fund / activist shareholder / activist investor, air freight, ASML, barriers to entry, Basel III, Black Monday: stock market crash in 1987, book value, BRICs, business climate, business cycle, 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, currency risk, discounted cash flows, distributed generation, diversified portfolio, Dutch auction, energy security, equity premium, equity risk premium, financial engineering, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, low interest rates, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, proprietary trading, purchasing power parity, quantitative easing, risk free rate, risk/return, Robert Shiller, Savings and loan crisis, shareholder value, six sigma, sovereign wealth fund, speech recognition, stocks for the long run, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, two and twenty, value at risk, yield curve, zero-coupon bond

Trading Income Over the past 30 years, proprietary trading emerged as a third main category of income for the banking sector as a whole. This can involve not only a wide variety of instruments traded on exchanges and over the counter, such as equity stocks, bonds, and foreign exchange, but also more exotic products, such as credit default swaps and asset-backed debt obligations, traded mostly over the counter. 760 BANKS Trading profits tend to be highly volatile: gains made over several years may be wiped out by large losses in a single year, as the credit crisis painfully illustrated. These activities have also attracted considerable attention in the wake of the crisis.


Engineering Security by Peter Gutmann

active measures, address space layout randomization, air gap, algorithmic trading, Amazon Web Services, Asperger Syndrome, bank run, barriers to entry, bitcoin, Brian Krebs, business process, call centre, card file, cloud computing, cognitive bias, cognitive dissonance, cognitive load, combinatorial explosion, Credit Default Swap, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, Debian, domain-specific language, Donald Davies, Donald Knuth, double helix, Dr. Strangelove, Dunning–Kruger effect, en.wikipedia.org, endowment effect, false flag, fault tolerance, Firefox, fundamental attribution error, George Akerlof, glass ceiling, GnuPG, Google Chrome, Hacker News, information security, iterative process, Jacob Appelbaum, Jane Jacobs, Jeff Bezos, John Conway, John Gilmore, John Markoff, John von Neumann, Ken Thompson, Kickstarter, lake wobegon effect, Laplace demon, linear programming, litecoin, load shedding, MITM: man-in-the-middle, Multics, Network effects, nocebo, operational security, Paradox of Choice, Parkinson's law, pattern recognition, peer-to-peer, Pierre-Simon Laplace, place-making, post-materialism, QR code, quantum cryptography, race to the bottom, random walk, recommendation engine, RFID, risk tolerance, Robert Metcalfe, rolling blackouts, Ruby on Rails, Sapir-Whorf hypothesis, Satoshi Nakamoto, security theater, semantic web, seminal paper, Skype, slashdot, smart meter, social intelligence, speech recognition, SQL injection, statistical model, Steve Jobs, Steven Pinker, Stuxnet, sunk-cost fallacy, supply-chain attack, telemarketer, text mining, the built environment, The Death and Life of Great American Cities, The Market for Lemons, the payments system, Therac-25, too big to fail, Tragedy of the Commons, Turing complete, Turing machine, Turing test, Wayback Machine, web application, web of trust, x509 certificate, Y2K, zero day, Zimmermann PGP

A complete discussion of the intricacies of risk assessment and risk management is somewhat outside the scope of this book, but if you do decide to do some reading on the topic then try and find a book on financial risk management published some time between about 2004 and 2006, which will go on at length about how effective collateralised debt obligations and credit default swaps are for managing credit risk. Risk Diversification for Internet Applications In terms of managing risk through diversification we don’t have any magic list of silver-bullet measures that will always work. What we do have though is a series of measures that we know tend to make things better, and ones that we know tend to make things worse.