collateralized debt obligation

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pages: 459 words: 118,959

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

activist fund / activist shareholder / activist investor, 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

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

Companies selling assets to the SPVs included Onyx Acceptance Corporation, which made loans to credit-impaired borrowers to purchase used cars, and American Business Financial Services, a company that originated home-equity loans in the subprime market. Gotham also pointed out that MBIA was now entering into credit-default-swap (CDS) contracts as a way to guarantee collateralized-debt obligations (CDOs), despite a New York state prohibition on bond insurers backing derivatives. “LaCrosse transforms obligations that MBIA cannot guarantee directly into ones it believes it can guarantee indirectly,” the report said. A statement in MBIA’s most recent filing with the New York State Insurance Department, saying the company has not entered into any transactions classified as derivative instruments, “obscures the company’s true credit derivative exposure,” the report said.

Buffett described how GEICO took in $70,000 for a few policies and lost $93 million paying claims. Such mistakes can wipe out a lifetime of earnings—a few cents gained when you’re right and a fortune lost when you’re wrong, Buffett said. Ackman believed that was exactly what MBIA was doing with its collateralized-debt-obligation (CDO) business. The huge decline in the value of the CDOs MBIA had insured was proof, Ackman believed, that the bond insurer was massively underpricing risk. Jay Brown had addressed Gotham’s estimates in his letter to shareholders in the company’s annual report that spring. “There was an ‘analysis’ performed by a hedge fund which suggested that our mark was miscalculated by several billion,” Brown wrote.


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

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

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

In fact, there was a powerful new reason why banks and other lenders were offering such wide-ranging come-ons to get people to sign up for loans they probably couldn’t afford. That was the heavy demand from securitization shops and bank departments for new carloads of mortgage loans to repackage into mortgage-backed securities or collateralized debt obligations. With the help of misleading or even rigged ratings, these would then be sold for a fat fee to a pension fund in Baton Rouge or a savings bank in Bavaria. The fees were paid up front. It didn’t matter too much what quality of meat was being stuffed into the securitized sausages. In fact, it was often subprime.


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

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

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.

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


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

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

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

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


pages: 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

Purnanandam, “Originate-to-Distribute Model and the Sub-Prime Mortgage Crisis,” paper presented at the American Finance Association Annual Meeting, September 18, 2009, Atlanta, Ga. 65 As securitization became increasingly commonplace: See, for example, Vinod Kothari, Securitization: The Financial Instrument of the Future (Hoboken, N.J.: John Wiley and Sons, 2006). 66 new, exotic, and complicated: Douglas J. Lucas, Laurie S. Goodman, and Frank J. Fabozzi, “Collateralized Debt Obligations and Credit Risk Transfer,” Journal of Financial Transformation 20 (2007): 47-59. 66 an elegant solution: the CDO: Zandi, Financial Shock, 117-19. See also Janet Tavakoli, Collateralized Debt Obligations and Structured Finance: New Developments in Cash and Synthetic Securitization (Hoboken, N.J.: John Wiley and Sons, 2003). 68 Moral hazard played a significant role: See, for example, Kevin Dowd, “Moral Hazard and the Financial Crisis.”

In fact, the ratings agencies may have had a genuinely difficult time figuring out the likelihood of defaults on the loans pooled into these securities, as very little historical data about the new subprime mortgages and their default rates were available. This was particularly the case with the new, exotic, and complicated mortgage-backed and asset-backed securities first crafted by investment banks in the 1980s. These securities go by different names and different acronyms: collateralized mortgage obligations (CMOs), collateralized debt obligations (CDOs), and collateralized loan obligations (CLOs). All of them worked according to the same principle. Anyone holding a plain-vanilla mortgage-backed security necessarily took on a certain amount of risk: the homeowner might default, for example, or simply prepay the loan, thereby depriving the lender of the additional interest payments it would earn if the loan was paid off on schedule.

This act, which was never debated in the Senate or the House, effectively declared huge swaths of the derivatives market off-limits to regulation. 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.)


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

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

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

It was AIG which was, in effect, the Joneses. It was the company which underwrote all the insurance: it was the single biggest player in the CDS market. Entertainingly for fans of financial acronyms, AIG was done in by CDSs on CDOs. That’s to say, it took part in credit default swaps on collateralized debt obligations, the pools of subprime mortgages whose dramatic collapse in value in 2008 was the proximate cause of the financial crisis. When the investment bank Lehman Brothers imploded in September 2008, done in by its exposure to bad assets, there was a generalized panicked scramble to see who else was carrying similar risk.


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

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

See Chained urban consumers, CPI (C-CPI-U) CDO. See Collateralized debt obligation (CDO) CDS. See Credit default swap (CDS) Certificate of deposit (CD), 41 Chained dollar GDP. See Nominal GDP Chained urban consumers, CPI (C-CPI-U), 48-49 Chapter 11, Bankruptcy Code, 19, 42 Characteristic line. See Security market line (SML) Chicago Board Options Exchange, 316 Churning, 307 CINS number, 63 Closed-end fund, 42-43, 195-196 CML. See Capital market line (CML) Coefficient of variation (CV), 43 COGS. See Cost of goods sold (COGS) Collateral, 43-44, 127 Collateralized debt obligation (CDO), 44, 290 Collateralized mortgage obligation (CMO), 44-45, 303 Commercial paper, 45 Commissions.

This isn’t just Main Street we’re talking about; Wall Street has made plenty of mistakes too. Therefore, we believe that the need for financial education among young people applies not only to those who might fall prey to adjustable-rate mortgages or credit card debt xii The Investopedia Guide to Wall Speak but also to the Wall Street set who staked their futures on collateralized debt obligations (CDOs), mortgage-backed securities (MBSs), and other creations of financial engineering that have emerged over the last few decades. Similarly, there has been no shortage of talk about the world’s “credit binge,” but this discussion rarely addresses what we view as the root cause: lack of education.


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

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

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.

They still had to find a way to process a high volume of deals rapidly; to industrialize the CDS trade, transforming it from a cottage industry into a mass-production business. The crucial, last piece of the puzzle that fell into place went by the strange name “BISTRO” (although bankers would later give the idea an even stranger tag, “synthetic collateralized debt obligations”). This brainchild emerged from months of heated debate and experimentation. By the mid-1990s, Hancock’s group had two views of how to make credit derivatives work large-scale. In London, Bill Winters was inclined to try to create what bankers call a “liquid market” in credit derivatives.


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

It is complex in that there are more institutions with more points of connection with each other, whether as counterparties in loans and transactions or by investing in each others’ commercial paper, swaps, and other securities. And the financial instruments that have been summoned into existence such as credit default swaps and collateralized debt obligations have made the connections more volatile and powerful. It is also complex because no one really sees all of the connections or the size of the exposures they create, and because they change from day to day (think of money market funds, for instance). At the same time, the number of connections and exposures has brought firms into closer proximity to each other.

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

This is not because the examiners have failed to find any deficiencies. The SEC published a summary of its findings after the 2007–2008 examination, and serious shortcomings were identified.14 The report dealt only with the three largest firms and focused on the rating processes for RMBSs and collateralized debt obligations (CDOs), but even this narrow look found disturbing deficiencies. It was this report that disclosed the infamous e-mail in which an analyst said that a deal could be structured by cows and they would still rate it. 13 ‘‘Chairman Cox Announces End of Consolidated Supervised Entities Program,’’ SEC Press Release, September 26, 2008. 14 Securities and Exchange Commission, ‘‘Summary Report of Issues Identified in the Commission Staff’s Review of Select Credit Rating Agencies,’’ July 2008.


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

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

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

Warren Buffett famously labeled derivatives “financial weapons of mass destruction” in the Berkshire Hathaway 2002 annual report.51 In his 2001 book Fooled by Randomness, Nassim Taleb argued that modern financial technology underestimated the likelihood of extreme events, with potentially catastrophic implications.52 Janet Tavakoli’s 2003 book, Collateralized Debt Obligations and Structured Finance, discussed the potential problems involved in securitization, including the risk of fraud.53 And decades before, Hyman Minsky had pointed out the role of innovation in enabling financiers to increase their profits at the risk of destabilizing the economy.54 They could all be ignored as long as market conditions remained benign.


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

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

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

One surprising statistic to come out of the subprime crisis is from a little-reported analysis by Sun Young Park, now an assistant professor at the Korea Advanced Institute of Science and Technology. She analyzed the actual performance of subprime tranches of mortgage-backed securities—not collateralized-debt obligations, but the preceding step in the securitization chain—­issued in the United States between 2004 and 2007 and looked at how many losses had actually been sustained. A total of $1.1 trillion in AAA-rated subprime MBS tranches were issued in that period, and Park identified a loss amount on these securities of $2.6 billion by August 2013.


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. Put simply, “globally integrated markets and innovation … led to a transformation of the financial landscape.”22 Growing Complexity The rise of securitization and structured financial products was one of the most striking features of the Golden Decade.

Figure 2.1 shows the issuance of corporate debt and asset-backed securities between 1990 and 2009. Until 2002, banks issued more corporate debt than asset-backed securities. In 2005, however, banks issued almost twice as much in complex asset-backed securities as in corporate debt. The same trend can be observed when looking at the global issuance of collateralized debt obligations, which increased by a factor of five between 2002 and 2006 (see figure 2.2). Box 2.1. Glossary of Securitization Derivative: A financial product governed by a contract that specifies the conditions under which payments are made between the parties. Its price is based on expectations regarding the value of underlying assets.

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.


pages: 179 words: 42,081

DeFi and the Future of Finance by Campbell R. Harvey, Ashwin Ramachandran, Joey Santoro, Vitalik Buterin, Fred Ehrsam

activist fund / activist shareholder / activist investor, bank run, barriers to entry, bitcoin, blockchain, collateralized debt obligation, crowdsourcing, cryptocurrency, David Graeber, Ethereum, ethereum blockchain, fault tolerance, fiat currency, fixed income, Future Shock, initial coin offering, Jane Street, margin call, money: store of value / unit of account / medium of exchange, Network effects, non-fungible token, passive income, peer-to-peer, prediction markets, rent-seeking, RFID, risk tolerance, Robinhood: mobile stock trading app, Satoshi Nakamoto, seigniorage, smart contracts, transaction costs, Vitalik Buterin, yield curve, zero-coupon bond

Achieved by sending the token to an unowned Ethereum address or to a contract that is incapable of spending. An important part of many smart contracts, for example, occurring when someone exits a pool and redeems the underlying assets. Collateralized currency. Paper currency backed by collateral such as gold, silver, or other assets. Collateralized debt obligation. In traditional finance, a debt instrument such as a mortgage. In DeFi, an example would be a stablecoin overcollateralized with a cryptoasset. Consensus protocol. The mechanism whereby parties agree to add a new block to the existing blockchain. Both Ethereum and Bitcoin use proof of work, but many other mechanisms exist, such as proof of stake.

The idea that combining protocols to build a new protocol is possible. Sometimes referred to as DeFi money legos or composability. Digest. Also known as message digest. See cryptographic hash. Direct incentive. A payment or fee associated with a specific user action intended to be a reward for positive behavior. For example, suppose a collateralized debt obligation becomes undercollateralized. The condition does not automatically trigger liquidation; rather, an externally owned account must trigger it, and then a reward (direct incentive) is given. Double spend. A problem that plagued digital currency initiatives in the 1980s and 1990s: perfect copies can be made of a digital asset, so it can be spent multiple times.

The exchange rate does change, however, and is now 2A:1B. Keeper. A class of externally owned accounts that is an incentive to perform an action in a DeFi protocol of a dApp. The keeper receives a reward in the form of a flat fee or a percentage of the incented action. For example, the keeper receives a fee for liquidating a collateralized debt obligation when it becomes undercollateralized. Know Your Customer (KYC). A provision of U.S. regulation common to financial services regulation requiring that users must identify themselves. This regulation has led to geoblocking of U.S. customers from certain decentralized exchange functionalities.


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

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.

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

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


pages: 543 words: 157,991

All the Devils Are Here by Bethany McLean

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

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

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

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


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.

The middle, or “mezzanine,” tranche might absorb the next 2 percent ($8 million), leaving owners of the top-rated, or “senior,” tranche vulnerable only to losses above 10 percent ($40 million)—an event that seemed so unlikely as to be nearly impossible. Call the resulting three-tranche bundle of securities a CDO (collateralized debt obligation). This example is unrealistically simple, by the way. Typical CDOs had seven or eight tranches; some had more. Now, think about what happens to the various tranches of the CDO as losses on mortgages rise from negligible to monumental. As long as loan losses remain below 8 percent, only the owners of the toxic waste take any hit.


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

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

Increasingly sophisticated varieties of securitization also began to evolve. When large bunches of mortgages have been resold as securities, other investors can buy a few hundred such securities of different origins, for example medium-risk ones, and repackage them once more into a new kind of security, a "collateralized-debt obligation," or CDO. That will also be split into tranches depending on the level of risk that buyers are willing to take. The original idea of CDOs was to spread risk by including a wide variety of assets, but in 2003, Wall Street firms started to create CDOs backed exclusively by mortgages. Similar to an ordinary mortgage-backed security, the buyer who picks the riskiest tranches gets paid the most but also has to suffer the first loss if the CDO investments fail.

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


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

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

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


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

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

By manipulating the market, he maintained the facade that the bonds were trading at genuine market prices. . . . When he [Milken] was brought down, and his trading operation with him, so were the S&Ls that depended on the value of his bonds to stay afloat.”24 Of note: the in-house pricing of derivatives, such as collateralized debt obligations (CDOs), was essential to the current financial collapse. Between 1983 and 1984, Lincoln’s assets more than doubled, from $1.1 billion to $2.24 billion.25 From the time Keating took control of Lincoln in February 1984 through the end of the year, he “had switched virtually all of its activities to real estate development and speculative investments.”26 21 Ibid., p. 346.

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

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


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

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

And as the years went by, Dick Fuld had tightened his circle, shutting out more and more key people from the downstairs floors where the daily action seethed, where the trading battles ebbed and flowed, where more critical information flew around than anywhere else in the city. That was the place from which he had, to all intents and purposes, removed himself. In the process, he had become separated from the most modern technology and the ultramodern trading of credit derivatives—CDO (collateralized debt obligations), RMBS (residential mortgage-backed securities), CLO (collateralized loan obligations), CDS (credit default swaps), and CMBS (commercial mortgage-backed securities). Stories about long-departed commanders were legion. There were mind-blowing tales of the Fuld temper, secondhand accounts of his rages, threats, and vengeance.

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


pages: 218 words: 62,889

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

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

When the American autoparts company Delphi Corp defaulted in 2005, the value of notional swaps on the company amounted to about $30bn, fifteen times its $2bn in bonds.22 By the end of 2007, CDSs had grown to more than $60tn in global business.23 The rest, as they say, is history. CDSs proved particularly toxic as they were sold to cover exotic financial instruments created during the subprime boom. As MBSs and collateralized debt obligations became nearly worthless, defaults were triggered across the system. The banks and hedge funds that were lured by easy fees, and had sold CDSs to others during the boom, now faced mounting costs. An element of the unknown added to the panic: as CDSs were traded over the counter, no one knew exactly the overall exposure to these products.

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

Like many in the industry, Bear Stearns was unprepared for the impending crisis. In its 2006 annual report the bank bragged about its results: ‘We ranked number one for the third consecutive year in US mortgage-backed securities underwriting, secured the top spot in the securitization of adjustable-rate mortgages, and ranked in the top five of global collateralized debt obligations (CDO) market.’9 In reality, however, Bear’s balance sheet was deteriorating. Two of its in-house hedge funds, High Grade Fund and Enhanced Leverage Fund, ran by Ralph Cioffi and Matt Tannin, loaded up on MBSs at precisely the wrong moment. From 2003 Cioffi and Tannin had been losing money in each of their funds.


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

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

It is easy to see how the BBB tranche of a bond formed from these low-quality mortgages would be extremely vulnerable to a complete loss. The story, however, does not end there. Not surprisingly, the BBB tranches were difficult to sell. Wall Street alchemists came up with a solution that magically transformed the BBB tranches into AAA. They created a new securitization called a collateralized debt obligation (CDO) that consisted entirely of the BBB tranches of many mortgage bonds.2 The CDOs also employed a tranche structure. Typically, the upper 80 percent of a CDO, consisting of 100 percent BBB tranches, was rated AAA. Although the CDO tranche structure was similar to that employed by subprime mortgage bonds consisting of individual mortgages, there was an important difference.

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


pages: 701 words: 199,010

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

affirmative action, 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

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

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

A repo is collateralized lending: one bank gives another a security in exchange for cash. The collateral typically takes a haircut, depending on how risky or liquid the security is. A loan might be 99% of a U.S. Treasury bond’s value, but just 95% of a mortgage security’s value. Bear Stearns bought mortgage-backed securities or collateralized debt obligations, then repo’d them immediately, effectively leveraging the investments. Suppose the MBS cost Bear $100,000. When the firm gave another bank the security in a repo, Bear received $95,000. Bear effectively bought the MBS with $5,000 of its own cash and $95,000 in borrowed cash, for a leverage ratio of 20.


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

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

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

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


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

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

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

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


pages: 733 words: 179,391

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

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

We may feel moral qualms about the particular case of John Doe, but that’s because the narrative of our example has personalized him. He has a name and a motive; he’s been transformed into a “YOU.” Now let’s consider a financial setting. Imagine you’re the head of the collateralized debt obligation desk at a major investment bank. You issue collateralized debt obligations that, based on your proprietary models, are likely to default, but your potential buyers believe otherwise, and they’re eager to invest. As a broker-dealer of these instruments, is it ethical to sell them to these investors? Are you obligated to disclose your proprietary models?

These mortgage brokers then sold the loans they originated to the secondary (resale) market, where they were bought by government-sponsored enterprises like Fannie Mae and Freddie Mac, or by investment banks, which used the mortgages as raw material to create the alphabet-soup of new financial products such as ABSs (asset-backed securities) and CDOs (collateralized debt obligations). This ecological change didn’t take place in a political or a cultural vacuum. Politicians across the partisan spectrum encouraged mortgage lending to a variety of different buyers, many of whom had never considered owning a home before. Home ownership became part of the new American dream for more people.

During this time, there was an enormous amount of financial evolution at the speed of thought. There was an adaptive radiation of new mortgage types: adjustable-rate mortgages, “pick-a-payment” mortgages, and even the infamous NINJA loan (“No Income, No Job, no Assets”), evaluated and approved by automated loan-review programs. At the same time, investment banks issued collateralized debt obligations, which enabled large pools of mortgages to be packaged and chopped up into a variety of new securities, and sold with the blessings of the rating agencies. Ultimately, the credit default swap market emerged, in order to provide insurance on some of those new debt issues, which encouraged even more investors to participate in the markets.


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

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

A stint at Tricadia Capital, a hedge fund founded by Michaelcheck’'s Mariner Investment Group, Inc., gave Pellegrini an education in the world of securitized debt and credit-default swaps (CDS), which the firm was heavily involved in. But Pellegrini didn’'t make many friends at Tricadia when he suggested that the firm find ways to short collateralized-debt obligations, even as others at the firm were buying and creating versions of these debts. After a derivative-focused company that Pellegrini hoped to set up for Tricadia failed to get off the ground, he began searching for a job once again. It was that development that led him to the interview that Paulson set up for him with two of Paulson’'s executives, Andrew Hoine and Michael Waldorf.

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


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

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

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

What I do affects your welfare; what you do affects mine. The same applies in business. When General Motors cuts its prices or offers interest-free loans, Ford and Chrysler come under pressure to match GM’s deals, even if their finances are already stretched. If Merrill Lynch sets up a hedge fund to invest in collateralized debt obligations or some other newfangled securities, Morgan Stanley will feel obliged to launch a similar fund so its wealthy clients don’t defect. Now, the chairmen of the Big Three automakers, despite all the criticism they have received recently, are presumably fairly rational, intelligent fellows who would rather coexist peaceably than get into damaging competition.


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

We use the term mortgage-related securities for a broad class of securities containing not only mortgage-backed securities (MBS) but also securities resulting from the securitization of MBS. MBS themselves might serve as collateral for collateralized debt obligations (CDOs) (see, for example, Das 2010, Chapter 9). The idea and the procedure are the same as those for the creation of a mortgage-backed security out of a package of mortgages except that the collateral consists of MBS or more general asset-backed securities (ABS) rather than mortgages. The resulting MBS CDOs or, more generally, ABS CDOs—collateralized debt obligations with MBS or ABS as collateral—might even be securitized further to create ABS CDOs2, CDOs whose collateral consists of ABS CDOs.

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

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


pages: 358 words: 106,729

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

"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

But even while the dullards ascended to the top positions at the banks, Wall Street became a more exciting and challenging place, paying people beyond their wildest dreams. It started attracting and recruiting the smartest students in class, people who thought they could price CDO squared and CDO cubed (particularly egregious forms of securitization involving collateralized debt obligations) and manage their risks. As Trillin writes: “When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was.

We should not worry so much about rugged individualism as about undifferentiated groupthink, for that is the primary source of systemic problems. A competitive system is also likely to produce the financial innovation necessary to broaden access and spread risk. Financial innovation nowadays seems to be synonymous with credit-default swaps and collateralized debt obligations, derivative securities that few outside Wall Street now think should have been invented. But innovation also gave us the money-market account, the credit card, interest-rate swaps, indexed funds, and exchange-traded funds, all of which have proved very useful. So, as with many things, financial innovations span the range from the good to the positively dangerous.

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


pages: 398 words: 105,917

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

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

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

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


pages: 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

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

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

However, because of the potentially large number of parameters needed to represent the relationship between underlyings, the correlations, it is also common to make simplifying assumptions. Such simplifications might be to assume a single common random factor representing default, and a single parameter representing all correlations. Collateralized Debt Obligation Squared (CDO2) is a CDO-like contract in which the underlyings are other CDOs instead of being the simpler risky bonds. Collateralized Mortgage Obligation (CMO) is a pool of mortgages securitized into one financial instrument. As with CDOs there are different tranches allowing investors to participate in different parts of the cashflows.


pages: 444 words: 86,565

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum, Joshua Pearl, Joseph R. Perella

accelerated depreciation, asset allocation, asset-backed security, bank run, barriers to entry, Benchmark Capital, book value, business cycle, capital asset pricing model, collateralized debt obligation, corporate governance, credit crunch, discounted cash flows, diversification, equity risk premium, financial engineering, fixed income, impact investing, intangible asset, junk bonds, London Interbank Offered Rate, performance metric, risk free rate, shareholder value, sovereign wealth fund, stocks for the long run, subprime mortgage crisis, technology bubble, time value of money, transaction costs, yield curve

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

Part Two: Leveraged Buyouts (Chapters 4 & 5) Part Two focuses on leveraged buyouts, which comprised a large part of the capital markets and M&A landscape in the mid-2000s. This was due to the proliferation of private investment vehicles (e.g., private equity firms and hedge funds) and their considerable pools of capital, as well as structured credit vehicles (e.g., collateralized debt obligations). We begin with a discussion in Chapter 4 of the fundamentals of LBOs, including an overview of key participants, characteristics of a strong LBO candidate, economics of an LBO, exit strategies, and key financing sources and terms. Once this framework is established, we apply our step-by-step how-to approach in Chapter 5 to construct a comprehensive LBO model and perform an LBO analysis for ValueCo.

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


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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

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

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

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


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

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

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

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


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

Cohen, Harold, 5.1, 5.2 Cohen, Jonathan Cohen, Laurie, 11.1, 15.1 Cohen, Roger Cohn, Gary, prl.1, 15.1, 15.2, 17.1, 19.1, 19.2, 19.3, 20.1, 20.2, 21.1, 21.2, 21.3, 21.4, 22.1, 22.2, 22.3, 22.4, 22.5, 22.6, 22.7, 23.1, 24.1, 24.2 Cole, Christopher Coles, Michael collateralized debt obligations (CDOs), prl.1, prl.2, prl.3, 19.1, 19.2, 19.3, 19.4, 20.1, 20.2, 20.3, 20.4, 21.1, 21.2, 21.3, 21.4, 21.5, 21.6, 21.7, 21.8, 22.1, 22.2, 22.3, 22.4, 22.5, 22.6, 22.7, 22.8, 23.1, 23.2 complexity of, prl.1, prl.2, 19.1 market volatility caused by synthetic, prl.1, prl.2, prl.3, prl.4, prl.5, 20.1, 20.2, 20.3, 20.4, 21.1, 21.2, 22.1, 23.1, 23.2, 24.1 tranches of, 19.1, 23.1 collateralized debt obligations (CDOs) squared, prl.1, 21.1, 21.2 collateralized mortgage obligations (CMOs), 18.1, 18.2 Collins, Timothy Commerce Department, U.S.

.” —— THE FIRST ACID TEST for Blankfein came on April 16, 2010, when, after a 3–2 vote along party lines, the SEC sued Goldman Sachs and one of its vice presidents for civil fraud as a result of creating, marketing, and facilitating, in 2007, a complex mortgage security—known as a synthetic CDO, or collateralized debt obligation—that was tied to the fate of the U.S. housing market. The CDO Goldman created was not composed of actual home mortgages but rather of a series of bets on how home mortgages would perform. While the architecture of the deal was highly complex, the idea behind it was a simple one: If the people who took out the mortgages continued to pay them off, the security would keep its value.

By the spring of 2006, Goldman was considered a respectable underwriter of mortgage-backed securities, ranking twelfth worldwide in 2005 in the underwriting of so-called structured finance deals—those for asset-backed securities, residential and commercial mortgage-backed securities, and collateralized debt obligations—worth $102.8 billion. By 2006, Goldman had moved up to tenth in the league tables—underwriting 204 deals globally, worth $130.7 billion—but still was far behind Lehman Brothers, Deutsche Bank, Citigroup, Merrill Lynch, and Bear Stearns. These other firms were coining money underwriting mortgage-backed securities and became so concerned about having access to a steady flow of mortgages to package up and sell that they all bought mortgage origination firms—Bear bought EMC Mortgage; Merrill bought First Franklin Financial Corp. from National City Bank in December 2006—at the top of the market—for $1.7 billion.


pages: 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 potential loss caused by any one mortgage going into default would be offset by the fact that it represented only a tiny portion of the security’s total value. Parts of the securities, in many cases the lowest on the food chain, were often bundled into even more esoteric monstrosities known as collateralized debt obligations, which took into account the fact that some of the underlying mortgages were more likely than others to default. The more-likely-to-default bundles obviously carried greater risk, though along with that came its corollary, greater potential reward. Between 2004 and 2007, billions in subprime home loans were stuffed into these so-called CDOs.

Instead, they were gambling on the perception of whether a company would default or not. If all of this weren’t strange enough, things became truly surreal when the world of credit default swaps met the world of securitization. Brown had watched, with some horror, as banks started to bundle securitized loans into a product they called a collateralized debt obligation, or CDO. CDOs were similar to the CMOs (collateralized mortgage obligations) Brown had encountered in the 1980s. But they were more diverse and could be used to package any kind of debt, from mortgages to student loans to credit card debt. Some CDOs were made up of other pieces of CDOs, a Frankenstein-like beast known as CDO-squared.

“Renaissance is a somewhat atypical investment management firm,” he said. “Our approach is driven by my background as a mathematician. We manage funds whose trading is determined by mathematical formulas. … We operate only in highly liquid publicly traded securities, meaning we don’t trade in credit default swaps or collateralized debt obligations. Our trading models tend to be contrarian, buying stocks recently out of favor and selling those recently in favor.” For his part, Griffin sounded a note of defiance, fixing his unblinking blue eyes on the befuddled array of legislators. Hedge funds weren’t behind the meltdown, he said.


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.

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


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

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

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

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


pages: 620 words: 214,639

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

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

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

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

He's doing fine,' and eventually they came to largely ignore him. And that's a little harsh, but not entirely wrong, because none of them really understood what he did.” Explained Marin to the New York Times about Cioffi: “He had come up with an approach to trading those assets”—among others, mortgage-backed securities and collateralized debt obligations—“that people who are experts in that arena thought was a sound and interesting approach.” BY 2003, HEDGE funds were the rage of global finance, much as private equity funds had been a decade or so earlier. Whereas the best and the brightest bankers on Wall Street left to become private equity dons, the best and the brightest traders on Wall Street left to become hedge fund managers.


pages: 354 words: 92,470

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

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

But Basel I was indifferent about the quality of lending within asset classes (prompting profit-maximizing banks to lend more in any one category to riskier customers, who would pay higher interest rate spreads) and it was overly dependent on the judgements of ratings agencies, which, on too many occasions, had no more understanding of the inherent riskiness of innovative financial assets – collateralized debt obligations, for example – than anybody else. The architects of Basel II, produced in 2004 but still not fully implemented as the global financial crisis got going, were more sceptical about the value that ratings agencies could add. Yet, remarkably, they preferred to rely on banks’ own internal risk models to gauge the riskiness of the activities banks were engaged in.

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

In effect, there are now massive cross-border economic and financial claims made up of a vast number of pieces of paper and entries in electronic ledgers. Because these claims relate to capital markets, they essentially operate through time and space: when, for example, a German Landesbank buys a US collateralized debt obligation (CDO), it is essentially making a – legal – claim on future US economic output. The interest rate paid by the US issuer of the CDO to its proud owner will, in turn, reflect a combination of reward for consumption forgone, the perceived ‘riskiness’ of the underlying borrowers (to be precise, the danger that the borrowers will not be able to repay the principal in full), and the liquidity of the CDO (in other words, the ease with which it can be converted quickly into cash at little cost).


pages: 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

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

Even as she spends every day publicly flubbing political SAT questions, she’s always dead-on when it comes to her basic message, which is that government is always the problem and there are no issues the country has that can’t be worked out with basic common sense (there’s a reason why many Tea Party groups are called “Common Sense Patriots” and rally behind “common sense campaigns”). Common sense sounds great, but if you’re too lazy to penetrate the mysteries of carbon dioxide—if you haven’t mastered the whole concept of breathing by the time you’re old enough to serve in the U.S. Congress—you’re not going to get the credit default swap, the synthetic collateralized debt obligation, the interest rate swap. And understanding these instruments and how they were used (or misused) is the difference between perceiving how Wall Street made its money in the last decades as normal capitalist business and seeing the truth of what it often was instead, which was simple fraud and crime.

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


pages: 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

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.

If any mortgages defaulted, it was the lowest tranches that took the loss. This meant that it would take a cataclysmic level of defaults before the top tranches sustained any losses. Those tranches were deemed so safe they deserved the highest credit ratings available: AAA or AA. Tranches were often pooled into a new security called a collateralized debt obligation (CDO), which was, itself, then sliced into tranches. AIG made a point of selling protection only on the highest-rated tranches of MBSs and CDOs. By 2006, AIGFP had begun to worry enough about the quality of underwriting that it stopped selling protection on subprime-backed MBSs and CDOs.

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


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

The Goldman traders had booked profits of somewhere between $1.5 billion and $3 billion--even by bond market standards, a breathtaking sum. In the process, Goldman Sachs created a security so opaque and complex that it would remain forever misunderstood by investors and rating agencies: the synthetic subprime mortgage bond-backed CDO, or collateralized debt obligation. Like the credit default swap, the CDO had been invented to redistribute the risk of corporate and government bond defaults and was now being rejiggered to disguise the risk of subprime mortgage loans. Its logic was exactly that of the original mortgage bonds. In a mortgage bond, you gathered thousands of loans and, assuming that it was extremely unlikely that they would all go bad together, created a tower of bonds, in which both risk and return diminished as you rose.

At the top of this tower was the triple-A tranche, just below it the double-A tranche, and so on down to the riskiest, triple-B tranche--the bonds Eisman had bet against. The Wall Street firms had taken these triple-B tranches--the worst of the worst--to build yet another tower of bonds: a CDO. A collateralized debt obligation. The reason they'd done this is that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce 80 percent of the bonds in it triple-A. These bonds could then be sold to investors--pension funds, insurance companies--which were allowed to invest only in highly rated securities.

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


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

In addition, as discussed earlier, they had a significant economic incentive to rate the bonds as highly as possible to increase their revenues. This is where the investment banks (Goldman Sachs, Morgan Stanley, Bear Stearns, Merrill Lynch, and Lehman Brothers) magnified the misallocation of credit to the housing market. They created a series of financial “innovations” (collateralized debt obligations [CDOs], derivatives, swaps, and others, which I discuss later) that leveraged an already overleveraged product. The explanation typically given for these ultimately very bad decisions by investment bankers is greed. However, there was plenty of greed on Wall Street before the bubble.

It is true that financial institution bankruptcies are more complex and need to be planned in advance. Unfortunately, Lehman did not plan for a bankruptcy because it expected to be bailed out. What was the nature of some of the more interesting derivatives—that is, the “innovations” in financial products? These instruments include CDOs (collateralized debt obligations), CDO2s, SIVs (structured investment vehicles), and other such products. Because of the complexity of the subject and the risk of confusion, let’s focus on a conceptually simplified example: CDOs. CDOs have a reasonable history, as they were designed originally to reduce credit risk.

., 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.


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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

That compared with only 24 failures in the previous six years.17 Capital markets ultimately are responsible for linking savers with investors. Yet the financial crisis revealed that the linkages were often tenuous – person A put her savings in pension fund B, which then purchased a bundle of pieces of paper known as collateralized debt obligations from bank C, which had assembled the bundle via investments in mortgage-backed securities – some of dubious quality – issued by banks D, E and F, which, in turn, had used the money raised to lend to homebuyers G, H and I, one or more of whom had a dubious credit history and, hence, was ‘subprime’.

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

As property portfolios went belly up, some institutions found access to the interbank market – the market that, on a daily basis, allows banks to deal with liquidity shortfalls and excesses – increasingly difficult. And, as interbank rates rose, so equity investors sold even more shares, believing that those operating in the interbank market might have had ‘inside knowledge’ of the state of an individual bank's solvency. Meanwhile, the underlying investors who now owned huge amounts of collateralized debt obligations and the like began to realize they were sitting on a pile of toxic waste: and without the appetite to buy more of the stuff, banks lost a key source of funding for lending. Credit creation came to a grinding halt and so, too, did Western economies. This was yet another example of an age-old banking problem.


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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

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

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

See also credit rating agencies for CDOs conflict of interest in fees for license metaphor for Born, Brooksley borrowers, lack of during financial crisis Braunstein, Douglas Breit, John Brown, Gordon Brown, Jay Brown, Sherrod bubble(s) Bernanke on definition of dot-com Alan Greenspan on mortgage. See mortgage bubble patterns of bucket shop laws Buffett, Warren Bunning, Jim Burger King Bush, George H. W. Bush, George W. California Callan, Erin capitalism Carroll, David Cassano, Joseph Cayne, James (Jimmy) CDOs. See collateralized debt obligations (CDOs) Cerenzie, Michael Chase Manhattan China China Investment Corporation Chrysler Citigroup acquisitions by n bailouts of capital raised by CDOs and corporate loans of dissent at Timothy Geithner and Glass-Steagall act repeal and history of mortgage bond insurance of international portfolio of job losses at leadership change at leverage of losses mortgage bubble and New York Federal Reserve and nonregulated subsidiaries of Hank Paulson and risk at annual letters to shareholders of stock price of subprime mortgages and Wachovia and Clinton, Bill Clinton, Hillary CNBC Cohen, H.


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The Lords of Easy Money: How the Federal Reserve Broke the American Economy by Christopher Leonard

2021 United States Capitol attack, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, collateralized debt obligation, coronavirus, corporate governance, COVID-19, Donald Trump, Dutch auction, financial engineering, financial innovation, fixed income, Ford Model T, forensic accounting, forward guidance, full employment, glass ceiling, Glass-Steagall Act, global reserve currency, Greenspan put, hydraulic fracturing, income inequality, inflation targeting, Internet Archive, inverted yield curve, junk bonds, lockdown, long and variable lags, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, Money creation, mortgage debt, new economy, obamacare, pets.com, power law, proprietary trading, quantitative easing, reserve currency, risk tolerance, Robinhood: mobile stock trading app, Ronald Reagan, Silicon Valley, stock buybacks, too big to fail, yield curve

Powell was concerned about one market in particular: the market for exotic, risky corporate debt. This was the kind of debt that private equity firms and hedge funds used to buy other companies. The debt, sometime in the form of “leveraged loans,” was packaged and resold, just as home loans had been during the 2000s. Back then, home loans were packaged into something called a collateralized debt obligation, or CDO. In 2013, corporate debt was being resold as something called a collateralized loan obligation, or CLO. When Powell talked about leverage loans and buyouts, he was describing his own life experience. He had spent a good part of his career engineering exactly the kinds of risky debt that he was now warning about.

When the tidal wave of QE cash arrived on Wall Street, it created a new opening for banks like Credit Suisse, an opening that would expand their leveraged loan business to an unprecedented scale. This would be made possible by something called the collateralized loan obligation, or CLO for short. * * * This name, CLO, might sound familiar to big fans of the 2008 financial crisis. In 2008, the market imploded thanks to an exotic debt product called the collateralized debt obligation, or CDO. The CDO was a package of home loans (or derivatives contracts based on home loans) stacked together and sold to investors. The CDO made the housing crash possible by creating a seamless assembly line that allowed mortgage brokers to create risky subprime home loans that were quickly packaged and sold to investors, which in turn allowed the mortgage brokers to extend yet more new loans.

To use the Wall Street jargon, the Fed’s balance sheet was about $900 billion before the crash of ’08. Then it rose to $4.5 trillion in the age of ZIRP. The balance sheet hit $8 trillion after the bailouts of 2020 and continues to increase. CDO: Basically a bundle of home loans. Best known for being at the center of the 2008 market crash, a collateralized debt obligation is a financial product sold on Wall Street. A CDO is built when a group of loans are bundled together. Investors can buy a portion of the CDO, and then collect the payments that are made on the underlying loans. If the loans default, investors can lose their money. CDOs usually refer to the home loans that were bundled together during the housing bubble of the 2000s.


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

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

Chicago School – a philosophy of economic and financial thought based on the premise that unfettered markets are the most efficient. Classical model – a microeconomic-based approach to economic decisionmaking that assumes that all actors are rational and maximize their selfinterest, and is driven by the principle that prices adjust to ensure supply is equal to demand. Collateralized debt obligations – investment-grade securities backed by a package of loans, mortgages, bonds, or other debt obligations. 188 Glossary 189 Consumption CAPM – an extension of the CAPM that includes future consumption preferences. Corporate finance – the study of financial decisions made by corporations to maximize shareholder value.

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


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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

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

.* Rates would be set by market participants, based on risk, reward, and a clear understanding that making bad loans would result in bankruptcy.† Do you see how awesome that would be, reader? Without regulation, everyone would live in harmony with nature and the intent of the Founders, and nothing like collateralized debt obligations would ever be invented. Bubbles would never happen. Bankers would never build systems that rewarded them for making bad loans—their rational self-interest wouldn’t let them! To get back to Beck: But we’ve done the complete opposite of that. The housing market is manipulated by the government every step of the way.

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


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

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

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


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

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

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


pages: 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

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

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

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


pages: 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

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

In 1999, when arguing against the proposal of the head of the Commodities Futures Trading Commission to regulate financial derivatives, Greenspan claimed that unrestricted derivatives trading would stabilize finance, not disrupt it. He had no idea how dangerous the new mortgage-based collateralized debt obligations were, as we shall see, the principal source of overly risky investment in the 2000s. It never occurred to him that investment banks were now creating loans just like the commercial banks he oversaw, but this shadow banking system was not regulated by the one agency designed to make sure U.S. credit was strong, his own.

Greenspan, based on his firm market principles, approved strongly of securitization and most derivative products as a way to spread risk—a view traditional market economists like Summers shared. But even when crisis struck in 2008, it was clear the Federal Reserve economists in Washington and New York did not understand how excessive and risky the borrowing now was. In particular, the relatively new collateralized debt obligations (CDOs), a way of packaging risky mortgages for investors willing to make only low-risk investments, was not understood or even investigated. Greenspan’s ultimately naive and dangerous faith in competitive markets showed itself nowhere as damagingly as in the Fed’s failure to be vigilant about the CDOs.


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

In the old days, when someone borrowed money from a bank and bought a house, the lending bank used to own the resulting financial product (mortgage) and that was that. However, financial innovations created mortgage-backed securities (MBSs), which bundle together up to several thousand mortgages. In turn, these MBSs, sometimes as many as 150 of them, were packed into a collateralized debt obligation (CDO). Then CDOs-squared were created by using other CDOs as collateral. And then CDOs-cubed were created by combining CDOs and CDOs-squared. Even higher-powered CDOs were created. Credit default swaps (CDSs) were created to protect you from default on the CDOs. And there are many more financial derivatives that make up the alphabet soup that is modern finance.

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

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: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

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

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

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

See Canada Housing and Mortgage Corporation Christie’s, 136–37 Chubais, Anatoly, 3 Čihák, Martin, 114 class differences. See inequality; wealth climate exchanges, 70–71 CME. See Chicago Mercantile Exchange CME Group, 61 cognitive dissonance, 159, 162–63, 181, 191 Cohen, Jon, 59 collateral, 239 collateralized debt obligations (CDOs), 52, 54 commodity forward contracts, 75 commodity futures, 4, 61, 75, 246n6 (Chapter 9) Commodity Futures Trading Commission, 60 communication, complex, 10, 11, 231 communism, 4–5, 9, 25–26, 129, 181–83, 210–11 communities: effects of war, 183; imagined, 198, 228; national, 197–98; philanthropy and, 197–98, 205 community development financial institutions, 51 compensation.


pages: 923 words: 163,556

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

algorithmic trading, Benoit Mandelbrot, Black Monday: stock market crash in 1987, capital asset pricing model, collateralized debt obligation, correlation coefficient, distributed generation, diversified portfolio, financial engineering, fixed income, global macro, index fund, junk bonds, Louis Bachelier, Myron Scholes, p-value, power law, quantitative trading / quantitative finance, random walk, risk free rate, risk-adjusted returns, short selling, stochastic volatility, subprime mortgage crisis, Thomas Bayes, transaction costs, value at risk

Fabozzi, Lionel Martellini, and Philippe Priaulet Analysis of Financial Statements, Second Edition by Pamela P. Peterson and Frank J. Fabozzi Collateralized Debt Obligations: Structures and Analysis, Second Edition by Douglas J. Lucas, Laurie S. Goodman, and Frank J. Fabozzi Handbook of Alternative Assets, Second Edition by Mark J. P. Anson Introduction to Structured Finance by Frank J. Fabozzi, Henry A. Davis, and Moorad Choudhry Financial Econometrics by Svetlozar T. Rachev, Stefan Mittnik, Frank J. Fabozzi, Sergio M. Focardi, and Teo Jasic Developments in Collateralized Debt Obligations: New Products and Insights by Douglas J. Lucas, Laurie S. Goodman, Frank J.

Fabozzi Investing in Emerging Fixed Income Markets edited by Frank J. Fabozzi and Efstathia Pilarinu Handbook of Alternative Assets by Mark J. P. Anson The Global Money Markets by Frank J. Fabozzi, Steven V. Mann, and Moorad Choudhry The Handbook of Financial Instruments edited by Frank J. Fabozzi Collateralized Debt Obligations: Structures and Analysis by Laurie S. Goodman and Frank J. Fabozzi Interest Rate, Term Structure, and Valuation Modeling edited by Frank J. Fabozzi Investment Performance Measurement by Bruce J. Feibel The Handbook of Equity Style Management edited by T. Daniel Coggin and Frank J. Fabozzi The Theory and Practice of Investment Management edited by Frank J.

The time between successive defaults in a portfolio of bonds is also often modeled as an exponential random variable. The parameter λ is interpreted as the default intensity, that is, the marginal probability of default within a vanishingly small period of time. This procedure provides an approach in credit risk management to model prices of structured credit portfolios called collateralized debt obligations. Mean of the Normal Distribution Let’s compute the expected value of a stock price at time t = 1. From the perspective of time t = 0, the stock price at time t = 1 is given by a function of the random return r1 and the initial stock price S0 according toS1 = S0 ⋅ Moreover, the return may be given as a normal random variable with mean µ and variance σ2, that is, r1 ~ N(0,02).


pages: 293 words: 88,490

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

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.

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

There, crude oil comes in, and is separated or “cracked” into various grades of products, from heavy heating oil to light naphtha. The raw material for the structured products at the heart of the 2008 crisis was mortgage-backed securities (MBSs), and the distilled products are various grades or tranches of collateralized debt obligations (CDOs), where the grade is determined by the risk of default. Just as any product coming out of the distillation process depends on the crude oil that feeds the process, any CDO coming out of the securitization process will have the markings of the MBS that comprises the feedstock. If the feedstock is tainted or diluted, the structured products will be as well.


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

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

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


pages: 584 words: 187,436

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

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

Lenders like Daniel Sadek generated mortgages that were sold to Wall Street banks; the banks turned these into mortgage bonds; then other banks bought the bonds, rebundled them, and sliced the resulting “collateralized debt obligation” into layers, the most senior ones rated a rock-solid AAA, the next ones rated AA, and so on down the line to BBB and lower—there might be eighteen tranches in the pyramid. If the mortgages in the collateralized debt obligation paid back 95 percent or more of what they owed, the BBB bonds would be fine, since the first 5 percent of the losses would be absorbed by even more junior tranches. But once non-payments surpassed the 5 percent hurdle, the BBB securities would start suffering losses; and since the BBB tranche was only 1 percent thick, a nonpayment rate of 6 percent would take the whole lot of them to zero.

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

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


pages: 351 words: 102,379

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

"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

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

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

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


pages: 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

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

Indeed, the aim is to price a multivariate product (the default probability of each of the basket constituents) in a consistent way with the prices (over time) of several univariate products. Application to the Pricing of a CDO7 Basket CDSs (cf. Section 12.1.5) are also embedded into “synthetic securitizations”, often called collaterized debt obligations (CDO), for example the C*Star 1, 1999–2001 of Citibank (data 1999), shown in Figure 13.6. Figure 13.6 Example of a CDO In this example, the CDO involves the lower CDS in the figure, in bold (the upper one is a regular CDS with a bank). This second CDS transfers the credit risk to an entity (C*Star) called a special purpose vehicle (SPV), whose function is to pool the debts into several notes, called tranches, offered to investors.


pages: 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

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

In Chapter 3, we speak to this point as we examine certain theories that provide very real value within their parameters, but have been misused or are not allowed to die a proper death because they serve an unintended and sometimes misguided purpose. We have also seen this phenomenon at work in the current market. The Collateralized Debt Obligation (CDOs) is first and foremost an asset allocation product and was first designed by JP Morgan to assist its clients in securitizing certain obligations. In designing this program, the bank also designed risk control features that assured a workable understanding of the bank’s obligations as well as those of its clients.

See CAPM (Capital Asset Pricing Model) Capital International Stock Indices, 168 Capital Market Line (CML), 5–6 CAPM (Capital Asset Pricing Model), 4–6, 18, 62–63 acceptance of, 28 and efficient market hypothesis, 6–10 and market risk, 43 Cash flow, 98 Casualty insurance, 98 CISDM CTA indices, 149, 150, 261, 262 CISDM ELS index, 193 CISDM Fund of Fund indices, 267, 268 CISDM Hedge Fund indices, 55, 131, 142, 144, 145, 185 CISDM indices, 259, 260, 261, 262, 263 Clustering, volatility, 95 Collar strategy, 234 Collateralized debt obligations (CDOs), 228, 229 Commodities, 59, 61, 65, 129, 130, 143–148, 160–165 benchmarks, 179–185, 275 futures, 12 Index return and risk performance, 162–163 volatility, 182, 185 Commodity Futures Trading Commission (CFTC), 11 Commodity pool operators (CPOs), 143 Commodity Research Bureau, 265, 266 Commodity risk, 196 Commodity trading advisors.


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

I couldn’t believe it. It was the worst possible thing you could read. FOR IMMEDIATE RELEASE SEC Charges Goldman Sachs with Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages I read further… The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

Whenever Bloomberg News reports a vitally important story, the news scrolls up on the screen from bottom to top in red. It is not a frequent occurrence. My entire screen was red. What kind of misrepresentations was the SEC alleging? I started talking to my colleagues; everyone was trying to piece it together. The chatter on the floor was about one of our products built on CDOs (collateralized debt obligations, basically a sausage stuffed with subprime mortgages). Why now? Why us? Everyone, including me, was on the defensive. Ever since the federal government had bailed out the banks thanks to TARP, there had been murmurings in the world at large that someone needed to be held accountable for the crisis; for months there had been the sense of a gathering lynch mob.

Buck: Wall Street slang for $1 million. “That hedge fund just traded five hundred bucks of silver futures without blinking.” “His loft in Tribeca cost eight bucks.” Call option: A type of derivative that gives the purchaser the right to buy an underlying security at a stipulated price in the future. CDO (collateralized debt obligation): A type of security that played a significant role in inflating the real estate bubble, the subsequent 2008 crash, and the downfall of Bear Stearns, Lehman, Merrill Lynch, Wachovia, and Washington Mutual. CDOs package mortgages together and serve to connect investor capital with the U.S. housing market.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

"hyperreality Baudrillard"~20 OR "Baudrillard hyperreality", accounting loophole / creative accounting, bank run, banking crisis, banks create money, behavioural economics, Bernie Madoff, bitcoin, Bitcoin Ponzi scheme, blockchain, borderless world, Bretton Woods, BRICs, business cycle, capital controls, capitalist realism, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, currency risk, David Graeber, debt deflation, dematerialisation, disintermediation, Dogecoin, emotional labour, eurozone crisis, fiat currency, financial engineering, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, gentrification, German hyperinflation, Goldman Sachs: Vampire Squid, Herbert Marcuse, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kickstarter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, Minsky moment, mobile money, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, National Debt Clock, Neal Stephenson, negative equity, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, post-Fordism, Post-Keynesian economics, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, risk free rate, Robert Shiller, Satoshi Nakamoto, scientific management, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

But the technology needed to make such a reading infallible (raised print, watermarks, holograms) is increasingly costly and complex, and difficult to read by sight alone. Finance is read differently, with its history of charts and graphs (Preda 2009), although it may have caught up with money in some respects. Credit ratings, too, are instantly legible, although those attached to collateralized debt obligations turned out to be tainted and their very legibility became a source of contagion (Carruthers 2010). Even here, a narrative is attached to the rating, which is unraveled whenever the rating shifts, or when various ratings agencies offer different grades for a particular financial product. 42 Bretton Woods refers to the international monetary system that was established in 1944, wherein countries agreed to adopt monetary policies aimed to ensure that their currencies maintained fixed rates of exchange against the U.S. dollar, which was in turn “pegged” to gold.

For Harvey, capital’s centralization through the credit system is integral to this idea because a credit crisis (the devaluation of capital) invariably leads to the destruction of money (inflation) (Harvey 2006: 328). In these terms, the policy whereby governments (via central banks) seek to stimulate effective demand by keeping interest rates low (or, recently, through quantitative easing) amounts to replacing privately created fictitious capital (such as collateralized debt obligations) with state-backed capital (or money). This additional money can be reinvested in production (leading to wage increases), channeled into speculative finance (leading to the creation of even more fictitious capital), or pumped into consumption (creating further upward pressure on wages).

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


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

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

The press release underlined how problems initially seen as a minor blip in US mortgages were affecting the European as well as US banks. The “certain segments” of the mortgage market that were in distress were securities that bundled subprime mortgages or securities that put these assets together into more complex collateralized debt obligations (CDOs) or even into CDOs-squared (CDOs of CDOs). The roaring market in these products rapidly collapsed as it became apparent that US house prices were falling, something that the proponents of these products had assured investors had not happened on a national basis in the United States in the sixty years since World War II.

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

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


pages: 484 words: 104,873

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

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

Still, it seems hard to make a strong case for financialization as the primary cause of, say, polarization and the elimination of routine jobs. It’s also important to realize that growth in the financial sector has been highly dependent on advancing information technology. Virtually all of the financial innovations that have arisen in recent decades—including, for example, collateralized debt obligations (CDOs) and exotic financial derivatives—would not have been possible without access to powerful computers. Likewise, automated trading algorithms are now responsible for nearly two-thirds of stock market trades, and Wall Street firms have built huge computing centers in close physical proximity to exchanges in order to gain trading advantages measured in tiny fractions of a second.

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

See collateralized debt obligations (CDOs) Center for Economic and Policy Research, 171n Central Intelligence Agency, 46, 85 cervical cancer screening, 152–153 chargemaster prices, 160–161, 164 cheating, MOOCs and, 136–137 Cheney, Dick, 240 chess, 97–98, 122, 123 Chicago, data portal of city of, 87–88 China American consumer spending and, 54 college graduates overqualified for occupations in, 251 consumer demand in, 223–227 globalization and, 53 industrial automation in, 3, 10–11, 225–226 labor’s share of national income in, 41 offshoring and, 120 reshoring and, 9 saving rate in, 224–225 super-intelligence and, 236n China rebalancing, 224–225 Chomsky, Noam, 129, 236 Christensen, Clayton, 142 Chronicle of Higher Education (journal), 139 Chrysler, 76 Circuit City, 16 Cisco, 234 Citigroup, 103, 198 citizen’s dividend, 266–267 Cleveland Clinic, 102 Clifford, Stephanie, 8 climate change, xvii, 211–212, 282–283 Clinton, Bill, 242 cloud computing, 52, 104–107, 109 cloud robotics, 20–23 cobalt poisoning, 145–146 cognitive capability, global competition for jobs and, 120 cognitive computer chip, 72 cognitive computing, 96–104 collaboration software, 64 Collapse: How Societies Choose to Succeed or Fail (Diamond), x collateralized debt obligations (CDOs), 56 college-educated workers, 120–121, 126–128 college graduates, declining income and underemployment for recent, 48–49 College Unbound (Selingo), 140 college wage premium, 48n Colton, Simon, 112 “The Coming Technological Singularity” (Vinge), 233 community colleges, 276–277 comparative advantage, 73–75 compensation.


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

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

• This led to a housing bubble, which was made much worse by sub-prime lending. • Partly because of the prior deregulation of the financial industry, the housing bubble was also magnified by over-leveraging within the financial services industry, which was in turn exacerbated by financial innovation and complexity (including the use of derivatives, collateralized debt obligations, and a dizzying variety of related investment instruments) — all feeding the boom of a shadow banking system, whose potential problems were hidden by incorrect pricing of risk by ratings agencies. • A commodities boom (which drove up gasoline and food prices) and temporarily rising interest rates (especially on adjustable-rate mortgages) ultimately undermined consumer spending and confidence, helping to burst the housing bubble — which, once it started to deflate, set in motion a chain reaction of defaults and bankruptcies.

Decades earlier, bond credit ratings agencies had been paid for their work by investors who wanted impartial information on the credit worthiness of securities issuers and their offerings. Starting in the early 1970s, the “Big Three” ratings agencies (Standard & Poor’s, Moody’s, and Fitch) began to be paid instead by securities issuers. This eventually led to ratings agencies actively encouraging the issuance of high-risk collateralized debt obligations (CDOs). Also in the 1990s, the Clinton administration adopted “affordable housing” as one of its explicit goals (this didn’t mean lowering house prices; it meant helping Americans get into debt), and over the next decade the percentage of Americans owning their homes increased 7.8 percent.


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

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

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

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


Global Financial Crisis by Noah Berlatsky

"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

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

., 18, 24, 144, 147 migrant workers, 110, 116, 130 must join with U.S. to control crisis, 65–71 stimulus packages, 19, 135, 140, 141–142, 144–145 trade with Africa, 195 trade with U.S., 65, 66, 70–71, 144, 147 unrest, 19, 25, 108–120, 139– 140 Clearinghouse regulations, 49–50 Climate change policy, 26, 163 Collateralized debt obligations (CDOs), 50, 88 Colombia, 161–162, 180, 182, 183, 184 Common Cause, 205–206 Communist Party, China, 110, 114–116, 139–140 Comparative advantage, 192–193 Competitiveness, financial, 48–49 Congress business subsidies, 202, 203, 204, 205–206 hearings, 175 predatory lending, 206 protectionism and trade agreements, 181, 182, 184 Construction industry, 34, 130, 131, 133 Consumer confidence, 63, 91, 100, 208, 213, 216 Corporate welfare, 201, 202–206 See also Bailouts Cox, Pamela, 158–159 Credit default swaps (CDSs), 17, 28, 29, 50, 175–176, 215 Credit derivatives.


pages: 479 words: 113,510

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

Affordable Care Act / Obamacare, 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

In August 2000, my firm, DLJ, was purchased by Credit Suisse for $11.5 billion. By January 2001, when we were all called in for that companywide meeting, the Swiss company’s stodgier, more regimented culture had already collided with DLJ’s entrepreneurial spirit. The bankers began describing their new product: a $340 million collateralized debt obligation (CDO), essentially a bond composed of home mortgages sliced into various tranches that produced income streams. Each tranche had been rated by Moody’s, Standard & Poor’s, and Fitch Ratings, the three most important ratings agencies. The AAA rating stood at the top, then AA, and so on down the ratings ladder until the bottom, the “equity” tranche.

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

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


pages: 399 words: 114,787

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

"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

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

Broeksmit and, 184–85, 186, 188, 263, 293–94 international banking rules, 165 Libor scandal, 263–64 Menke’s letter, 263–65 Val’s investigation, 249, 296, 332 BakerHostetler, 330–33 Banca Monte dei Paschi di Siena, 154–56 BaFin investigation, 208 Broeksmit’s warnings about, 295–97, 301, 326 collapse, 193–94, 208 Deutsche derivatives scheme, 155–56, 193–94, 295 Italian investigation, 193–94 Val and Goracci, 301–304 Val and Justice Department, 320–21, 358 Bankers Trust Deutsche Bank acquisition, 63–67, 68, 93, 147, 154 Trump loans, 64, 68, 74 Bank Leumi, 167, 169, 312 Bank of America, 28, 168–69, 312 Bank of Cyprus, 338–39 Bank of England, 209 Bannon, Steve, 305–306, 325 Bänziger, Hugo, 106–108, 161, 183 background of, 106–107 BaFin and Broeksmit, 184–85 Sewing and, 259, 348–49 sexual harassment allegations, 107–108, 108n Barclays, 92 Baron, Stefan, 100 Barrack, Tom, 272 Barry, Maryanne Trump, 174 Bartmann, Flavio, 85–86, 204 Bean, Stephen, 88–89 Bear Mountain, 89 Bear Stearns, 74–75, 134 Beatles, the, 2 Belamar Hotel (Los Angeles), 279, 280, 281 Belton, Catherine, 321–22, 322n Ben-Artzi, Eric, 159–62, 180, 195, 261 Ben-Artzi, Jonathan, 159–60 Benson, Harry, 2 Berlin Wall, 24, 42 Berman, Geoffrey, 344–45 Bernanke, Ben, 164 Big Bang (financial markets), 24 Big Short, The (movie), 138n Bikini Robot Army (band), 218–19, 254–55, 283 Bittar, Christian, 128–30 background of, 129 compensation, 152, 264, 290, 291 investigation, 195–96, 264, 290–91 Libor scheme, 151–52, 195–96, 261, 290–91 Bloomberg, Michael, 99 BMW 8 Series, 47, 48 BMW X5, 181 Bogart, Humphrey, 20–21 Boies, David, 255 Bowers, Tom, 169, 170–75, 354 Brand, Jacques “Jack,” 4–7 DBTCA and, 187–88, 205–206 Trump loans and, 5–6, 7, 306 Breit, John, 38, 39, 40, 185, 206 Breitbart News, 238, 325 Breuer, Rolf-Ernst, 63–67, 82–83, 93 Bridge School, 244–45 Broeksmit, Alessa, 189–90, 207, 216, 223, 224, 285 Broeksmit, Alla, 156, 188 background of, 213–15 Bänziger’s fiftieth birthday party, 184 Bill’s burial, 244 Bill’s memorial service, 229–30 Bill’s retirement, 204, 210 Bill’s suicide, 3–4, 221–22, 224, 225, 227–28 Brooklin home, 39–40, 190, 244 move to London, 50, 83–84 Park Avenue apartment, 123 in Short Hills, New Jersey, 33–34 Val and, 213–20, 221–22, 242–44, 280, 281–82, 283–84, 300, 351–53 Virgin Gorda vacation, 207–208 wrongful-death lawsuit considerations, 243–44 Broeksmit, Bill background of, 30–32 at Continental Illinois, 32–33 drinking and partying of, 32, 123–24 memorial service for, 229–30 at Merrill Lynch, 33–41, 48–49, 123, 126–27 Mitchell’s death and, 89–90, 122–23 Scott Mitchell and, 188–90 suicide of, 1–4, 221–30, 251–52, 287–89, 292, 341, 359–60 suicide notes, 223–24, 227, 229, 246–47, 280, 284–86 Val and, 39, 215–22 World Economic Forum and, 209 Broeksmit, Bill, at Deutsche Bank, 8, 51–52, 54, 83–84, 157 BaFin and, 184–85, 186, 188, 263, 293–94 Banca Monte dei Paschi scheme, 295–97, 301, 326 DBTCA and, 186–88, 191, 192, 204, 205–208, 223, 233, 241–42, 256, 285, 293–94, 317, 326–27, 358 Dixon and, 158–59, 326 ethical standards of, 58–59, 207, 359–61 hiring, 48–50 Libor scheme, 196, 288–94 offer of chief risk officer job, 183–85 retirements, 84–86, 85, 122–24, 204, 210 return as consultant, 135–37, 156 Senate investigation, 237–38 Val’s investigation, 279–86, 289–95, 298–304 Broeksmit, Bob, 31, 229–30 Broeksmit, Jack, 30–31 Broeksmit, Jane, 30–31 Broeksmit, Katarina, 207, 216, 223, 224, 244, 285 Broeksmit, Valentin “Val,” 213–21 author’s contacts with, 247–50, 252, 257, 279 Banca Monte dei Paschi investigation, 295–97, 301–304, 320–22 Deutsche Bank investigation, 279–86, 289–90, 298–304 drug rehab, 242–45, 248 drug use, 219, 282, 283, 300, 330, 331 early life of, 39, 213–17 education of, 50, 216, 217–18 father and Mitchell’s death, 89–90 father’s files, 225–26, 225n, 246–47, 249–50, 256–57, 300, 322, 355–56, 357–59 father’s memorial service, 230, 242 father’s retirement, 204 father’s suicide, 1–4, 222, 223–26, 227–29, 245, 252 father’s suicide notes, 223–24, 246–47, 280, 284–86 John Moscow and, 330–33 Justice Department and, 320–21, 357–59 Marie and, 351–53, 355, 359 mother’s computer files, 281–82, 283–84, 292–93 Senate investigation and Roach, 329–30 Senate report, 237 Simpson and, 324–27, 333, 333n Sony Pictures hack, 253–55 Trump and The Art of the Deal, 123 Brooklin, Maine, 39–40, 190, 244 Browder, Bill, 331 Brown University, 69 Buffalo Bills, 270, 271 Buffett, Warren, 75 Bush, George W., 162, 164 Business Executives for National Security, 334–35 BuzzFeed, 324 Byrne, Richard, 114–16, 119, 175–77, 274–75 Callable interest rate swaps, 34 Capital ratio, 182–83, 192 Carbon-emissions permits, 150–51, 191–92 Carney, Mark, 209 Casablanca (movie), 20–21 CDOs (collateralized debt obligations), 127, 136–37, 138–40, 154 Central Presbyterian Church (New York City), 229 Cerberus Capital Management, 347 Charles de Gaulle Airport, 300 Cherednichenko, Alexander, 213–15, 216–17 Chicago Mercantile Exchange, 194 Chicago Sun-Times, 214 Chrysler Building (New York City), 76 Cicero (magazine), 263 Citigroup (Citicorp), 74, 120, 147, 167–68, 270 Citron, Robert, 40–41 Claremont McKenna College, 31, 31n Clarke, Stuart, 174 Cleopatra (movie), 254 Climate change, 150–51 Clinton, Bill, 164 Clinton, Hillary, 307, 309 Cloete, Alan, 129, 262, 262n Cohan, William, 74, 275 Cohen, Michael, 357 Cohn, Gary, 320 Cohrs, Michael, 92, 102–103 Colby College, 27 Collateralized debt obligations (CDOs), 127, 136–37, 138–40, 154 Colony Capital, 272–73 Columbia Business School, 69 Commerzbank, 82, 347–48 Commodity Futures Trading Commission, 194 Concorde, 45, 47, 88 Consumer Financial Protection Bureau, 343 Continental Illinois, 32–33 Cook County Juvenile Court, 214, 215 Cooper Horowitz, 75–76 Coppola, Francis Ford, 254 Craig, Sue, 307–308, 308n Credit Suisse, 97, 106–107 Croatia, 122–23 Crossman, Alex, 142 Crow Indians, 13 Cryan, John, 298–99 appointment as CEO, 266–68 background of, 267 replacement as CEO, 345 Trump and, 307–308, 314 Cypriot banking, 231–33, 338–39 Daimler-Benz, 23 Daisy (dog), 4, 123, 220, 221, 223, 225, 230, 243, 286 Dartmouth College, 28 Davis, Sidney, 244 Davis, Steven, 105, 105n DB Pace Acquisitions, 275 DBTCA.

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


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

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

But I have acknowledged that there are political problems with pricking asset-price bubbles, and the Federal Reserve cannot maintain its political independence if it ruffles too many political feathers. Not enough economists noticed (or at least remarked) the relation between executive compensation practices and risky lending, or appreciated the riskiness of mortgage-backed securities, other collateralized-debt obligations, and credit-default swaps, or connected the decline in personal savings to the danger that such lending posed to the economy. Not enough seem to have realized that the crisis of the banking industry, when it hit, was a crisis not of (or at least not mainly of) illiquidiry but of insolvency.


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

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

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

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


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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

Dekker also observes that systems tend to drift in the direction of failure, gradually reducing the safety margin and taking on more risk, because of pressures to optimize the system in order to be more efficient and competitive. We are able to build complex things—deep-sea oil rigs, spaceships, collateralized debt obligations—all of whose properties we can understand in isolation. But with complex systems in competitive, regulated societies—like most organizations—failure is often primarily due to unanticipated interactions and interdependencies of components and factors or forces outside the system, rather than failure of the components themselves.

They compromise on an experiment with a test case outside the United States, and Goldman advises Krupp in a successful hostile take-over of Thyssen (O, C). J.P. Morgan develops a proprietary product that helps banks clean up their balance sheets using credit default swaps—the first synthetic collateralized debt obligations (CDOs) (T, C). Morgan Stanley merges with Dean Witter Reynolds, the financial services business of Sears that serves retail clients (C). The acquisition extends Morgan Stanley’s ability to sell stock offerings and makes Morgan Stanley larger. Travelers Group, run by Sandy Weill, purchases Salomon Brothers, a major bond dealer and investment bank, for $9 billion (C).

Six months later he is arrested on criminal charges, soon after the SEC charges another Goldman employee with insider trading. In April, Senator Carl Levin (D.-Mich.) releases the 650-page report of the Senate investigation into the credit crisis (R). It concludes that Goldman misled clients and Congress about the collateralized debt obligations that helped cause the financial crisis. The report urges regulators to identify any violations of law in the activities of Goldman leading up to the financial crisis. The report asserts that conflicts of interest led Goldman to place its financial interests before those of its clients.


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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

One key trigger was the difficulty of HFLI to cover their losses once prices on risky assets they owned by borrowing against equity started to fall. Greatly complicating the situation was the expansion of two financial instruments which had radically reduced the riskiness of individual assets: one was collateral debt obligation (CDOs) that bundled loans such as mortgages, credit card debt, student loans, and bank loans, and thus minimized individual default risk, and cut the securitized packages into different risk tranches. The other was credit default swaps (CDSs) that “insured” assets against a wide range of defaults.

., 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.


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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

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

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

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


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, 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

It is easy to see how the BBB tranche of a bond formed from these low-quality mortgages would be extremely vulnerable to a complete loss. The story, however, does not end there. The BBB tranches were difficult to sell. Wall Street alchemists came up with a solution that magically transformed the BBB tranches into AAA. They created a new securitization called a collateralized debt obligation (CDO) that consisted entirely of the BBB tranches of many mortgage bonds.7 CDOs also employed a tranche structure. Typically 75 percent to 80 percent of a CDO was rated AAA, even though it consisted of 100 percent BBB tranches. Although the CDO tranche structure was similar to that employed by subprime mortgage bonds consisting of individual mortgages, there was an important difference.

I first became aware of the opportunity in October 2006 when a friend sent us a write-up of a presentation made by Paul Singer of Elliot Associates. Singer walked through the sleight-of-hand that banks used to amalgamate the riskiest tranches of subprime mortgage-backed securitizations (MBS)—the BBB tranches that investors were starting to shy away from—into a new collateralized debt obligation (CDO), the majority of which was rated AA or higher. 9 Singer demonstrated that housing prices didn’t have to fall for the AA tranches of these CDOs to fail; they simply had to stop rising. The assertion that institutional investors were willing to accept the paltry returns associated with AA or higher rated securities for that kind of risk didn’t even seem plausible.

I have listened to every podcast since the program’s inception, and I highly recommend it. 4If this comment is unintelligible to you, don’t worry. A primer on mortgage-backed securities and their role in the financial crises is provided later in this chapter before our conversation related to Cornwall’s short trade in collaterized debt obligations (CDOs). 5Mai explained that the typical quoting convention for implied volatility in interest rate markets, known as “normalized volatility,” is the number of absolute basis points reflecting a one-standard-deviation event, as opposed to the standard convention of quoting implied volatility in other asset classes in terms of percentage changes in the underlying security.


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

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

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

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


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

No money was invested in mortgages or any productive enterprise. This was one group betting against another, and a lot of these deals were done all over New York and London.” Mauldin goes on to question why large institutional investors were even gambling on such things as synthetic collateralized debt obligations in the first place: “This is an investment that had no productive capital at work and no remotely socially redeeming value.72 It did not go to fund mortgages or buy capital equipment or build malls or office buildings.” Commenting on our looming debt crisis, Princeton economist Alan Blinder noted that “in 1980 [policymakers] knew about the year 2010 but that was really far away.”73 Well, it’s not anymore, and given that much of our deficit problem is about huge numbers of workers born decades ago now hitting retirement age, Blinder quipped, “The long run is now the short run and they’re combining.”

How is it that more and more Americans were able to buy more and more houses—even as incomes stagnated? By taking on more debt, of course, provided by an underregulated army of lenders pitching seductive new mortgage vehicles. By 2005, subprime mortgages had skyrocketed to 20 percent of the market.63 Fueling the boom was the development of securitized mortgages—including collateralized debt obligations (CDOs)—in which mortgages of varying degrees of risk were bundled together in “tranches” and sold to investors.64 Since lenders were selling off the risk to someone else, they felt much freer to make loans to borrowers who never would have been able to qualify for a prime mortgage. The Fed did its part, too, contributing extremely low interest rates and lax oversight to the increasingly toxic housing mix.


pages: 345 words: 75,660

Prediction Machines: The Simple Economics of Artificial Intelligence by Ajay Agrawal, Joshua Gans, Avi Goldfarb

Abraham Wald, Ada Lovelace, AI winter, Air France Flight 447, Airbus A320, algorithmic bias, AlphaGo, Amazon Picking Challenge, artificial general intelligence, autonomous vehicles, backpropagation, basic income, Bayesian statistics, Black Swan, blockchain, call centre, Capital in the Twenty-First Century by Thomas Piketty, Captain Sullenberger Hudson, carbon tax, Charles Babbage, classic study, collateralized debt obligation, computer age, creative destruction, Daniel Kahneman / Amos Tversky, data acquisition, data is the new oil, data science, deep learning, DeepMind, deskilling, disruptive innovation, driverless car, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, everywhere but in the productivity statistics, financial engineering, fulfillment center, general purpose technology, Geoffrey Hinton, Google Glasses, high net worth, ImageNet competition, income inequality, information retrieval, inventory management, invisible hand, Jeff Hawkins, job automation, John Markoff, Joseph Schumpeter, Kevin Kelly, Lyft, Minecraft, Mitch Kapor, Moneyball by Michael Lewis explains big data, Nate Silver, new economy, Nick Bostrom, On the Economy of Machinery and Manufactures, OpenAI, paperclip maximiser, pattern recognition, performance metric, profit maximization, QWERTY keyboard, race to the bottom, randomized controlled trial, Ray Kurzweil, ride hailing / ride sharing, Robert Solow, Salesforce, Second Machine Age, self-driving car, shareholder value, Silicon Valley, statistical model, Stephen Hawking, Steve Jobs, Steve Jurvetson, Steven Levy, strong AI, The Future of Employment, the long tail, The Signal and the Noise by Nate Silver, Tim Cook: Apple, trolley problem, Turing test, Uber and Lyft, uber lyft, US Airways Flight 1549, Vernor Vinge, vertical integration, warehouse automation, warehouse robotics, Watson beat the top human players on Jeopardy!, William Langewiesche, Y Combinator, zero-sum game

Beyond Churn Machine learning is improving prediction in a variety of other settings beyond churn, from financial markets to the weather. The financial crisis of 2008 was a spectacular failure of regression-based prediction methods. Partly driving the financial crisis were predictions of the likely default of collateralized debt obligations, or CDOs. In 2007, ratings agencies like Standard & Poor’s forecasted that AAA-rated CDOs had a less than one in eight hundred chance of failing to deliver a return in five years. Five years later, more than one in four CDOs failed to deliver a return. The initial prediction was staggeringly wrong despite very rich data on past defaults.

Martin, 125 Chen Juhong, 164 China, 8 AI advantages of, 218–220 autonomous vehicles in, 164 language translation in, 26–27 Chiou, Lesley, 216 Chisel, 3, 53–54, 68 Christensen, Clay, 50, 181 churn, 32–36 classification, 13 cloud, data from the, 188–189, 202 clustering, 13 collaboration, human/machine, 65–67, 212 bank tellers/ATMs and, 171–173 job redesign for, 141–151 in medical imaging, 146–147 collateralized debt obligations (CDOs), 36–37 complements, 15, 76. See also data; judgment value of, 165 complexity, 103–110 if-then logic and, 104–109 compromises, 107. See also trade-offs computers cheap arithmetic from, 12 programming of, effect of prediction on, 38, 40 conditional average, 33 consumer preferences data, 176–177 Consumer Reports, 169 Cook, Tim, 189–190 cookies, 175 Copenhagen metro, 104 corn, hybrid, 158–160, 181 correlations, unanticipated, 36–37 cost, 7–20 of data acquisition, 44 effects of reduced AI, 9–11 of foundational inputs, 11–13 internet, 10–11 of prediction, 13–15, 29 strategy and, 15–17, 169 counterfactual, 62–63 crashes, 200 creative destruction, 215 Creative Destruction Lab (CDL), 2, 134 credit card fraud detection, 24–25, 27, 91 judgment in, 84–88 creditworthiness, 27–28, 66–67 Croesus, King of Lydia, 23 crowd behavior, alterations in, 191 crystal balls, 24 customer churn, 32–36 Daimler, 164 Dartmouth College conference, 31–32, 39 data, 18, 43–51 acquiring, 46–47 business transformation and, 174–176 on customer churn, 35–36 decisions about, 47–49 economies of scale and, 49–50, 216 feedback, 43, 46, 204–205 homogeneity in, 201–202 how machines learn from, 45–47 input, 43 necessity of for prediction, 44–45 prediction with little, 98–102 privacy issues with, 189–190 quality of, 163, 200 real world, autonomous vehicles and, 186–187 retention practices, 216 roles of, 43 security risks with, 199–205 selling consumer, 176–177 signal vs. noise in, 48 strategic advantage from unique, 176–177 as strategic asset, 163–164 strategy and, 174–176 training, 43, 45–47, 202–204 types that humans have and machines don’t, 98 decision making, 18, 73–82.


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

For example, when you hear the words ‘‘toxic assets’’ or ‘‘troubled assets’’ on the evening news, most of what you are hearing about are structured finance instruments based on pools of mortgages, Financial Innovation Made Easy ‘‘collateralized mortgage obligations’’ or CMOs. These proved such a success in getting mortgages off the books of lenders that the same structuring process was used to get business loans off the books. These collateralized loan obligations, or CLOs, were joined by collateralized debt obligations, or CDOs, that pooled corporate debt. Obviously, such instruments lose value very quickly when the value of the underlying mortgages, loans, and bonds becomes questionable. Basically, they become ‘‘unsaleable.’’ Buying and selling makes prices, so without such transactions, there is no way to put a value on these instruments.

See S&L Buffett, Warren, 48, 52, 175 Busts, xv, xx, 16, 18, 27, 67, 80, 98, 104, 121–131, 139–140, 158, 170 buy side, 22–27, 46, 67, 68, 146 ‘‘capital,’’ 4–5, 16, 26–28, 41, 46, 54, 60, 64, 66, 68, 70–74, 93, 99, 103–104, 117, 127, 142–143, 148, 156–160, 165, 184, 189 capital market, 27, 60, 117, 156, 160, 189 CD (Certificate of Deposit), 39, 49, 71, 130, 145–146 CDO (Collateralized Debt Obligation), 73–74 CDS (Credit Default Swap), 73 central bank, 12–13, 69, 74, 83, 102–113, 122–123, 136, 150, 160, 162–165, 173, 185. See also Bank of England, Fed, Federal Reserve System, Board of Governors, Federal Reserve Bank of New York checks, xv, 2, 10–14, 36–37, 84–90, 100, 105, 120, 122–123, 144 clearing, 13–14, 84–85, 91, 100, 105, 168 Index clearing houses, 11, 14, 84–85, 91, 105, 121, 144, 150 CLO (Collateralized Loan Obligation), 73 CMO (Collateralized Mortgage Obligation), 73 coinage, xvi, 105 Cold War effect on international finance, 147 commanding heights (of the economy), 126, 166, 174, 182, 187, 189 commercial paper, 41–42, 65–66, 130, 152 commodity money, xiii Compensating Balances, 144 Comptroller of the Currency, 38, 128, 141 confidence, xix, 12, 22, 28, 44, 80, 103, 112, 121, 129, 135–136, 140–141, 161, 164–165, 168 contracts, 25, 29–32, 36–37, 40–41, 47, 53–57, 73, 80, 98, 119–120, 138, 156, 175, 186 contracts in a box, 29–30, 34–35, 41–47, 54, 78 consumer lending, 61, 63, 65, 70 corporate equities.


pages: 206 words: 9,776

Rebel Cities: From the Right to the City to the Urban Revolution by David Harvey

Alan Greenspan, Bretton Woods, business cycle, collateralized debt obligation, commoditize, creative destruction, David Graeber, deindustrialization, financial innovation, Garrett Hardin, gentrification, Guggenheim Bilbao, Hernando de Soto, high-speed rail, housing crisis, illegal immigration, indoor plumbing, invisible hand, Jane Jacobs, late capitalism, Lewis Mumford, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, means of production, military-industrial complex, moral hazard, mortgage debt, mortgage tax deduction, Murray Bookchin, New Urbanism, Ponzi scheme, precariat, profit maximization, race to the bottom, radical decentralization, Robert Shiller, Savings and loan crisis, special economic zone, the built environment, the High Line, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transcontinental railway, urban planning, We are the 99%, William Langewiesche, Works Progress Administration

B ut this urbanization b o om has depended, as did all the others before it, on the construction of new financial institutions and arrangements THE RIGHT TO THE CITY 13 to organize the credit requ ired to susta in it. Financial innovations set in train in the 1980s, p articularly the securitization and packaging of local mortgages for sale to investors world-wide, and the setting up of new financial institutions to facilitate a secondary mortgage market and to hold collateralized debt obligations, has played a crucial role. The ben­ efits of this were legion: it spread risk and permitted surplus savings pools easier access to surplus housing demand, and also, by virtue of its coordinations, it brought aggregate interest rates down (wh ile generat­ ing immense fortunes for the financial intermediaries who worked these wonders).

Stimulating demand by taxation and public poli c y gimm icks and other T H E U R BAN ROOTS OF CAP I TALI ST C R I S E S 47 incentives (such as increasing the volume of sub-prime mortgages) does not necessarily elicit an increased supply: it merely inflates prices and stimulates speculation. As much if not more money can then be made from fin ancial trading on existing housing rather than from building n ew. It becomes more profitable to finance shady mortgage-originating institutions like Countrywide than actual housing production. Even more tempting is to invest in collateralized debt obligations made up of tranchcs of mortgages gathered together in some spuriously h ighly rated investment veh icle (supposedly "as safe as houses") in which the flow of interest from homeowners provides a steady income (no matter whether the homeowners are creditworthy or not) . Th is was exactly what happened in the United States as the sub-prime steamroller got going.


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

Indeed, once it became clear that house prices were falling, some walked away without making any payments at all. The bonds backed by these mortgages, known as subprime in the jargon because of the low credit ratings of the borrowers, started to default. But what made the crisis worse was that the mortgage-backed bonds themselves had been bundled up and repackaged. Securities known as collateralized debt obligations or CDOs had been created. These were made up of bundles of asset-backed bonds. The CDOs were sliced and diced into different elements, known as tranches. The riskiest slice, known as equity, paid the highest yield. But in return, they suffered the first loss when any of the underlying assets defaulted.

Bonds are attractive to investors because they can usually be bought and sold easily BROKERS Those who link buyers and sellers in return for a commission BUILDING SOCIETIES Institutions whose primary function is to accept the savings of small depositors and channel them to house buyers in return for the security of a mortgage on the property BULLS Investors who believe that share or bond prices are likely to rise CASH RATIO The proportion of a bank’s liabilities which it considers prudent to keep in the form of cash CDO (COLLATERALIZED DEBT OBLIGATION) Complex security comprised of a portfolio of bonds or credit default swaps (see below). The CDO is divided into tranches, offering different combinations of risk and return CERTIFICATE OF DEPOSIT Short-term interest-paying security CHAPS Clearing House Automated Payment System – an electronic system for settling accounts between the major clearing banks CHINESE WALL A theoretical barrier within a securities firm which is designed to prevent fraud.


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

Morgan team eventually created a product called a broad index secured trust offering (BISTRO). Complex in its details and accounting, the product was nevertheless simple in essence—it aggregated the odds of default on a whole package of loans, not just on a single credit. Collateralized debt packages had long been around, but BISTRO represented a whole new segment—synthetic collateralized debt obligations (CDOs). Wall Street has an endless ability to slice and dice, though; and as soon as it was created, BISTRO was separated into various “tranches” that carried different levels of risk and return. Investors in the junior tranche would eat the first losses due to any defaults, and therefore earn the highest return.

(Dimon is fond of Mark Twain’s wry comment that history does not repeat itself, but it does rhyme.) One answer to Laura Dimon’s question is that this time around it wasn’t just one entity (such as Long-Term Capital Management) or one investment product (such as Internet stocks) that melted down. Almost every credit product out there collapsed—subprime mortgages, mortgage-related collateralized debt obligations, asset-backed commercial paper, auction-rate securities, SIVs, Alt-A mortgages, financial insurers, home equity. Among the large commercial and investment banks, only Goldman Sachs and JPMorgan Chase seem to have been in any way prepared for the possibility of disaster. In March 2007, Dimon had written in the company’s 2006 annual report, “Credit losses, both consumer and wholesale, have been extremely low, perhaps among the best we’ll see in our lifetimes.

., 202–3 Chase Home Finance, 235, 291 Chase Manhattan, 89, 135, 162, 171–73, 194, 199–204 Chase National Bank, 202–3 Chemical Bank, 36, 41, 57, 59, 89, 145, 171, 203 Chenault, Ken, 244 Cherasia, Peter, 270 Chernow, Ron, 52, 87, 202, 203, 260 Chicago Sun-Times, 153 Chief Executive, 163 Cioffi, Ralph, 223–26, 231 Citadel Investment Group, 217–18, 268, 285–86 CITIC, 228 Citicorp, 54–55, 98–101 Citigroup, 83, 98–150, 155, 160–68, 177, 178, 183–84, 185, 195, 196, 200–209, 214, 219, 220, 221, 228–30, 232, 238, 240, 251, 269, 276, 280, 289, 295–303, 310, 316, 321, 323, 324, 325 City National Bank, 143 Clinton, Bill, 87, 103, 140, 221 Clinton, Hillary, 241, 316 CNBC, 84, 227, 245, 249, 302 CNN, 196 Cogan, Marshall, 19 Cohan, William, 224, 244, 258, 262 Cohen, H. Rodgin, 245, 264, 293 Cohen, Peter, 19, 21, 22, 46, 60, 77, 97, 101 Cole, Robert, 51 Coleman, Lewis, 147 collateralized debt obligations (CDOs), 210–14, 230, 235–37, 276, 309 Collins, Paul, 100, 102, 104, 105 Comcast, 9, 149 Commercial Credit, 30–50, 53, 59, 62, 85, 143, 150, 156, 159, 171, 192, 195, 203 Commodities and Futures Trading Commission, 87–88 Comptroller of the Currency, 87 “conduit” arrangement, 248–49, 267–68, 270 Continental Airlines, 168 Continental Illinois, 295 Control Data, 31–33 Cook, Charles, 323 Corrigan, E.


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.

Sachsen LB, a state-owned German bank, collapsed after one of its US mortgage funds failed; Barclays had structured the fund, marketed it to investors and bought and sold shares in it for clients. The day after returning from his summer holiday, Edward Cahill, who ran Barclays Capital’s collaterized debt obligation division, part of its US mortgage business, departed abruptly. On 28 August, the Financial Times reported that Barclays had been left with hundreds of millions of dollars’ worth of exposure to failed debt vehicles arranged by Barclays Capital.15 A Barclays Capital spokesman said the report was untrue, adding that the bank had not provided any funding to the Sachsen vehicle.

The latter is used throughout this book. 8: Diamond’s Halo Slips, 1998 fn1 The investment bank moved to Canary Wharf in 1997; head office moved there in 2005. 12: The Big Vision, 2004 fn1 In 2001, Barclays announced that its head office would move to new premises in Canary Wharf and its registered address formally changed from 54 Lombard Street to 1 Churchill Place on 31 May 2005. fn2 A mortgage-backed security is a financial instrument backed by a package of mortgages. A collaterized debt obligation is a security comprising pools of debt some of which might be mortgage-backed securities. A credit default swap is an insurance policy against a company defaulting. An equity swap is an agreement for two parties to exchange future payments from specified financial instruments. 13: Dutch Courage, 2007 fn1 The exchange rate was €1.50 to the pound. 15: Night Falls, 16 September – 13 October 2008 fn1 Myners has not disclosed the identity of the caller other than to say ‘It’s not who you might think.’


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

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.

To get around the rules, insurance companies repackaged the high yield assets into CBOs and transferred the riskier parts to their holding companies (which did not have to hold reserves). Now, CBOs in a more modern form were used to repackage credit risk for investors. It was even given a new name – CDO (Collateralized Debt Obligations). Imitation and flattery In the 1970s, mortgage securitization developed in the US. Banks originally had written mortgage loans, then they had waited 30 years for the homeowners to pay it back. Now, banks wrote the loan and once they had a bunch they sold them to a special purpose vehicle (SPV).

However, the text is different. 6 ‘What Worries Warren’ (3 March 2003) Fortune. 13_INDEX.QXD 17/2/06 4:44 pm Page 325 Index accounting rules 139, 221, 228, 257 Accounting Standards Board 33 accrual accounting 139 active fund management 111 actuaries 107–10, 205, 289 Advance Corporation Tax 242 agency business 123–4, 129 agency theory 117 airline profits 140–1 Alaska 319 Allen, Woody 20 Allied Irish Bank 143 Allied Lyons 98 alternative investment strategies 112, 308 American Express 291 analysts, role of 62–4 anchor effect 136 Anderson, Rolf 92–4 annuities 204–5 ANZ Bank 277 Aquinas, Thomas 137 arbitrage 33, 38–40, 99, 114, 137–8, 171–2, 245–8, 253–5, 290, 293–6 arbitration 307 Argentina 45 arithmophobia 177 ‘armpit theory’ 303 Armstrong World Industries 274 arrears assets 225 Ashanti Goldfields 97–8, 114 Asian financial crisis (1997) 4, 9, 44–5, 115, 144, 166, 172, 207, 235, 245, 252, 310, 319 asset consultants 115–17, 281 ‘asset growth’ strategy 255 asset swaps 230–2 assets under management (AUM) 113–4, 117 assignment of loans 267–8 AT&T 275 attribution of earnings 148 auditors 144 Australia 222–4, 254–5, 261–2 back office functions 65–6 back-to-back loans 35, 40 backwardation 96 Banca Popolare di Intra 298 Bank of America 298, 303 Bank of International Settlements 50–1, 281 Bank of Japan 220 Bankers’ Trust (BT) 59, 72, 101–2, 149, 217–18, 232, 268–71, 298, 301, 319 banking regulations 155, 159, 162, 164, 281, 286, 288 banking services 34; see also commercial banks; investment banks bankruptcy 276–7 Banque Paribas 37–8, 232 Barclays Bank 121–2, 297–8 13_INDEX.QXD 17/2/06 326 4:44 pm Page 326 Index Baring, Peter 151 Baring Brothers 51, 143, 151–2, 155 ‘Basel 2’ proposal 159 basis risk 28, 42, 274 Bear Stearns 173 bearer eurodollar collateralized securities (BECS) 231–3 ‘behavioural finance’ 136 Berkshire Hathaway 19 Bermudan options 205, 227 Bernstein, Peter 167 binomial option pricing model 196 Bismarck, Otto von 108 Black, Fischer 22, 42, 160, 185, 189–90, 193, 195, 197, 209, 215 Black–Scholes formula for option pricing 22, 185, 194–5 Black–Scholes–Merton model 160, 189–93, 196–7 ‘black swan’ hypothesis 130 Blair, Tony 223 Bogle, John 116 Bohr, Niels 122 Bond, Sir John 148 ‘bond floor’ concept 251–4 bonding 75–6, 168, 181 bonuses 146–51, 244, 262, 284–5 Brady Commission 203 brand awareness and brand equity 124, 236 Brazil 302 Bretton Woods system 33 bribery 80, 303 British Sky Broadcasting (BSB) 247–8 Brittain, Alfred 72 broad index secured trust offerings (BISTROs) 284–5 brokers 69, 309 Brown, Robert 161 bubbles 210, 310, 319 Buconero 299 Buffet, Warren 12, 19–20, 50, 110–11, 136, 173, 246, 316 business process reorganization 72 business risk 159 Business Week 130 buy-backs 249 ‘call’ options 25, 90, 99, 101, 131, 190, 196 callable bonds 227–9, 256 capital asset pricing model (CAPM) 111 capital flow 30 capital guarantees 257–8 capital structure arbitrage 296 Capote, Truman 87 carbon trading 320 ‘carry cost’ model 188 ‘carry’ trades 131–3, 171 cash accounting 139 catastrophe bonds 212, 320 caveat emptor principle 27, 272 Cayman Islands 233–4 Cazenove (company) 152 CDO2 292 Cemex 249–50 chaos theory 209, 312 Chase Manhattan Bank 143, 299 Chicago Board Options Exchange 195 Chicago Board of Trade (CBOT) 25–6, 34 chief risk officers 177 China 23–5, 276, 302–4 China Club, Hong Kong 318 Chinese walls 249, 261, 280 chrematophobia 177 Citibank and Citigroup 37–8, 43, 71, 79, 94, 134–5, 149, 174, 238–9 Citron, Robert 124–5, 212–17 client relationships 58–9 Clinton, Bill 223 Coats, Craig 168–9 collateral requirements 215–16 collateralized bond obligations (CBOs) 282 collateralized debt obligations (CDOs) 45, 282–99 13_INDEX.QXD 17/2/06 4:44 pm Page 327 Index collateralized fund obligations (CFOs) 292 collateralized loan obligations (CLOs) 283–5, 288 commercial banks 265–7 commoditization 236 commodity collateralized obligations (CCOs) 292 commodity prices 304 Commonwealth Bank of Australia 255 compliance officers 65 computer systems 54, 155, 197–8 concentration risk 271, 287 conferences with clients 59 confidence levels 164 confidentiality 226 Conseco 279–80 contagion crises 291 contango 96 contingent conversion convertibles (co-cos) 257 contingent payment convertibles (co-pays) 257 Continental Illinois 34 ‘convergence’ trading 170 convertible bonds 250–60 correlations 163–6, 294–5; see also default correlations corruption 303 CORVUS 297 Cox, John 196–7 credit cycle 291 credit default swaps (CDSs) 271–84, 293, 299 credit derivatives 129, 150, 265–72, 282, 295, 299–300 Credit Derivatives Market Practices Committee 273, 275, 280–1 credit models 294, 296 credit ratings 256–7, 270, 287–8, 297–8, 304 credit reserves 140 credit risk 158, 265–74, 281–95, 299 327 credit spreads 114, 172–5, 296 Credit Suisse 70, 106, 167 credit trading 293–5 CRH Capital 309 critical events 164–6 Croesus 137 cross-ruffing 142 cubic splines 189 currency options 98, 218, 319 custom repackaged asset vehicles (CRAVEs) 233 daily earning at risk (DEAR) concept 160 Daiwa Bank 142 Daiwa Europe 277 Danish Oil and Natural Gas 296 data scrubbing 142 dealers, work of 87–8, 124–8, 133, 167, 206, 229–37, 262, 295–6; see also traders ‘death swap’ strategy 110 decentralization 72 decision-making, scientific 182 default correlations 270–1 defaults 277–9, 287, 291, 293, 296, 299 DEFCON scale 156–7 ‘Delta 1’ options 243 delta hedging 42, 200 Deming, W.E. 98, 101 Denmark 38 deregulation, financial 34 derivatives trading 5–6, 12–14, 18–72, 79, 88–9, 99–115, 123–31, 139–41, 150, 153, 155, 175, 184–9, 206–8, 211–14, 217–19, 230, 233, 257, 262–3, 307, 316, 319–20; see also equity derivatives Derman, Emmanuel 185, 198–9 Deutsche Bank 70, 104, 150, 247–8, 274, 277 devaluations 80–1, 89, 203–4, 319 13_INDEX.QXD 17/2/06 4:44 pm Page 328 328 Index dilution of share capital 241 DINKs 313 Disney Corporation 91–8 diversification 72, 110–11, 166, 299 dividend yield 243 ‘Dr Evil’ trade 135 dollar premium 35 downsizing 73 Drexel Burnham Lambert (DBL) 282 dual currency bonds 220–3; see also reverse dual currency bonds earthquakes, bonds linked to 212 efficient markets hypothesis 22, 31, 111, 203 electronic trading 126–30, 134 ‘embeddos’ 218 emerging markets 3–4, 44, 115, 132–3, 142, 212, 226, 297 Enron 54, 142, 250, 298 enterprise risk management (ERM) 176 equity capital management 249 equity collateralized obligations (ECOs) 292 equity derivatives 241–2, 246–9, 257–62 equity index 137–8 equity investment, retail market in 258–9 equity investors’ risk 286–8 equity options 253–4 equity swaps 247–8 euro currency 171, 206, 237 European Bank for Reconstruction and Development 297 European currency units 93 European Union 247–8 Exchange Rate Mechanism, European 204 exchangeable bonds 260 expatriate postings 81–2 expert witnesses 310–12 extrapolation 189, 205 extreme value theory 166 fads of management science 72–4 ‘fairway bonds’ 225 Fama, Eugene 22, 111, 194 ‘fat tail’ events 163–4 Federal Accounting Standards Board 266 Federal Home Loans Bank 213 Federal National Mortgage Association 213 Federal Reserve Bank 20, 173 Federal Reserve Board 132 ‘Ferraris’ 232 financial engineering 228, 230, 233, 249–50, 262, 269 Financial Services Authority (FSA), Japan 106, 238 Financial Services Authority (FSA), UK 15, 135 firewalls 235–6 firing of staff 84–5 First Interstate Ltd 34–5 ‘flat’ organizations 72 ‘flat’ positions 159 floaters 231–2; see also inverse floaters ‘flow’ trading 60–1, 129 Ford Motors 282, 296 forecasting 135–6, 190 forward contracts 24–33, 90, 97, 124, 131, 188 fugu fish 239 fund management 109–17, 286, 300 futures see forward contracts Galbraith, John Kenneth 121 gamma risk 200–2, 294 Gauss, Carl Friedrich 160–2 General Motors 279, 296 General Reinsurance 20 geometric Brownian motion (GBM) 161 Ghana 98 Gibson Greeting Cards 44 Glass-Steagall Act 34 gold borrowings 132 13_INDEX.QXD 17/2/06 4:44 pm Page 329 Index gold sales 97, 137 Goldman Sachs 34, 71, 93, 150, 173, 185 ‘golfing holiday bonds’ 224 Greenspan, Alan 6, 9, 19–21, 29, 43, 47, 50, 53, 62, 132, 159, 170, 215, 223, 308 Greenwich NatWest 298 Gross, Bill 19 Guangdong International Trust and Investment Corporation (GITIC) 276–7 guaranteed annuity option (GAO) contracts 204–5 Gutenfreund, John 168–9 gyosei shido 106 Haghani, Victor 168 Hamanaka, Yasuo 142 Hamburgische Landesbank 297 Hammersmith and Fulham, London Borough of 66–7 ‘hara-kiri’ swaps 39 Hartley, L.P. 163 Hawkins, Greg 168 ‘heaven and hell’ bonds 218 hedge funds 44, 88–9, 113–14, 167, 170–5, 200–2, 206, 253–4, 262–3, 282, 292, 296, 300, 308–9 hedge ratio 264 hedging 24–8, 31, 38–42, 60, 87–100, 184, 195–200, 205–7, 214, 221, 229, 252, 269, 281, 293–4, 310 Heisenberg, Werner 122 ‘hell bonds’ 218 Herman, Clement (‘Crem’) 45–9, 77, 84, 309 Herodotus 137, 178 high net worth individuals (HNWIs) 237–8, 286 Hilibrand, Lawrence 168 Hill Samuel 231–2 329 The Hitchhiker’s Guide to the Galaxy 189 Homer, Sidney 184 Hong Kong 9, 303–4 ‘hot tubbing’ 311–12 HSBC Bank 148 HSH Nordbank 297–8 Hudson, Kevin 102 Hufschmid, Hans 77–8 IBM 36, 218, 260 ICI 34 Iguchi, Toshihude 142 incubators 309 independent valuation 142 indexed currency option notes (ICONs) 218 India 302 Indonesia 5, 9, 19, 26, 55, 80–2, 105, 146, 219–20, 252, 305 initial public offerings 33, 64, 261 inside information and insider trading 133, 241, 248–9 insurance companies 107–10, 117, 119, 150, 192–3, 204–5, 221, 223, 282, 286, 300; see also reinsurance companies insurance law 272 Intel 260 intellectual property in financial products 226 Intercontinental Hotels Group (IHG) 285–6 International Accounting Standards 33 International Securities Market Association 106 International Swap Dealers Association (ISDA) 273, 275, 279, 281 Internet stock and the Internet boom 64, 112, 259, 261, 310, 319 interpolation of interest rates 141–2, 189 inverse floaters 46–51, 213–16, 225, 232–3 13_INDEX.QXD 17/2/06 4:44 pm Page 330 330 Index investment banks 34–8, 62, 64, 67, 71, 127–8, 172, 198, 206, 216–17, 234, 265–7, 298, 309 investment managers 43–4 investment styles 111–14 irrational decisions 136 Italy 106–7 Ito’s Lemma 194 Japan 39, 43, 82–3, 92, 94, 98–9, 101, 106, 132, 142, 145–6, 157, 212, 217–25, 228, 269–70 Jensen, Michael 117 Jett, Joseph 143 JP Morgan (company) 72, 150, 152, 160, 162, 249–50, 268–9, 284–5, 299; see also Morgan Guaranty junk bonds 231, 279, 282, 291, 296–7 JWM Associates 175 Kahneman, Daniel 136 Kaplanis, Costas 174 Kassouf, Sheen 253 Kaufman, Henry 62 Kerkorian, Kirk 296 Keynes, J.M. 167, 175, 198 Keynesianism 5 Kidder Peabody 143 Kleinwort Benson 40 Korea 9, 226, 278 Kozeny, Viktor 121 Krasker, William 168 Kreiger, Andy 319 Kyoto Protocol 320 Lavin, Jack 102 law of large numbers 192 Leeson, Nick 51, 131, 143, 151 legal opinions 47, 219–20, 235, 273–4 Leibowitz, Martin 184 Leland, Hayne 42, 202 Lend Lease Corporation 261–2 leptokurtic conditions 163 leverage 31–2, 48–50, 54, 99, 102–3, 114, 131–2, 171–5, 213–14, 247, 270–3, 291, 295, 305, 308 Lewis, Kenneth 303 Lewis, Michael 77–8 life insurance 204–5 Lintner, John 111 liquidity options 175 liquidity risk 158, 173 litigation 297–8 Ljunggren, Bernt 38–40 London Inter-Bank Offered Rate (LIBOR) 6, 37 ‘long first coupon’ strategy 39 Long Term Capital Management (LTCM) 44, 51, 62, 77–8, 84, 114, 166–75, 187, 206, 210, 215–18, 263–4, 309–10 Long Term Credit Bank of Japan 94 LOR (company) 202 Louisiana Purchase 319 low exercise price options (LEPOs) 261 Maastricht Treaty and criteria 106–7 McLuhan, Marshall 134 McNamara, Robert 182 macro-economic indicators, derivatives linked to 319 Mahathir Mohammed 31 Malaysia 9 management consultants 72–3 Manchester United 152 mandatory convertibles 255 Marakanond, Rerngchai 302 margin calls 97–8, 175 ‘market neutral’ investment strategy 114 market risk 158, 173, 265 marketable eurodollar collateralized securities (MECS) 232 Markowitz, Harry 110 mark-to-market accounting 10, 100, 139–41, 145, 150, 174, 215–16, 228, 244, 266, 292, 295, 298 Marx, Groucho 24, 57, 67, 117, 308 13_INDEX.QXD 17/2/06 4:44 pm Page 331 Index mathematics applied to financial instruments 209–10; see also ‘quants’ matrix structures 72 Meckling, Herbert 117 Melamed, Leo 34, 211 merchant banks 38 Meriwether, John 167–9, 172–5 Merrill Lynch 124, 150, 217, 232 Merton, Robert 22, 42, 168–70, 175, 185, 189–90, 193–7, 210 Messier, Marie 247 Metallgesellschaft 95–7 Mexico 44 mezzanine finance 285–8, 291–7 MG Refining and Marketing 95–8, 114 Microsoft 53 Mill, Stuart 130 Miller, Merton 22, 101, 194 Milliken, Michael 282 Ministry of Finance, Japan 222 misogyny 75–7 mis-selling 238, 297–8 Mitchell, Edison 70 Mitchell & Butler 275–6 models financial 42–3, 141–2, 163–4, 173–5, 181–4, 189, 198–9, 205–10 of business processes 73–5 see also credit models Modest, David 168 momentum investment 111 monetization 260–1 monopolies in financial trading 124 moral hazard 151, 280, 291 Morgan Guaranty 37–8, 221, 232 Morgan Stanley 76, 150 mortgage-backed securities (MBSs) 282–3 Moscow, City of 277 moves of staff between firms 150, 244 Mozer, Paul 169 Mullins, David 168–70 multi-skilling 73 331 Mumbai 3 Murdoch, Rupert 247 Nabisco 220 Napoleon 113 NASDAQ index 64, 112 Nash, Ogden 306 National Australia Bank 144, 178 National Rifle Association 29 NatWest Bank 144–5, 198 Niederhoffer, Victor 130 ‘Nero’ 7, 31, 45–9, 60, 77, 82–3, 88–9, 110, 118–19, 125, 128, 292 NERVA 297 New Zealand 319 Newman, Frank 104 news, financial 133–4 News Corporation 247 Newton, Isaac 162, 210 Nippon Credit Bank 106, 271 Nixon, Richard 33 Nomura Securities 218 normal distribution 160–3, 193, 199 Northern Electric 248 O’Brien, John 202 Occam, William 188 off-balance sheet transactions 32–3, 99, 234, 273, 282 ‘offsites’ 74–5 oil prices 30, 33, 89–90, 95–7 ‘omitted variable’ bias 209–10 operational risk 158, 176 opinion shopping 47 options 9, 21–2, 25–6, 32, 42, 90, 98, 124, 197, 229 pricing 185, 189–98, 202 Orange County 16, 44, 50, 124–57, 212–17, 232–3 orphan subsidiaries 234 over-the-counter (OTC) market 26, 34, 53, 95, 124, 126 overvaluation 64 13_INDEX.QXD 17/2/06 4:44 pm Page 332 332 Index ‘overwhelming force’ strategy 134–5 Owen, Martin 145 ownership, ‘legal’ and ‘economic’ 247 parallel loans 35 pari-mutuel auction system 319 Parkinson’s Law 136 Parmalat 250, 298–9 Partnoy, Frank 87 pension funds 43, 108–10, 115, 204–5, 255 People’s Bank of China (PBOC) 276–7 Peters’ Principle 71 petrodollars 71 Pétrus (restaurant) 121 Philippines, the 9 phobophobia 177 Piga, Gustavo 106 PIMCO 19 Plaza Accord 38, 94, 99, 220 plutophobia 177 pollution quotas 320 ‘portable alpha’ strategy 115 portfolio insurance 112, 202–3, 294 power reverse dual currency (PRDC) bonds 226–30 PowerPoint 75 preferred exchangeable resettable listed shares (PERLS) 255 presentations of business models 75 to clients 57, 185 prime brokerage 309 Prince, Charles 238 privatization 205 privity of contract 273 Proctor & Gamble (P&G) 44, 101–4, 155, 298, 301 product disclosure statements (PDSs) 48–9 profit smoothing 140 ‘programme’ issuers 234–5 proprietary (‘prop’) trading 60, 62, 64, 130, 174, 254 publicly available information (PAI) 277 ‘puff’ effect 148 purchasing power parity theory 92 ‘put’ options 90, 131, 256 ‘quants’ 183–9, 198, 208, 294 Raabe, Matthew 217 Ramsay, Gordon 121 range notes 225 real estate 91, 219 regulatory arbitrage 33 reinsurance companies 288–9 ‘relative value’ trading 131, 170–1, 310 Reliance Insurance 91–2 repackaging (‘repack’) business 230–6, 282, 290 replication in option pricing 195–9, 202 dynamic 200 research provided to clients 58, 62–4, 184 reserves, use of 140 reset preference shares 254–7 restructuring of loans 279–81 retail equity products 258–9 reverse convertibles 258–9 reverse dual currency bonds 223–30 ‘revolver’ loans 284–5 risk, financial, types of 158 risk adjusted return on capital (RAROC) 268, 290 risk conservation principle 229–30 risk management 65, 153–79, 184, 187, 201, 267 risk models 163–4, 173–5 riskless portfolios 196–7 RJ Reynolds (company) 220–1 rogue traders 176, 313–16 Rosenfield, Eric 168 Ross, Stephen 196–7, 202 Roth, Don 38 Rothschild, Mayer Amshel 267 Royal Bank of Scotland 298 Rubinstein, Mark 42, 196–7 13_INDEX.QXD 17/2/06 4:44 pm Page 333 Index Rumsfeld, Donald 12, 134, 306 Rusnak, John 143 Russia 45, 80, 166, 172–3, 274, 302 sales staff 55–60, 64–5, 125, 129, 217 Salomon Brothers 20, 36, 54, 62, 167–9, 174, 184 Sandor, Richard 34 Sanford, Charles 72, 269 Sanford, Eugene 269 Schieffelin, Allison 76 Scholes, Myron 22, 42, 168–71, 175, 185, 189–90, 193–7, 263–4 Seagram Group 247 Securities and Exchange Commission, US 64, 304 Securities and Futures Authority, UK 249 securitization 282–90 ‘security design’ 254–7 self-regulation 155 sex discrimination 76 share options 250–1 Sharpe, William 111 short selling 30–1, 114 Singapore 9 single-tranche CDOs 293–4, 299 ‘Sisters of Perpetual Ecstasy’ 234 SITCOMs 313 Six Continents (6C) 275–6 ‘smile’ effect 145 ‘snake’ currency system 203 ‘softing’ arrangements 117 Solon 137 Soros, George 44, 130, 253, 318–19 South Sea Bubble 210 special purpose asset repackaging companies (SPARCs) 233 special purpose vehicles (SPVs) 231–4, 282–6, 290, 293 speculation 29–31, 42, 67, 87, 108, 130 ‘spinning’ 64 333 Spitzer, Eliot 64 spread 41, 103; see also credit spreads stack hedges 96 Stamenson, Michael 124–5 standard deviation 161, 193, 195, 199 Steinberg, Sol 91 stock market booms 258, 260 stock market crashes 42–3, 168, 203, 257, 259, 319 straddles or strangles 131 strategy in banking 70 stress testing 164–6 stripping of convertible bonds 253–4 structured investment products 44, 112, 115, 118, 128, 211–39, 298 structured note asset packages (SNAPs) 233 Stuart SC 18, 307, 316–18 Styblo Bleder, Tanya 153 Suharto, Thojib 81–2 Sumitomo Corporation 100, 142 Sun Tzu 61 Svensk Exportkredit (SEK) 38–9 swaps 5–10, 26, 35–40, 107, 188, 211; see also equity swaps ‘swaptions’ 205–6 Swiss Bank Corporation (SBC) 248–9 Swiss banks 108, 305 ‘Swiss cheese theory’ 176 synthetic securitization 284–5, 288–90 systemic risk 151 Takeover Panel 248–9 Taleb, Nassim 130, 136, 167 target redemption notes 225–6 tax and tax credits 171, 242–7, 260–3 Taylor, Frederick 98, 101 team-building exercises 76 team moves 149 technical analysis 60–1, 135 television programmes about money 53, 62–3 Thailand 9, 80, 302–5 13_INDEX.QXD 17/2/06 4:44 pm Page 334 334 Index Thatcher, Margaret 205 Thorp, Edward 253 tobashi trades 105–7 Tokyo Disneyland 92, 212 top managers 72–3 total return swaps 246–8, 269 tracking error 138 traders in financial products 59–65, 129–31, 135–6, 140, 148, 151, 168, 185–6, 198; see also dealers trading limits 42, 157, 201 trading rooms 53–4, 64, 68, 75–7, 184–7, 208 Trafalgar House 248 tranching 286–9, 292, 296 transparency 26, 117, 126, 129–30, 310 Treynor, Jack 111 trust investment enhanced return securities (TIERS) 216, 233 trust obligation participating securities (TOPS) 232 TXU Europe 279 UBS Global Asset Management 110, 150, 263–4, 274 uncertainty principle 122–3 unique selling propositions 118 unit trusts 109 university education 187 unspecified fund obligations (UFOs) 292 ‘upfronting’ of income 139, 151 Valéry, Paul 163 valuation 64, 142–6 value at risk (VAR) concept 160–7, 173 value investing 111 Vanguard 116 vanity bonds 230 variance 161 Vietnam War 182, 195 Virgin Islands 233–4 Vivendi 247–8 volatility of bond prices 197 of interest rates 144–5 of share prices 161–8, 172–5, 192–3, 199 Volcker, Paul 20, 33 ‘warehouses’ 40–2, 139 warrants arbitrage 99–101 weather, bonds linked to 212, 320 Weatherstone, Dennis 72, 268 Weil, Gotscal & Manges 298 Weill, Sandy 174 Westdeutsche Genosenschafts Zentralbank 143 Westminster Group 34–5 Westpac 261–2 Wheat, Allen 70, 72, 106, 167 Wojniflower, Albert 62 World Bank 4, 36, 38 World Food Programme 320 Worldcom 250, 298 Wriston, Walter 71 WTI (West Texas Intermediate) contracts 28–30 yield curves 103, 188–9, 213, 215 yield enhancement 112, 213, 269 ‘yield hogs’ 43 zaiteku 98–101, 104–5 zero coupon bonds 221–2, 257–8


pages: 77 words: 18,414

How to Kick Ass on Wall Street by Andy Kessler

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

Dow 1000 to Dow 14000 meant amazing wealth creation - Gates, Buffet, Dell but also rippling though 401K plans and home values. So how bizarre is it that the end of the bull run came not from inflation returning, or so it seems, but from an overextension of asset backed financial instruments. The ‘70’s dressed up as a Collateralized Debt Obligation. I half expect bell bottoms to make a comeback. Wealth needs to be rebuilt. But the Federal Reserve can’t just print it. That will inevitably increase prices and inflation and a return to the ugly ‘70’s. It has to be earned. Profits. Human profits. Company profits. Fortunately, we have structure the economy for just such a task.


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

Paulson too had been betting on a housing collapse, but he’d assembled a big enough war chest from his wealthy hedge fund clients to keep playing, despite the continued buoyancy of the housing market. After the meeting with Shilling, he was convinced that now was the time to go really big. One frustration for Paulson was that there just weren’t enough of these stocks, known as collateral debt obligations (CDO), to bet against. So he decided to become proactive. He approached a number of investment banks with the request that they create more CDOs to sell to clients, so that he could then take out ‘insurance’ betting that these would fail. The arrangement Paulson had in mind was rife with potential conflicts of interest.

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: 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

In aggregate the aid provided to the bank totaled $45 billion. Because banks are highly leveraged, it is crucial to thoroughly analyze their assets, as a small percentage loss can quickly wipe out the equity. During the financial boom, Citigroup made many speculative investments, particularly in collateralized debt obligations (CDOs), mortgages, derivatives and other types of structured products. When the value of these assets deteriorated, they took enormous write downs, which in turn required them to raise more equity. Investors lined up to purchase equity in Citigroup starting in October 2007 as they thought the decline in the stock price represented a good buying opportunity.

Ackman zeroed in on MBIA. It was the largest of the bond insurers, the largest guarantor of municipal bonds in the United States. While MBIA had its origins insuring low-risk municipal bonds, in more recent years it had begun to move into the more lucrative business of insuring exotic and highly risky collateralized debt obligations (CDOs) and other structured products. Ackman believed that the company was underreserved relative to the risk it was underwriting, was overleveraged, and was engaging in various accounting devices to shield losses and accelerate gains. He believed that it was poised for a dramatic fall.


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

The further platitude that “there can never be a nationwide wave of mortgage defaults” caused mortgage backed securities to be accepted as prime candidates for investment, particularly by financial institutions. Wall Street came forward with a model for securitizing prosaic, reliable home mortgages into tranched collateralized debt obligations—the next high-return, low-risk thing. The construction and selling of CDOs and other mortgage backed securities (MBS) added greatly to bank profits. With relaxed regulations allowing banks to employ materially greater leverage, large amounts of capital were available for investment in the equity required for MBS creation.

All the points noted here were obvious and not subject to debate. All that mattered is whether you made these observations and drew the appropriate conclusions. You didn’t have to fully understand what was wrong with sub-prime mortgages or deconstruct mortgage backed securities and highly structured collateralized debt obligations. We certainly didn’t. And, by the way, in those years when the mortgage bubble was building, stocks weren’t doing well or selling at lofty multiples, and the economy wasn’t booming (and thus necessarily heading for a recession). But if you made the observations just listed, you likely would have concluded, as we did, that it was time to reduce the quantum of risk in your portfolio.


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

I’d been preaching its themes to whoever would listen at CIBC for years. It was time to take the message to a broader audience. By the time I stepped away from the job, CIBC had much bigger things to worry about than my literary ambitions. At the time, the bank, like many financial institutions, was knee-deep in fancy financial market derivatives called collateralized debt obligations (CDOs). Prior to the housing market crash, CDOs, which are backed by assets such as homeowner subprime mortgages, were making investors a ton of money. They also seemed to be relatively safe investments, at least according to rating agencies that granted many of these debt instruments gold-plated Triple-A status.

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: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

"World Economic Forum" Davos, Admiral Zheng, Alan Greenspan, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, foreign exchange controls, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, Great Leap Forward, guns versus butter model, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, junk bonds, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low interest rates, low skilled workers, market clearing, Martin Wolf, mass immigration, Meghnad Desai, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, Savings and loan crisis, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, 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 Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, We are all Keynesians now, women in the workforce, working-age population, Y2K, Yom Kippur War

Capital market participants – bankers, fund managers, private- equity investors and other ‘go-betweens’ – package their products in all sorts of ways, ranging from simple bank deposits and loans through to the ever-more complex instruments that make up the lexicon of international finance: syndicated loans, equities, corporate bonds, commercial paper, asset-backed securities, collateralized debt obligations and structured products. Ultimately, each of these products offers a claim on future economic wealth (or, put another way, a reward for abstinence today). Banks provide loans in exchange for an interest payment. Shareholders hold equities because they expect a dividend or a capital gain.

Since equities couldn’t deliver the necessary returns, and government bond yields were ludicrously low, investors went in search of other assets that might do the trick. As with any other market, an increase in demand for high-returning non-equity assets was met with an increase in supply. Asset-backed securities, mortgage-backed securities, collateralized debt obligations and so on became the investments du jour. Banks packaged up vast quantities of loans into these securities and either tucked them away under the mattress as off-balance-sheet items in the form of conduits and special investment vehicles (SIVs) or, instead, sold them off to other investors – insurance companies, pension funds, hedge funds and, in some cases, local councils – who, collectively, became known as the ‘shadow banking system’.


pages: 632 words: 159,454

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

accounting loophole / creative accounting, Alan Greenspan, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial engineering, financial innovation, fixed income, floating exchange rates, foreign exchange controls, Francisco Pizarro, full employment, German hyperinflation, Glass-Steagall Act, guns versus butter model, hiring and firing, income inequality, invisible hand, Isaac Newton, it's over 9,000, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, land bank, liberal capitalism, low interest rates, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, subprime mortgage crisis, Suez canal 1869, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

In the 2008 edition of his book The Return of Depression Economics, Paul Krugman noted the ‘complete abandonment of traditional principles’ of lending.7 It is true that some individual families were motivated by dreams of owning their own spacious home, but the explosion of credit was as much driven by the suppliers of credit who created such novel instruments as Collateralized Debt Obligations, or CDOs for short, to satisfy the need for higher yields. This so-called ‘securitization’ of assets has been described as the act of ‘turning an expected future cash flow into tradable bond-like securities’.8 A famous example of securitization occurred when Bowie Bonds were created in 1997.

From June 2006 to September 2007, the rate was held at 5.25 per cent, having risen from a low of 1 per cent in June 2003.15 This increase, between 2003 and 2006, would eventually put pressure on mortgage holders. Yet by late August 2007 it was already too late to supply relief. At that time, funds and banks around the world had already ‘taken hits’ because they had purchased bonds backed by US home loans, ‘often bundled into financial instruments called collateralized debt obligations, or CDOs’. An Australia-based professor of finance observed that it was ‘amazing how much ignorance and fear are out there’.16 In the spring of 2008, the former ‘maestro’, Alan Greenspan himself, writing in a blog on the Financial Times’s website, referred in his jargon-filled academic prose-style to the ‘dramatic fall in real long-term interest rates’ which ‘statistically explains, and is the most likely major cause of, real estate capitalization rates that declined and converged across the globe’.

., 296–7, 305–14, 321, 330–2, 348 Business China, 292 Byrnes, James, 182 Cajamarca, 16 Callaghan, James, 241 Calonne, Charles-Alexandre, 43–5 Cambridge Apostles, 111, 149 Campbell, John, 245 Canada, 39, 352 Cantor, Eric, 349 capital, free movement of, 243–4 capitalization rates, 326–7 Cardin, Benjamin, 297 Carnegie, Andrew, 75, 77, 80 Carter, Jimmy, 235–6, 238–9, 249, 308, 310 Case, Walter, 128 Cassel, Sir Ernest, 88–9 Cassel, Gustav, 114–15 Cato Institute, 309 central banks Burns’s paradox, 239–40 and currency stability, 207, 239–40 and global gold stocks, 358–9 invention of, 22 and issue of paper money, 59–60, 64–5 as lenders of last resort, 50 US establishment of, 66–8, 78–80, 108 Chamberlain, Neville, 138 Chandos, Duke of, 37 Charles II, King, 24, 357 Charles V, Emperor, 11–12, 19–20 Chase, Salmon, 71–2 Chase Manhattan Bank, 230–1, 238 Cheney, Dick, 132 Chiang Kai-shek, 193 China communist victory in, 193 and currency value, 285–8, 291–2, 296–9, 319, 351 dollar reserves, 299–301, 318–19 economic expansion, 78, 83, 282–300 and financial crisis, 351–2 financial reforms, 293–4 foreign exchange reserves, 287, 358 and global financial system, 358 gold reserves, 358 infrastructure spending, 294–6 Japanese war in, 191 and Korean War, 163 and mercantilism, 284–5 national debt, 295 state enterprises, 293–4 symbiosis with US, 318–19, 321 welfare provision, 296 Chinese Communist Party, 282, 288, 294 Chongqing, 293 Church assets, taxation of, 44–6 Churchill, Winston, 4, 100, 107, 118, 138, 142, 147, 181, 246, 331 Cieza de Léon, Pedro, 13 Citicorp, 230 Citizens Against Government Waste, 310 City of London, 24–5, 27 ad hoc financial arrangements, 86 Bagehot’s account of, 63–4 and Barings crisis, 85–6 Big Bang deregulation, 258 decline as financial centre, 97, 106, 108 dependence on government, 38 in Edwardian period, 82–3, 86–90 and outbreak of First World War, 91–3 post-war, 171–2 social structure, 86–9 working week, 88 see also Lombard Street Clarke, Richard (‘Otto’), 173 Clay, Henry, 70–1 Clay, Lucius D., 181–5 Cleveland, Grover, 74 Clinton, Bill, 307–8, 310, 348 Cobbett, William, 52 Cobbold, Cameron, 178–9 Cobden, Richard, 160, 246 Coggan, Philip, 5, 320, 325, 329, 355 Cold War, 157, 159, 186, 198, 234, 237, 261 collateralized debt obligations (CDOs), 324–7 Colombian Mining Association, 56 Columbus, Christopher, 12 Compagnie d’Occident, 30–1, 34 Companies Act, 87 company indebtedness, high levels of, 233 Company of the Indies, 31–3 ‘compensatory finance’, 203 ‘competitive devaluation’, 132 Connally, John, 216–19 conquistadors, 12–16, 23 Conrad, Kent, 305 ‘consumption function’, 136 ‘contagion’, 290 Continental Congress, 41–2 ‘continental’ currency, 5, 41–3, 46, 71 Cooke, Jay, 71 Coolidge, Calvin, 119 Cornwell, Rupert, 277 Cortés, Hernan, 12–15 Council of the Indies, 19 Countrywide mortgage lenders, 322–3 Covarrubias, Diego de, 20 Craggs, James, 32, 37 Crawford, Thomas, 35 credit bubbles, ending of, 123 Crimean War, 61 Cripps, Sir Stafford, 175, 179–80 Crosland, Anthony, 172 ‘Currency School’, 64 Curtice, Harlow, 154 Curtis, Timothy Abraham, 57 Czechoslovakia, 157 Daily Mail, 180 Dalton, Hugh, 171–2, 174–5 Darling, Alistair, 332–3, 343 de Gaulle, Charles, 209–11, 214 de Zoete, Walter, 88 debt-for-equity swaps, 31 Delors, Jacques, 262, 264, 267–8, 276 Delors Committee, 272, 276 democracy, and public spending, 2–3, 93, 279 Deng Xiaoping, 282–4 Der Spiegel, 275–6, 279 deregulation, of financial services, 257–8 derivatives, 320 Detroit Bank, 193, 207 Deutschmark devaluation, 188 dollar exchange rate, 254–5 and ERM, 264, 266–72 and German reunification, 266, 268 introduction of, 183–7 and single currency, 274–5, 278 and the snake, 263 Dillon, Douglas, 210 Disraeli, Benjamin, 56–7 Dodd, David, 161 Dodd–Frank Act, 351 Dodge, Joseph, 184, 193–6, 201 dollar break with gold, 5, 214, 218–20, 223, 225, 255, 262 Bretton Woods and link to gold, 140, 143–4, 149–50, 167–70, 208–12, 250–1 defined value of, 42–3 devaluation, 131–2 establishment of, 42–3, 279 importance of exchange rate, 254–6 stabilization of, 237–9 suspension of link to gold, 71–2, 74, 76, 219 Dollar Drain Committee, 175, 179 ‘dollar financing problem’, 154–5 ‘dollar shortage’, 158, 181 dot-com bubble, 314, 316 Dow Jones average, 218, 226, 237, 259–60, 331 Drew, Daniel, 75 ducats, 11 duelling, 27–8 Duncan, Richard, 315–16, 355 East Germany, 186, 266, 268 East India Company, 32 Eckstein, Otto, 228 Economic Club of Detroit, 165, 207–8 Economic Journal, 97, 107, 111 Economist, 82, 91, 99, 104, 113, 142, 226, 292, 299, 338 articles on Japan, 198–9 Friedman obituary, 234 and launch of euro, 279–80 and shift in economic power, 228–9 Eden, Anthony, 246 Edward VII, King, 89, 147 Eichengreen, Barry, 131–2 Einzig, Paul, 135–6 Eisenhower, Dwight D., 168–70, 193, 202, 204, 207, 252, 259, 306, 308, 311, 339 Ekali swimming pools, 335–6 El Dorado, 13 Elizabeth II, Queen, 270 Ellerman, John, 87–8 ‘emerging markets’, 289 Emminger, Otmar, 187, 254–6 English, Phil, 297 Erhard, Ludwig, 182 ERM (exchange rate mechanism), 263–72, 276, 280 euro conditions for joining, 272–3, 277, 336 Greece joins, 280–1, 335–7 introduction of, 272–81, 334–5 and moral hazard, 274 risk of collapse, 346–7 European Central Bank, 272, 346 European Commission, 346 European Economic Community (EEC), 211, 226, 262, 276 European Financial Stabilization Facility (EFSF), 338 European Union, 267, 276, 337, 352 Evening Standard, 118 excess profits duty, 104–5 Export-Import Bank of Japan, 195 Export-Import Bank of Washington, 154, 164 Fairchild, Fred, 103 Faisal, King, 229–30 Federal Reserve Accord of 1951, 164–5, 169 under Bernanke, 327, 343 under Burns, 215, 233 establishment of, 108 Federal Open Market Committee (FOMC), 163–4 and Great Depression, 126–8 under Greenspan, 258–60, 301–4, 310, 313–14, 325 and market stabilization, 259–60 under Martin, 205–6, 215 Meltzer’s history of, 212–13 relationship with Treasury, 163–7, 169 Strong and New York branch, 123 under Volcker, 223, 237–8, 249–50 Feis, Herbert, 83 Ferguson, Niall, 6, 90, 318–19, 351 fiat money, 5, 61, 320 Field, Marshall, 75 ‘Financial Revolution’, 24 Financial Times, 227, 265, 271–2, 326, 347 Finland, 278 First Bank of the United States, 67 First World War, outbreak of, 90–3 fiscal policy, primacy of, 2–3 ‘fiscal repression’, 357–8 Fish, Hamilton, 157 Fisher, Irving, 121–2 Fisk, James, Jr (‘Big Jim’), 76 Fleming, Ian, 4 floating currencies, 226, 231, 234–5, 262, 299 florins, 11 Forbes, Steven, 299 Ford Motor Company, 121 Ford, Gerald, 232, 235, 308 foreign exchange controls, abolition of, 242–3 Forster, E.


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

The most important innovation was, arguably, in the allegedly mathematically rigorous pricing of derivatives – financial assets that ‘derive’ their value from the prices of underlying assets, such as stocks or bonds, indices, or interest rates.30 But, it should be noted, Nassim Nicholas Taleb, famous for the ‘Black Swan’ (an unforecastable event), views the theories underlying the pricing of derivatives as intellectually fraudulent.31 But, aided by rising computing power, this almost universally accepted intellectual innovation led to an explosion in the invention and trading of ever more sophisticated products, including the infamous collateralized debt obligations (CDOs), synthetic collateralized debt obligations and CDOs squared, which triggered the global financial crisis of 2007–08. (These instruments are explained further below.) According to the Bank for International Settlements, between June 1998 and June 2008 the notional value of outstanding over-the-counter derivatives exploded from $72tn to $673tn (whereupon it stagnated), the latter being just under eleven times global gross product.

It was true of households and companies, particularly investors in property, property developers and those engaged in leveraged buy-outs. With more debt relative to equity, and overvalued asset prices, the outcome was extreme vulnerability to crisis. In addition, the market-based financial system embedded an enormous amount of leverage inside financial instruments. Collateralized debt obligations (CDOs) are an excellent example, with leverage inherent in the process of tranching cash inflows. Synthetic CDOs, which are created by pooling and tranching credit-default swaps on asset-backed securities and other bonds, involve much the same process. Think of the simplest possible CDO, one in which the underlying interest payments and mortgage repayments are divided into just two securities: the lower risk of these two securities would be entitled to receive the first 50 per cent of all the payments and repayments; the higher risk of these securities would get the rest.


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

In his capacity as resident wise man, he urged Citigroup, as he had once urged Goldman Sachs, to take more trading risks with its huge balance sheet. He also advised that the risks needed to be carefully managed. After that, he didn’t pay much attention while, between 2003 and 2005, Citigroup tripled its issuing of collateralized debt obligations and mortgage-backed securities stuffed full of bad loans from places like Tampa, where people whose incomes had been flat for years had all their wealth in their houses and used them as cash machines. By late 2007, the bank had forty-three billion dollars in CDOs on its books. Most of it turned out to be worthless, and in 2008, when the financial crisis hit, Citigroup practically became a ward of the state.

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?

Before long, a financial boom was on. In 2004, Kevin left his safe and boring job to join the proprietary trading desk at a big European bank, with zero job security and huge potential—one of the ballsier and more correct decisions of his life. The European bank was about to get into collateralized debt obligations. The stock market determined the size of your apartment and whether you had a Viking stove—who was rich and who wasn’t. The bond market determined if shit worked or everyone was eating sand, who was alive and who wasn’t. Ever since the eighties, credit had been the biggest driver. All the things that would later go wrong, structured credit, default swaps, were good inventions; they mitigated risk or offered financial solutions to companies and investors.


pages: 269 words: 104,430

Carjacked: The Culture of the Automobile and Its Effect on Our Lives by Catherine Lutz, Anne Lutz Fernandez

"Hurricane Katrina" Superdome, barriers to entry, Bear Stearns, book value, car-free, carbon footprint, collateralized debt obligation, congestion pricing, failed state, feminist movement, Ford Model T, fudge factor, Gordon Gekko, housing crisis, illegal immigration, income inequality, inventory management, Lewis Mumford, market design, market fundamentalism, mortgage tax deduction, Naomi Klein, Nate Silver, New Urbanism, oil shock, peak oil, Ralph Nader, Ralph Waldo Emerson, ride hailing / ride sharing, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, traffic fines, traumatic brain injury, Unsafe at Any Speed, urban planning, white flight, women in the workforce, working poor, Zipcar

Eerily echoing the reviled Gordon Gekko of Oliver Stone’s morality tale Wall Street, Ray Diallo, founder of hedge fund Bridgewater Associates, noted, “The money that’s made from manufacturing stuff is a pittance in comparison to the amount of money made from shuffling money around.” 2007 was the year many first learned 124 Carjacked the terms “predatory lending” and “hedge fund,” both of which have come to hit American car owners, not just home owners, with a vengeance. The housing crisis grabbed the headlines beginning in 2007, but auto loans played a meaningful role in the CDO market that helped precipitate the crisis. CDOs are collateralized debt obligations, also known as credit derivatives, a financial instrument dating back to the early 1990s that is essentially the securitization of risk. When an investor, such as a bank or hedge fund, purchases a credit derivative, he is buying not a bundle of home or auto loans but a portion or all of the risk of that bundle.

., 9 carlessness, xii, 15, 32, 101–2, 104–5, 114, 125 carpooling, 4–5, 72, 90, 107, 135, 140, 145–7, 157, 210–1, 219, 223 car-sharing, 212 Cars (film), 7, 51 Cash for Clunkers, 93 cell phone use, 147, 152, 154–5, 181, 194 Cheney, Dick, 9, 122 Chevrolet, xii, 16–7, 29, 35–7, 50, 88, 177–81, 216 Chevron, 122 Christine (film), 7 Chrysler, 1, 57, 73, 93, 123, 207 Claritas, 44–5 Clean Air Act, 167, 174–5 Cohen, Steven A., 124–5 Cold War, 17 collateralized debt obligations (CDOs), 124 Collins, Jane, 103 Commuter Choice, 220 commuters, 93, 132, 134, 138, 145–6, 156, 171, 211, 215 Connelly, Sheryl, 42 Conoco, 122 Consumer Reports, 46, 65, 213, 215 convenience as reason for car use, 4, 14, 38, 56, 135, 142, 154, 163, 239–40n26 Cortázar, Julio, 34 Crash (film), 101, 105 crossover vehicles, 57, 73, 157, 178, 180–1 cruise control, 75, 221 customizing, 27–9, 51, 53 Danziger, Pamela, 74 Davis, David E., Jr., 29 Day After Tomorrow, The (film), 34 De Cauter, Lieven, 146 dealerships, xi, xiv, 5, 16, 62–9, 74, 80, 85–6, 103, 207 DeHaven, Hugh, 195 Department of Motor Vehicles (DMV), ix, 19, 31, 219 depreciation, 60, 65, 70, 80–3, 87–8, 102, 212–5 Detroit, Michigan, xi, xiii, 8–9, 18, 43, 126, 195, 206, 224 Diallo, Ray, 123 Diamond, Jared, 99 diesel exhaust, 161, 170, 241n1 disabled, 31, 182–189, 200 Dodge, 35, 157 Downey, Robert, Jr., 13 Downs, Anthony, 133–4 downsizing, 98, 210–2, 217 driver’s licenses, 2–3, 18–22, 31, 106, 113, 139, 193, 219 driving: enjoyment of, 6, 14, 130, 140–144 under the influence (DUI), ix, 23, 95, 113, 152, 193–6, 202, 221, 237n16 “while black,” 112–4 Eastern States Nationals, 29 Edmunds.com, 85, 214, 236, 238, 246–7 electric cars, 36, 90, 215–6, 225–6 electronic stability control (ESC), 216 Emerson, Ralph Waldo, 15, 27 emissions standards, 120, 174–5 Exelbert, Gary, 47, 52, 76 Exxon Mobil, 120, 122 INDEX Fairness Doctrine, 149 Fast and the Furious, The (film), 7, 51 fast food industry, 52, 63, 163–4 fatalities, 35–6, 152, 172, 177, 180–2, 188–193 Federal-Aid Highway Act, 9 Financing, See under car ownership Firestone, 10, 195–6 Ford, Henry, 25, 27, 103, 205–6 Ford Motor Company: 1, 3, 15–7, 27, 49, 42, 51, 54, 56, 61, 73, 120, 124, 195–6, 199, 205–6 foreign policy, xii, 17, 21, 96–98, 224 Formula One, 51 fraud, 69–71 freedom: car as symbol and myth of, 15–21, 37–38, 133, 141–144, 154, 198 freedomCAR, 36 price of, 91 French Connection, The (film), 7 fuel economy standards, 9, 199, 226.


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

If the euro succeeded they won praise and if the euro came under stress they won power. The stress came soon enough. The European banks gorged not only on euro sovereign debt but also on debt issued by Fannie Mae and the full alphabet soup of fraudulent Wall Street structured products such as collateralized debt obligations, or CDOs. These debts were originated by inexperienced local bankers around the United States and repackaged in the billions of dollars by the likes of Lehman Brothers before they went bust. The European banks were the true weak links in the global financial system, weaker even than Citigroup, Goldman Sachs and the other bailed-out icons of American finance.

Treasury holdings See also yuan, Chinese China National Offshore Oil Corporation China-U.S. Strategic Economic Dialogue of 2006 Christ, Carl F. Churchill, Winston Citibank Citigroup civilizational collapse, causes of Clinton, Bill CNBC Cogan, John F. Cold War era Collapse of Complex Societies, The (Tainter) collateralized debt obligations (CDOs) commodities Commodity Futures Modernization Act Communist Party of China competitive devaluations complexity theory Connally, John connectedness, in complex systems convening power theory copper correlation, in global financial warfare Cosmic Evolution (Chaisson) Coughlin, Charles counterfeiting Credit-Anstalt Bank of Vienna critical state systems critical thresholds currency collapse capital flight response to dollar collapse in complexity theory 1920s currency convergence currency devaluations competitive dollar devaluation against gold, 1930s and 1970s 1930s and 1970s sterling devaluations Tripartite Agreement of 1936 and currency markets currency peg currency wars Atlantic theater benefits of chaos as outcome of Currency War I (1921–1936) Currency War II (1967–1987) Currency War III (2010–) Eurasian theater Pacific theater Czechoslovakia Davison, Henry P.


pages: 391 words: 97,018

Better, Stronger, Faster: The Myth of American Decline . . . And the Rise of a New Economy by Daniel Gross

"World Economic Forum" Davos, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, American Society of Civil Engineers: Report Card, asset-backed security, Bakken shale, banking crisis, Bear Stearns, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, carbon tax, Carmen Reinhart, clean water, collapse of Lehman Brothers, collateralized debt obligation, commoditize, congestion pricing, creative destruction, credit crunch, currency manipulation / currency intervention, demand response, Donald Trump, financial engineering, Frederick Winslow Taylor, high net worth, high-speed rail, housing crisis, hydraulic fracturing, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, index fund, intangible asset, intermodal, inventory management, Kenneth Rogoff, labor-force participation, LNG terminal, low interest rates, low skilled workers, man camp, Mark Zuckerberg, Martin Wolf, Mary Meeker, Maui Hawaii, McMansion, money market fund, mortgage debt, Network effects, new economy, obamacare, oil shale / tar sands, oil shock, peak oil, plutocrats, price stability, quantitative easing, race to the bottom, reserve currency, reshoring, Richard Florida, rising living standards, risk tolerance, risk/return, scientific management, Silicon Valley, Silicon Valley startup, six sigma, Skype, sovereign wealth fund, Steve Jobs, superstar cities, the High Line, transit-oriented development, Wall-E, Yogi Berra, zero-sum game, Zipcar

By the end of 2011 Treasury had received $15.45 billion of the $67.84 billion it put into AIG, and still owned 1.455 billion common shares of the company.6 Separately, in November 2008, the Fed created two investment vehicles to remove toxic assets from AIG’s balance sheets. The first, dubbed Maiden Lane II, borrowed $19.5 billion from the Fed and bought $20.8 billion in mortgage-backed securities at half of their original price. The second, Maiden Lane III, borrowed $24.3 billion from the Fed and bought a portfolio of collateralized debt obligations from former AIG customers, also at about half their face value. As the credit markets recovered, the investment vehicles—essentially hedge funds with concentrated positions—generated enough income to pay off the loans, and the Fed sold off chunks of the assets held by the Maiden Lane entities.

., 8, 67, 90, 193, 212 China, 6–9, 14, 18–21, 25–26, 82, 164–78, 187, 217 comparisons between U.S. and, 7–8, 25, 166–67, 202, 208 economy of, 2, 7–8, 18–20, 25, 141, 148, 165, 178, 222 efficiency economy and, 62, 67–69, 71, 227 employment and, 164–68, 170 FDI and, 85–87, 92–94, 97, 164 incomes in, 20, 164–67 inports and, 134–36, 138–44, 146, 164, 227 and reshoring and insourcing, 169–78, 222 trade and, 94, 98, 100–104, 106–9, 112–14, 116, 118–20, 122–28, 164 China Eastern, 124 China UnionPay, 124 Christie, Chris, 211 Chrysler: bailout of, 40–42 bankruptcy of, 40–41, 46, 51, 136 Fiat’s acquisition of, 40, 78, 87 and reshoring and insourcing, 173–74 Chung, Winston, 97 CIT Group, 47–49 Citi, Citibank, Citigroup, 37, 53, 84–85, 172 Citic Press, 128 Civilian Conservation Corps (CCC), 206–7 Civil War, 18, 82 Civil Works Administration, 206 Cleveland Clinic, 126, 145 Clinton, Bill, 26, 31, 70, 217–18, 228 Clooney, George, 129, 227 CNBC, 4, 108 CNG Now, 105 CNOOC, 86 coal, 102–5, 162, 165, 202 Coca-Cola, 83–84, 143, 202, 227 inports and, 133, 137–38, 146 coffee, 139–40, 181 Coleman, 171 collateralized debt obligations, 36 Collinses, 111–14, 116 Colombia, 26, 131, 148 FDI and, 85, 88–91 Commerce Department, U.S., 1, 54, 99–100, 104, 120, 122, 125, 219 Commercial Paper Funding Facility, 34 Committee on Foreign Investment in the United States, 96 competition, 3, 19, 21, 23, 80, 83, 106–7, 167, 194, 204, 228 efficiency economy and, 62, 68, 77 efficient consumers and, 193, 196 inports and, 131–32, 137, 141 North Dakota and, 148, 161 and reshoring and insourcing, 169, 179 Congress, U.S., 14, 19, 23–24, 125, 146 deficits and, 221–22 economic decline and, 3, 10 health care reform and, 5–6 U.S. credit rating and, 1–2 Congressional Budget Office, 31 Connecticut, 50, 86, 105, 140, 146, 151, 161–62, 212 efficient consumers and, 187–88 Conservation and Recreation Department, Mass., 66 construction, 174 efficient consumers and, 190–91 housing crisis and, 219–20 infrastructure and, 205–6, 209, 211, 213 North Dakota and, 152–53, 155–56 Consumer Price Index, 187 consumers, consumerism, consumption, 2, 25, 28, 81, 101, 111, 216, 219 coal and, 102–3 economic pessimism and, 22–23 efficiency economy and, 64–65, 68, 73–75, 78, 223–24 exports and, 98–99, 104–5, 107, 110, 119, 128, 130–31, 147, 154, 164 FDI and, 83, 89–90, 92–93 indebtedness and, 9–10, 53–57 inports and, 131–32, 136–37, 141, 143, 147, 227 North Dakota and, 151, 153–54 and reshoring and insourcing, 169, 172, 175, 177 restructuring and, 44–45, 53–59 supersizing and, 202, 204, 209 see also efficient consumers Cooper, Bill, 105 Cooper, Stephen, 44 CoreLogic, 190 corporations, 1, 9–10, 60, 139–43, 163–67, 169–85, 192–206, 225 comparisons between consumers and, 181, 185, 189, 195 and costs of labor, 164–67 economic optimism and, 23–24 economic pessimism and, 22–23 efficiency economy and, 63–68, 71, 75–76, 80–81, 158, 172, 223 efficient consumers and, 181–85, 192–96 exports and, 98, 103, 108–10, 112–14, 116–17, 131, 177 FDI and, 82–96 global, 22, 24, 71, 95 inports and, 132, 135–37, 139–42, 144, 146–47, 202–3, 227 job growth and, 218–19 North Dakota and, 152–53, 155, 157–60 recoveries and, 17–18, 21, 215 and reshoring and insourcing, 167, 169–79 restructuring and, 44–45, 47–49, 52–53, 57–58, 81, 166 supersizing and, 199–206, 209–10 taxes on, 146–47, 163 timely policy decisions and, 28, 30, 34 U.S. economic importance and, 227–28 Costner, Kevin, 129–30 Coty, 71 Coulomb Technologies, 211 Council of Economic Advisers, 31 Cowan, Lynn, 203 Creation Technologies, 67 credit, 32–36, 94, 194 booms in, 21, 29, 56, 62 crisis in, 2, 4, 23, 26, 48, 53 exports and, 112–13 restructuring and, 49, 51, 53–56, 58 timely policy decisions and, 29, 32–33, 35–36, 42–43 credit cards, 34, 183–85 restructuring and, 54–56 credit ratings, 1–2, 11, 52 Credit Suisse, 137, 223 Davis, Fred, 90–91 debt, 1, 19–20, 23–24, 60, 185 CIT Group and, 48–49 consumers and, 9–10, 53–57 crises and, 6, 29, 216 efficiency economy and, 62–63, 72, 78 efficient consumers and, 181, 189, 193, 196 Erie Canal and, 205–6 FDI and, 82, 94 national, 2, 5, 11, 217 North Dakota and, 155–56 restructuring and, 45–59, 78 strengthening recovery and, 215–16 timely policy decisions and, 32–34, 36, 39, 42 see also loans, lending, lenders debt ceiling extensions, 2, 217 Dedrick, Jason, 140 Defense Department, U.S., 109 deficits: budget, 2, 6, 10, 64–65, 217, 221–22 efficiency economy and, 64–65 trade, 102, 107, 168, 221–22 Delphi, 46 demand, 18, 31, 45, 57, 101, 132, 178, 221 efficiency economy and, 60, 62, 72–74, 223 exports and, 99, 104, 107–10, 116, 119 North Dakota and, 153–54, 159 supersizing and, 206, 208 Deming, W.


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

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. The country’s financial markets had gone from being decontrolled to being uncontrollable. But as long as the market expanded, the profits seemed enormous and apparently insured against loss. The operating margins at the giant insurer AIG on collateralized debt obligation (CDO) insurance rose steadily; by 2002 the margin was 44 percent of revenue, and by 2005, 83 percent. The profits of the unit that sold CDOs rose from $737 million in 1999 to $3.26 billion in 2005. Fat bonuses, lavish parties, and padded expense accounts for exotic travel followed. The credit boom built on subprime mortgages also provided real, if temporary, benefits to a large number of Americans who never bought a derivative.

Federal Election Commission, civil liberties, erosion of civil rights Civil War class. 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.


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

The fund held only 1.2 percent of its portfolio in Lehman commercial paper, but given the uncertainty in the markets at the time, even this relatively modest allocation caused investors to panic. As the equivalent of a bank run ensued, the government was forced to step in to make sure money market funds didn’t go belly up. While MMFs didn’t cause the subprime crisis, the shadow banking services they provided exacerbated an already fraught situation. Collateralized debt obligations (CDOs), sale-and-repurchase agreements (repos), and asset-backed commercial paper (ABCP) were also part of the pre-2008 shadow banking system—and the attendant crisis. For our purposes, how these intricately structured financial instruments worked is not important. The crucial takeaway is merely that they are intensely complicated, and complexity itself is a risk to financial stability.

See specific topics Bitcoin Beach Bitcoin City Bitcoin Conference, Miami Bitcoin Magazine Bitfinex Bitfinex’ed (Twitter handle) Block, James (Dirty Bubble Media) Bloomberg blue-sky laws Boozman, John Borman, Frank Bouscal, Naia Brady, Tom Brandvold, Neil Brecht, Bertolt Brooks, Brian bucket shops Budd, Ted Bukele, Nayib capitalism Carlin, George Carlson, Tucker “The Case (for and) against Multi-level Marketing” (Taylor) casino capitalism “Celebrity Crypto Shilling Is a Moral Disaster” (McKenzie, B., and Silverman) celebrity endorsement Celsius. See also Mashinsky, Alex Central Intelligence Agency (CIA) centralized exchanges Chalopin, Jean Changpeng Zhao (CZ) Chanos, Jim Chaum, David Claros, Wilfredo Clayton, Jay Coinbase CoinDesk collateralized debt obligations (CDOs) collateralized default obligations (CDOs) Collins-Rector, Marc commercial paper Commodity Exchange Acts (1936) Commodity Exchange Authority (CEA) Commodity Futures Trading Commission (CFTC) cooling out the mark COVID-19 pandemic Credit Suisse Cressey, Donald Crypto Critics’ Corner (podcast) cryptocurrency.


pages: 383 words: 108,266

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

air freight, Al Roth, Alan Greenspan, Bear Stearns, behavioural economics, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, compensation consultant, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, IKEA effect, invisible hand, John Perry Barlow, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, Pepsi Challenge, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skinner box, Skype, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Upton Sinclair

But in the wake of a number of financial crises, from the dot-com implosion of 2000 to the subprime mortgage crisis of 2008 and the financial meltdown that followed, we were rudely awakened to the reality that psychology and irrational behavior play a much larger role in the economy’s functioning than rational economists (and the rest of us) had been willing to admit. It all started from questionable mortgage practices, augmented by collateralized debt obligations (CDOs are securities based mostly on mortgage payments). In turn, the CDO crisis accelerated the deflation of the housing market bubble, creating a reinforcing cycle of decreasing valuations. It also brought to light some questionable practices of various players in the financial services industry.

items and, 51–54, 64–65 rational cost-benefit analysis and, 64–65 Citigroup, 280 Clark, John Maurice, 281 Clark, Margaret, 68 closets, consumerism and size of, 110 clothing, worn and returned to store for full refund, 196, 223 Cobb, Leonard, 173–74 coffee: questioning outlays for, 44 at Starbucks vs. Dunkin’ Donuts, 37–39, 47 upscale ambience and, 39, 159–60 cognitive limitations, taking account of, 327 Coke, taste tests of Pepsi and, 166–68 cold remedies, price and efficacy of, 184 colds, antibiotics as placebo for, 189 collateralized debt obligations (CDOs), 279–80 comparisons, see relativity compensation: cash vs. gift rewards and, 82–83, 253–54 for bankers, calculating correct amount of, 319–24 of CEOs, 16–17, 18, 310 poetry reading experiment and, 40–42 erosion of public trust and, 306, 310, 311 Obama’s call for “commonsense” guidelines for, 323–24 recent cuts in benefits and, 82 social exchange in workplace and, 80–83 and transformation of activity into work, 39–43 see also bonuses; salaries compensation consulting firms, 17 conditioning, placebo effect and, 179 condoms: importance of widespread availability of, 100–102 and willingness to engage in unprotected sex when aroused, 89, 95, 96–97, 99, 107 conflicts: expectations and perception of, 156–57, 171–72 neutral third party and, 172 conflicts of interest, 291–96 in banking and financial industries, 291, 294–96, 311 cheating and, 292–93, 294 elimination of, 295–96, 311 in health care, 293, 295 theory of rational crime and, 291–92 conformity, ordering food and drink and, 238 Congress, U.S., 151, 152, 228 ethics reforms in, 204–6 consumerism, 109–10 context effects, 240 control, perception of: learned helplessness and, 312–16 mistaken, 243 corporate scandals, xiv, 196, 204, 214, 219, 222–23 cost-benefit analysis: dishonesty and, 202–3, 204, 292–93 relative value and, 64–65 theory of rational crime and, 291–92 credit cards, 110, 204, 304 FREE!


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.

constructed function intertemporal making mistaken models of outcomes of parameter political process, improving pros/cons of sensitive strategic wise See also Rational choice Cleveland, Grover Climate change challenge of characteristics of coal industry and as compound lottery evaluation/management of hazard risk and impact of legitimate policies of mitigation of outcomes of path for policy premiums and Climate negotiations Climate risks Club of Rome Coates, John “Coconut” uncertainty Cognitive activity emotional activity and Cohen, Jonathan Collaboration Collateral debt obligations (CDOs) Commitment prediction and uncertainty and Communication development of theory Compassion collapse of(fig.) Conference of Rio on Environment and Development Consequences actions and decision making and Conservatism, environmental issues and Consumption social welfare and Contracts insurance Convention on the Prevention and Punishment of the Crime of Genocide (1948) Coolidge, Calvin Copenhagen Agreed Outcome Copenhagen Consensus (2004) Cost-of-search hypothesis Costs diffuse Credit default swaps (CDS) Credit instruments Crises Crisis management Dacy, Douglas Damasio, Antonio Darfur genocide Debreu, Gérard Decision analysis (DA) adaptation by challenges for disappointments with principles of training in Decision analytical model(fig.)


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 upside is that junk bonds have a higher yield, and they allowed companies that couldn’t get conventional backing to launch themselves. The downside was that some of them were extremely risky. ‘The securities involve a high degree of risk,’ said the front page of one junk-bond prospectus two days after the 1987 Crash, ‘and accordingly, investors may lose their entire investment.’ A quarter of a century on, the Collateralized Debt Obligations (CDOs), the complex instruments that bundled up good mortgage debt with unrepayable subprime debt, were deliberately packaged to be obscure so that the credit-rating agencies could not value them, and they could then be sold to less sophisticated investors. Michael Lewis interviewed the handful of people who had seen what was coming, and whose bets against the subprime bonds flew in the face of market momentum — just as Paul Woolley had done during the dot.com boom.

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: 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

Their business model was built on getting rid of the mortgages as quickly as they created them; in the absence of the cashflow from sales, they were unable to meet their debts. The problem then rippled through the chain. The mortgage-backed securities had been bundled into other securities called ‘collateralized debt obligations’ (CDOs). These were designed to give investors a diversified pool of high-yield assets. Such assets were attractive as an ironic consequence of the great moderation; yields on cash and government bonds were low so investors were happy to chase higher returns. These CDOs had been organized in tranches, like a kind of trifle.

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: 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 market approach vindicated by Enron’s bankruptcy. TWO Going to the Mattresses The advent of VAR and OTC derivatives. The collapse of Long-Term Capital Management (LTCM). A fatal flaw is exposed. The wrong lesson is learned. THREE A Free Lunch . . . with Processed Food A new market for collaterized debt obligations (CDOs). Risky investments, diversification, and the role of the ratings agencies. Barclays finds investors for its CDOs, only to fall out with them. FOUR The Broken Heart Syndrome J.P. Morgan and Deutsche Bank dominate the European CDO market. Innovation outpaces the ratings agencies.

With these incentives in place, dry brushwood was in place that only needed two more things to catch fire: credit derivatives and securitization. CHAPTER THREE A Free Lunch . . . with Processed Food A pioneering pack of very clever and ambitious traders—aided by some mathematical wizardry—figured out how to bundle risky investments into packages that carried triple-A ratings. This incredibly lucrative new market in collateralized debt obligations (CDOs), which was propped up by the ratings agencies, swept across Europe, as cautious banks sought new ways to diversify without taking on too much risk. The Too-Perfect Investment Like the grain of sand lodged in an oyster’s shell, an irritant sometimes drives what is—and should always be—an introspective, conservative company to outsize ambitions.


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

The classic example is deposit insurance, Franklin Delano Roosevelt’s response to Depression-era bank runs. Since 1934, the government has guaranteed deposits at banks, so insured depositors who get worried that their bank has problems no longer have an incentive to yank out their money and make the problems worse. Of course, the banking system that FDR inherited didn’t have “collateralized debt obligations,” “asset-backed commercial paper,” or other complexities of twenty-first-century finance. In the panic of 2008, insured bank deposits didn’t run on any significant scale, but all kinds of other frightened money did—and in the digital age, a run doesn’t require any physical running, just a phone call or a click of a mouse.

That was almost twice as large a write-down as Merrill had predicted three weeks earlier, leaving the impression that losses were exploding and more unpleasant surprises lay ahead. Merrill CEO Stan O’Neal was forced out, although he did receive a $161.5 million severance to ease the blow. The bulk of Merrill’s losses came from “collateralized debt obligations,” piles of mortgage-backed securities where the income streams had been sliced up and repackaged into smaller streams known as “tranches.” Merrill was a leading manufacturer of CDOs, and it had made billions selling them to investors around the world. But the investors, reaching for yield, had shown little interest in the safest tranches, the “super-senior” CDOs that would pay out in full unless mortgage losses were so severe that investors in every tranche below them were wiped out.

The VIX captures investor expectations of near-term stock market volatility—how uncertain investors are about whether and how far the S&P will rise or fall. 4 two complex new Maiden Lane vehicles: Among AIG’s major liquidity needs were their securities lending operations and the credit default swaps written by AIG Financial Products on collateralized debt obligations. Maiden Lane II and III addressed these issues, respectively, by purchasing the underlying collateral from AIG and its counterparties and canceling the CDS contracts that AIG owed against them. This eliminated the risk that these contracts would continue to result in additional margin calls that would further drain AIG’s cash.


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

Yet Bernanke’s analysis ignores the fact that the riskiest subprime loans were priced off short-term rates, including the option of adjustable-rate mortgages with their negative amortization feature (in which interest was rolled up with the principal). It was only after the Fed’s easy money policy was launched that credit growth picked up, financial leverage soared, housing markets bubbled, underwriting standards declined and the repackaging of subprime mortgage debt into collateralized debt obligations took off. Low interest rates fed the demand for credit, while financial innovation increased its supply. The explosive growth of the market for complex mortgage securities was driven in large part by a desperate search for yield at a time when interest rates were at multi-decade lows.

One might have thought that those painful losses would have been seared on to Wall Street’s collective memory. But ultra-low interest rates induced amnesia among investors. After 2008, a new shadow-banking system arose that had much in common with its defunct predecessor. Collateralized loan obligations (CLOs) – a nearly identical security to the ‘toxic’ collateralized debt obligations (CDOs) that fuelled subprime lending and later spectacularly imploded – found a ready market. ‘Ultra-short’ bond exchange-traded funds (ETFs) provided an income-enhancing alternative to money market funds and bank deposits.34 As long as liquidity remained abundant, these investment vehicles could be treated as money substitutes.

., 72 Charles II, King of England, 33, 38 Chase National Bank, 87, 88 Chaumont, the Widow, 54–5 Child, Sir Josiah, xxii, 33–4, 35, 36–7, 37*, 38–40, 41, 43, 44, 202 China: authoritarian relapse in recent years, 288–9; back-alley banking, 281–3; capital controls in, 262, 266, 285; capital flight from, 285–6; and ‘commodity super-cycle (from 2010), 173–4, 255–6; corporate zombies in, 277, 281, 285, 289; corruption in, 270, 274, 275, 287–8, 287*; currency devaluation (2015), 227; debt-deflation in, 280–81; Deng’s reform era, 265, 266, 267; and digital currencies concept, 294; economic stimulus plan (2008/9), 270, 271–81, 282, 289, 292; export driven expansion, 132, 182, 267–70; and financial repression, 264–5, 265*, 266–81, 268*, 283, 286–9, 292; foreign capital inflows, 254–5, 256, 265–6, 267, 270, 270*; garlic bulb bubble, 173, 271, 282; ‘great divergence’ from West, 288; growing inequality in, 287–8, 287†; high occurrence of elevator accidents, 274, 274*; high-speed rail expansion, 275; housing boom during Covid pandemic, 310; increased share of world trade, 260; ‘iron rice bowl’ removed, 268; joins WTO (2001), 267; as leading producer of greenhouse gases, 277–8; long tradition of impressive investments, 276; ‘national team’ of state enterprises, 272, 272*; and new technologies, 177, 276, 283, 284; paper money invented in, 265; ‘Red Capitalism’, 280, 284, 292; savings/current account surpluses, 129, 268–9, 270; ‘shadow banks’ in, 266, 270, 282*, 283–5, 286; SHIBOR lending rate, 284; and taper tantrum (June 2013), 256, 284; treatment of Uighurs, 288; Trump’s trade wars with, 262; uncoordinated investment in, 266, 269, 270, 272–4, 275–9, 280–81; undervalued exchange rate, 267–8, 270, 271; unscrupulous vested interests, 270, 286–9; unstable bubbles in, 270, 271–4, 282, 288; unsustainable debt in, 270, 279–81, 282–5, 289; US loss of manufacturing jobs to, 261, 261*; vast investment boom in, xxiii, 128, 267–81, 280*, 282–9; wealth management product (WMP), 283–4; Wenzhou’s credit crunch (2011), 282–3 Chu, Charlene, 280 Citigroup, 232† Clapham, Sir John, 79 Clarida, Richard, 310 classical economists, 12, 14, 27–8, 31, 41, 85*, 130–31, 132–3, 183 see also Smith, Adam Clifford & Sons, 63 climate change, 255, 277–8 cloth trade, 14–15, 22, 23 Cobham, Thomas of, 19–20, 26 Coffin, Charles, 156 Cole, Christopher, 229*, 231 collateralized debt obligations (CDOs), 116, 227 collateralized loan obligations (CLOs), 227 Commerzbank, Germany, 245 compound interest, xvii, 8–9, 190, 200, 202 Conard, Joseph, 141* Connally, John, 251, 262 Consols (British bonds), 62–3, 65, 65†, 70, 77, 79, 80, 126 Conti, Louis Armand II, Prince of, 55 Coolidge, Calvin, 87, 92–3 corporate sector: benefits of low interest rates for, xxii; the financialized firm, 166–7; ‘good will’ on balance sheets, 169, 180; profits bubble in post-crisis USA, 183, 185, 211; ‘shareholder value’ philosophy, 163–6, 167, 170–71 corruption, 63, 258, 274, 275, 287*, 288; in China, 270, 274, 275, 287–8, 287*; Galbraith coins ‘bezzle’ term, 287 Coughlin, Father Charles, 242 Coupe, Mike, 160 ‘coveitise’, practice of, 24 Covid-19 pandemic, xxii, 224*, 304, 305–7, 309–10 Cowen, Tyler, 198 Coxey’s Army, 201 credit: in ancient Near East, 3, 5–10, 11, 15; and Borio’s financial cycle, 132, 134, 135; causes of booms, 42, 43, 44, 118, 176–7, 220; central bank dominion over markets, xxii, 292–3, 293*; collapse in quality in post-crisis decade, 222–4, 231, 233, 237–8; decline in quality during booms, 112, 116, 135–6; Defoe on, 28; emergence of modern credit cycle, 62–4; expansion in 1920s USA, 87–91, 92–4, 96–8, 112, 203; growth before 2008 crisis, 112–13, 114, 115, 116; Law’s credit theory, 47, 60; in medieval Italy, 22–3, 35; poor quality in expanding China, 266; as pre-dating barter, 3, 14; psychological elements, 64; rationing under Bretton Woods system, 291; strong growth of as red flag, 132, 135; unequal access to, xxii, xxv, 14, 15, 215; vast investment boom in China, xxiii, 128, 267–81, 280*, 282–9; Wenzhou’s credit crunch (2011), 282–3 Credit Suisse, 229 Creditanstalt, collapse of (1931), 93, 93*, 243, 261 Cruz, Gaspar da, 276 cryptocurrencies, 173, 177–9, 307–8, 312 Culpeper, Sir Thomas, the Younger, 34–5, 44 Culpeper, Sir Thomas, ‘Tract Against Usury’ (1621), 34, 35 Cyprus, 262 Dalio, Ray, 217, 229, 291 Datini, Francesco, 21–3, 24 Dawes Loan (1924), 91 Deaton, Angus, 213 debt: after 2008 crisis, 138–9, 237, 237†; ancient debt tablets, 5–6; ‘balance sheet recessions’, 191; cancellation/jubilees/clean slates, 9, 300; dangers of cheap credit, 32, 44; debt bondage, 5, 9, 18; ‘debt supercycle’, 135; ‘debt trap’, 43, 135, 280; debt-deflation, 98–9, 100, 119, 280–81; debt–service ratio, 135; ‘evergreening’ of bad debts, 136, 145–6, 280; late payment penalties, 10, 14, 25; Lord King on (2019), 304; as missing link in secular stagnation narrative, 135–6, 138–9; mortgage equity withdrawal, 112–13, 191, 205; problem of compound interest, 8–9; Proudhon on, xvii, xviii; revival of subprime market, 215, 221, 224; student debt ‘bubble’, 212, 213; tax structures favour over equity, 164; transferable/heritable in Babylon, 7 deflation: after 1929 Crash, 98–9, 100, 101, 105, 108; Austrian economists’ view of, 100, 101, 105, 113, 133–4; crisis of 2008 revives fears of, 119, 122; debt-deflation, 98–9, 100, 119, 280–81; in early-1920s Britain, 85–6; and Fed’s post-2008 policies, 236–8; ‘forgotten depression’ (1921), 84, 86, 100, 143; and high rates of interest, 42, 43, 64; impact of zombies, 237, 237†; impact on working people, 99–100; in Japan from 1990s, 100–101, 107–8, 114, 119, 135, 136, 145–6, 147, 148, 182, 191, 193; in late nineteenth century, 78–80, 99, 101; in post-Great War period, 84, 85–6; as preoccupation of modern central bankers, xxiii, xxv, 76, 112, 115, 115†, 122; Say’s view of, 99; and Victorian era, 76; view of as good/not harmful, 99–101, 113–14, 132; and Wicksell’s view of interest, 42 Defoe, Daniel, 28, 46, 47, 56, 57, 202, 308 Del Monte Foods, 222 democracy, 293, 293†, 296, 297; the old as largest voting cohort, 211–12; rise of populism, xxii, 299; weakening support for, 299 demographics: ageing societies, 29, 127; ‘Bank of Mum and Dad’, 212; generational impact of 2008 crisis, 211–12, 213; Alvin Hansen on, 126; and interest, xxiv, 10, 12, 126–7, 131, 133; largest voting cohort as old, 211–12; life expectancy statistics, 198, 213; and secular stagnation argument, 125, 126, 129; student debt ‘bubble’, 212, 213; and ‘time preference’ theory, 29 Demosthenes, 18† Deng Xiaoping, 265, 266, 267 Denmark, 242, 244, 245, 247 Deutsche Bank, 147* Dodd, David, 90–91 Dodd–Frank Act (2010), 232 Dogecoin, 308 Dollar Standard, 118, 251–2, 253, 261, 262–3, 267 Dostoyevsky, Fyodor, 294 Dotcom bubble, 111–12, 136–7, 176, 204, 206 double-entry bookkeeping, 21–2 Douglas, C.


pages: 160 words: 6,876

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

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Alan Greenspan, Bear Stearns, collateralized debt obligation, crony capitalism, housing crisis, junk bonds, Michael Milken, mortgage debt, negative equity, obamacare, Pershing Square Capital Management, race to the bottom, Savings and loan crisis

David Fiderer, a former banker turned journalist, calculates that from 2005 to 2007, roughly $2.9 trillion of private-label first-lien single-family mortgage securities were issued, only about 15 percent of which were purchased by Fannie and Freddie, and they bought the safest possible part. That supposedly safer part of the securities—the triple-A-rated ones—became increasingly easy to sell because so many buyers around the world were looking for “safe” investments. As for the riskier pieces, it was a Wall Street invention—the collateralized debt obligation—that became the buyer. Without them, the last frenzied years of the bubble wouldn’t have been possible. The narrative that blames Fannie and Freddie and the affordable-housing goals ignores some other inconvenient facts. Among them: •The first wave of subprime lenders in the 1990s grew up outside the GSEs.


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

S&P’s intrusion into American politics is also ironic because much of our current debt is directly or indirectly due to S&P’s failure (along with the failures of the two other major credit-rating agencies, Fitch and Moody’s) to do its job before the financial meltdown. Until the eve of the collapse, S&P gave triple-A ratings to some of the Street’s riskiest packages of mortgage-backed securities and collateralized debt obligations. Had S&P fulfilled its responsibility and warned investors of how much risk Wall Street was taking on, the housing and debt bubbles wouldn’t have become so large, and their bursts wouldn’t have brought down much of the economy. You and I and other taxpayers wouldn’t have had to bail out Wall Street; millions of Americans would have spent the subsequent years working instead of collecting unemployment insurance; the government wouldn’t have had to inject the economy with a massive stimulus to save millions of other jobs; and far more tax revenue would have been pouring into the Treasury from individuals and businesses.


pages: 428 words: 121,717

Warnings by Richard A. Clarke

"Hurricane Katrina" Superdome, active measures, Albert Einstein, algorithmic trading, anti-communist, artificial general intelligence, Asilomar, Asilomar Conference on Recombinant DNA, Bear Stearns, behavioural economics, Bernie Madoff, Black Monday: stock market crash in 1987, carbon tax, cognitive bias, collateralized debt obligation, complexity theory, corporate governance, CRISPR, cuban missile crisis, data acquisition, deep learning, DeepMind, discovery of penicillin, double helix, Elon Musk, failed state, financial thriller, fixed income, Flash crash, forensic accounting, friendly AI, Hacker News, Intergovernmental Panel on Climate Change (IPCC), Internet of things, James Watt: steam engine, Jeff Bezos, John Maynard Keynes: Economic Possibilities for our Grandchildren, knowledge worker, Maui Hawaii, megacity, Mikhail Gorbachev, money market fund, mouse model, Nate Silver, new economy, Nicholas Carr, Nick Bostrom, nuclear winter, OpenAI, pattern recognition, personalized medicine, phenotype, Ponzi scheme, Ray Kurzweil, Recombinant DNA, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Ronald Reagan, Sam Altman, Search for Extraterrestrial Intelligence, self-driving car, Silicon Valley, smart grid, statistical model, Stephen Hawking, Stuxnet, subprime mortgage crisis, tacit knowledge, technological singularity, The Future of Employment, the scientific method, The Signal and the Noise by Nate Silver, Tunguska event, uranium enrichment, Vernor Vinge, WarGames: Global Thermonuclear War, Watson beat the top human players on Jeopardy!, women in the workforce, Y2K

Wall Street investment bankers, aided and abetted by mortgage sellers, were bundling up thousands of risky mortgages in which the homeowners had a poor chance of meeting their payments (the industry calls these dogs “subprime mortgages”) into aggregated pools of homeowner debt available for purchase. The bundled piles of these dangerous mortgages were called collateralized debt obligations (CDOs) and were relabeled by the ratings agencies charged with determining the likelihood they would collapse2 as being less risky than their constituent parts. Though the practice was widespread and more than $1.4 trillion in mortgages had been bundled into CDOs from 2004 to 2007, only a tiny handful of people realized that these CDOs were ticking time bombs placed under the largest banks, the largest businesses in the world.

See also Upper Big Branch Mine disaster Cassandra system, 122, 125, 133, 137–38, 140–41 fatality rate, 123–24, 125–28 federal regulations, 124–30, 137–39 federal research program, 124–25 history of, 122–23 institutional refusal and, 137–42 Coastal wetlands, 41, 42–44 Coastal Wetlands Planning, Protection, and Restoration Act (CWPPRA), 43–44 Coding errors, 366–67 Cognitive biases, 34–35, 171–72 heuristics and, 189–91 Cognitive style, 14–15 Cold and the Dark, The: The World after Nuclear War (Sagan, Ehrlich, and Kennedy), 273–74 Cold Start doctrine, 264–65, 267, 270 Cold War, 25–26, 267–68, 271–74, 277–78 Collateralized debt obligations (CDOs), 147–48 Columbia University, 237, 238 Coming Plague, The (Garrett), 232 Complexity, and vulnerabilities, 366–67 Complexity Mismatch, 116, 178–79, 215, 299 Comprehensive Nuclear-Test-Ban Treaty (CTBT), 266 Computers in Crisis (Murray), 193–94 Conference on the Long-Term Worldwide Biological Consequences of Nuclear War (1983), 273 Congressional oversight committees, 355 Consensus science, 172–73 Continuous miners, 131–32 Conventional wisdom, 28, 355 Coplan, Jeremy, 186 Corvette hacks, 297–98 Cosmic Catastrophes (Morrison and Chapman), 302, 303, 304–5, 308–9, 312, 314–15, 319 Cost-benefit analysis, 361–62 Countervalue strike, 275, 278–79 Cowardice, 180 Cox, Jeff, 150 Cretaceous-Paleogene extinction event, 307–9 Crichton, Michael, 172–73 Crick, Francis, 328 Crimea, 285 CRISPR, 231–32, 326, 327, 329–49 CRISPR/Cas9, 326, 330–49, 360, 366–67 CRISPR Therapeutics, 333 Critical infrastructure protection (CIP), 287 Critics, 168, 170, 186–88 Crittenden, Gary, 143–44, 156 Crocker, Ryan, 73 Crocker’s Rules, 208–9 Cuban Missile Crisis, 26, 274 Cybersecurity, 283–300 Cynomolgus monkeys, 334–35 Daniel, 2 DARPA (Defense Advanced Research Projects Agency), 210, 382n Darwin, Charles, 325 Data, 36–37, 184 “Decay heat,” 85 Decision makers (the audience), 168, 170, 176–82, 380n false Cassandras and, 191–98 making the same mistakes, 189–91 responses, 358–64 scanning for problems, 354–56 Deep Impact (movie), 313–14 Deep learning, 210, 212 Demon core, 83 Deutsche Bank, 157 Devil’s advocates, 359, 379n DiBartolomeo, Dan, 105–6 Diffusion of responsibility, 176–77, 215, 235, 321, 348 Dinosaurs, 307–9 DiPascali, Frank, 107 Disembodied AI, 207 DNA, 326, 327–28, 336–37 Dole, Bob, 28–29 Dot-com bubble, 147 Doudna, Jennifer, 326–30, 335–36, 338–41, 343, 345, 346–49, 360 Drijfhout, Sybren, 253 Duchenne muscular dystrophy, 332 Duelfer, Charles, 30–31 Eagles, the (band), 305 Earth Institute, 238 Earthquake preparedness, 352–53 Ebola virus, 3, 219–20 Edwards, Edwin, 43 Eemian interglacial, 249, 250 Eggers, Dave, 39 Egypt, 59, 63, 66–67 Ehrlich, Paul, 192–93 Ein-Dor, Tsachi, 13, 186, 380n Einstein, Albert, 185 Eisman, Steve, 149, 152 Electricity Information Sharing and Analysis Center (E-ISAC), 287 Electric Power Research Institute, 286 Electromagnetic pulse (EMP), 274, 352 Embodied AI, 206 EMCON (emissions control), 29–30 Empire State Building, 260 Empirical method, 36, 184, 185 Energy policy, 243–44 Enron, 152 Enthoven, Alain, 361 Epidemic Intelligence Service, 354–55 Epidemic That Never Was, The (Neustadt), 196–97 EQ (emotional quotient), 183 Erasmus Medical Center, 222 Ermarth, Fritz, 27 Erroneous Consensus, 172–73 Ethics of AI growth, 205–6 of gene editing, 334, 339–40, 343 Eugenics, 342, 344 Evolution, 329–33 Expert Political Judgment (Tetlock), 13–15 Explainable AI, 210 Fairfield Greenwich Group, 108, 113 Fallujah, 68, 69 False Cassandras, 191–98 Famines, 192 Farmington Mine disaster, 127–28 Farson, Richard, 175 “Fast-failure” review, 357 Fatalism, 2 Fate of the States (Whitney), 153 Federal Bureau of Investigation (FBI), 8, 100, 112, 115 Federal Deposit Insurance Corporation (FDIC), 160 Federal Emergency Management Agency (FEMA), 40, 46–48, 51, 53–54, 323–24 Hurricane Pam exercise, 40, 47–49 Federal Reserve Bank, 159 Feedback loops, 16, 192–93 Fermi, Enrico, 373n Feynman, Richard, 240 Figueres, Christiana, 247 Financial Crisis Inquiry Commission, 162 Financial crisis of 2008, 143–65 Madoff fraud and SEC, 118–19 primary cause of, 147–48 Whitney and, 143–46, 148–50, 156–60 Flash Crash of 2010, 211 Fletcher, Charles, 256–57 Flood Control Act of 1928, 42 Flood Control Act of 1965, 46 Flu pandemic of 1918, 195, 198, 217, 221–24 Flu pandemic of 2009, 217–18, 221–22 Forbes, 154 Ford, Gerald, 196–97 Ford, Robert, 57–74 aid to Syrian opposition, 62–63, 64–65 ambassadorship in Egypt, 67 ambassadorship in Syria, 57–58 departure from Syria, 60–62 warning and prediction of, 64–74 Foreign Service, U.S., 57, 58, 67 Fortune, 146, 148–49, 161 Fossil fuels, 16, 42, 257–58.


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

And so the law of international finance became Lawlessness. ATHENS In May 2010, the end-game ended for Greece. The new financial products were packaged, polished to a shine, and sold to government pension funds all over the planet. The bankers sold blind sacks of sub-prime mortgages, sliced and mixed up, as Collateralized Debt Obligations (CDOs) and other fetid concoctions. The Financial Services Agreement was rockin’! But when opened, buyers found the bags were filled with financial feces. Government pensions and sovereign funds, from Finland to Qatar, lost trillions. The bags were toxic to bank balance sheets and several failed.

But Lula told the IMF to jam it and body-blocked privatizations, especially of the state-owned banks. Instead of begging international financiers for scraps, he opened the vaults of the state bank and lent out over half a trillion dollars for factories, farms, infrastructure—but not for one real for derivatives, hostile takeovers or collateralized debt obligations. During his two terms in office, Lula’s state banks gave their citizen-owners more credit than the IMF gave to over hun-dered nations. And Brazil’s economy went from the swamp to the stars. Then Brazil struck oil, lots of it, in deep Atlantic waters. In the old days, that is, a decade ago, Chevron, Shell, and BP would have been onto those reservoirs like ticks, sucking up Brazil’s oil.


pages: 469 words: 132,438

Taming the Sun: Innovations to Harness Solar Energy and Power the Planet by Varun Sivaram

"World Economic Forum" Davos, accelerated depreciation, addicted to oil, Albert Einstein, An Inconvenient Truth, asset light, asset-backed security, autonomous vehicles, bitcoin, blockchain, carbon footprint, carbon tax, clean tech, collateralized debt obligation, Colonization of Mars, currency risk, decarbonisation, deep learning, demand response, disruptive innovation, distributed generation, diversified portfolio, Donald Trump, electricity market, Elon Musk, energy security, energy transition, financial engineering, financial innovation, fixed income, gigafactory, global supply chain, global village, Google Earth, hive mind, hydrogen economy, index fund, Indoor air pollution, Intergovernmental Panel on Climate Change (IPCC), Internet of things, low interest rates, M-Pesa, market clearing, market design, Masayoshi Son, mass immigration, megacity, Michael Shellenberger, mobile money, Negawatt, ocean acidification, off grid, off-the-grid, oil shock, peer-to-peer lending, performance metric, renewable energy transition, Richard Feynman, ride hailing / ride sharing, rolling blackouts, Ronald Reagan, Silicon Valley, Silicon Valley startup, smart grid, smart meter, SoftBank, Solyndra, sovereign wealth fund, Ted Nordhaus, Tesla Model S, time value of money, undersea cable, vertical integration, wikimedia commons

In subsequent decades, these securities gave rise to the more general category of asset-backed securities, which offer investors an opportunity to invest in everything from auto and student loans to Domino’s Pizza franchise royalties. In the run-up to the financial crisis, Wall Street abused securitization by packaging subprime mortgage-backed securities together into an arcane entity known as a “collateralized debt obligation.” But since the crash, federal regulators have reined in these abuses, and asset-backed security markets are thriving again. Today, the U.S. mortgage-backed security market is worth about $9 trillion, and the asset-backed security market is worth $1.4 trillion. Attracting these enormous sums of capital has made it possible for Americans to engage in activities with an up-front cost they wouldn’t normally be able to afford.

See also specific types deployment of, 11 expansion of, 5, 7 global energy transition to, 22–23 institutional investments in, 66 limitations on, xvi nuclear power as, 21 private funding for, 111, 113 tax incentives for, 266–271 U.S. military support for, 265–266 venture capital for R&D on, 257, 258f Climate bonds (green bonds), 113, 288g Climate change and future of solar power, 1, 6, 7, 10 impact of transition to solar power on, 22–23 and India’s use of solar energy, 15, 16 and natural disasters, 207 solar investment required to limit, 57, 112f Climate Policy Initiative (CPI), 65, 97, 236 CLP (China Light and Power), 105–106, 108 Coal-fired power plants baseload power from, 76 carbon capture for, 61, 238 flexible-base, 76, 236 and future of solar, 3, 14, 15 in industrial sector, 60 pollution controls on, 271 U.S. transition away from, 234 Coatings, PV, 12, 24, 27, 80–81, 141, 144 Cobalt-phosphorus alloy, 182 Cogeneration plants, 244 Collateralized debt obligation, 99 Columbia University, 273 Combined cycle CSP plants, 188, 189 Combined-cycle gas turbines, 234 Commercial and industrial (C&I) market segment, 280g. See also Industrial sector Community solar, 107, 280g Competitive Renewable Energy Zone (CREZ), 269 Compressed air, 231–232 COMSTAT, 40 Concentrated solar power (CSP), 183–190 commercial success for, 24 cost of, 32, 173, 189 deep decarbonization with, 61 defined, 281g for desalination plants, 246 exporting power from, 205 in future of solar energy, 8 growth of, 183–184 hybrid approaches using, 188–190 scaling up, 190–191 technological innovation to improve, 185–188 thermal storage for, 184–185 Con Edison, 208 Congo, 230 Connecticut Green Bank, 102 Consumption subsystem, 129 Control algorithms, 214–215 Conversion losses, 217 Coons, Chris, 93, 249, 270 Copper indium gallium (di)selenide (CIGS), 38, 151, 153, 281g Copper industry, Chilean, 69 Corporate investment, in new solar projects, 105–110.


pages: 448 words: 142,946

Sacred Economics: Money, Gift, and Society in the Age of Transition by Charles Eisenstein

Albert Einstein, back-to-the-land, bank run, Bernie Madoff, big-box store, bread and circuses, Bretton Woods, capital controls, carbon credits, carbon tax, clean water, collateralized debt obligation, commoditize, corporate raider, credit crunch, David Ricardo: comparative advantage, debt deflation, degrowth, deindustrialization, delayed gratification, disintermediation, diversification, do well by doing good, fiat currency, financial independence, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global supply chain, God and Mammon, happiness index / gross national happiness, hydraulic fracturing, informal economy, intentional community, invisible hand, Jane Jacobs, land tenure, land value tax, Lao Tzu, Lewis Mumford, liquidity trap, low interest rates, McMansion, means of production, megaproject, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, multilevel marketing, new economy, off grid, oil shale / tar sands, Own Your Own Home, Paul Samuelson, peak oil, phenotype, planned obsolescence, Ponzi scheme, profit motive, quantitative easing, race to the bottom, Scramble for Africa, special drawing rights, spinning jenny, technoutopianism, the built environment, Thomas Malthus, too big to fail, Tragedy of the Commons

Consider this typical example from a financial journal: [Paul] Volcker is right. The collateralized debt obligations, collateralized mortgage-backed securities, and other computer-spawned complexities and playthings were not the solutions to basic needs in the economy, but to unslaked greed on Wall Street. Without them, banks would have had no choice but to continue to devote their capital and talents to meeting real needs from businesses and consumers, and there would have been no crisis, no crash, and no recession.”1 This describes only the most superficial level of a deeper problem of which the collateralized debt obligations (CDOs) and so forth are mere symptoms.


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

Arguments about pricing, hedging, and risking should take place before trading begins, not after. JWPR007-Lindsey 234 May 7, 2007 17:9 h ow i b e cam e a quant Adventures in CDO Land Another incident shows the power and limitations of quantitative risk management. A charismatic ex-derivatives trader started a CDO (collateralized debt obligation) business, which he ran as a derivatives business. The accounting was mark-to-market, and he acted as both the structurer and the active manager of the portfolios of the underlying portfolios of credits. A general problem for CDO structurers is that they have to find buyers for all the tranches of a new structure at once in order to launch the deal.

., 151 Bohren, Øyvind, 155 Bonds mathematics, analogy, 23–26 valuation, option theory (application), 40 Booth, Laurence, 139 Bop Play, 191 Borel subgroup, 109–110 Bossaerts, Peter, 77 Boyle, Phelim, 161, 162 Brain-imaging technologies, improvement, 27–28 Brennan, Michael, 140 Bretton Woods system, 297–298 Bridge brokerage, 220 Brinson, Hood, and Beebower (BHB) methodology, 260 British Telecommunications Pension Scheme, 143 Broadie, Mark, 171 Broker-sponsored WRAP accounts, growth, 79 Brown, Jerry, 213 Brown, Stephen, 253 Bubble Logic, 204 Buglierello, George, 335 Call markets, conditional orders (allowance), 77 Campbell, Myron, 117 Cantor, Bernie, 21 Cantor Fitzgerald, 21 Cantwell, Gary, 320 Capital allocation, standalone risk (basis), 103–104 Capital Asset Pricing Model (CAPM), 34 development, 147 result, appearance, 43 validation, 77 P1: OTE/PGN JWPR007-Lindsey P2: OTE January 1, 1904 6:33 382 Capital Ideas and Market Realities: Option Replication, Investor Behavior, and Stock Market Crashes (Jacobs), 278, 280, 281 Capital Market Risk Advisors, 83 control/maintenance, continuation, 90–91 Capital Markets Risk Advisors, 90–91 Capital structure, 212 irrelevance, Modigliani-Miller explanation (usage), 139 Capped stock index options, analysis, 160–161 Carnegie-Mellon, Graduate School of Industrial Administration, 264 Carr, Peter, 137–141, 242 Carret, Philip, 321 Carry play, 193 CFA Institute, 213, 280, 283 Chalone Group, 217 Chaos control, 165 Charlotte Group, 217 Chase Manhattan Bank, 245–248 Chicago Board of Trade (CBOT), 331 options, exchange trading, 89 Chriss, Neil, 107–135 Churchill, Winston, 37 risk management, problems, 232 Clark, Kent, 200 Clayman, Michelle, 253–254 Clifford, Scott, 45 Clinton Group, 302 Clowes, Michael, 279 Cohen, Kalman, 71–72 Coleman, Lew, 221 Collateralized debt obligations (CDOs), 234 equity tranche, 234 Collateralized mortgage obligations (CMOs), instrument creation, 184 Columbus, Christopher, 112 Commercial International Brokerage Company (CIBC), 231–232 Commercial loan-pooling venture, 215 Commerzbank Securities, 173–175 Communication, quality, 105 Complete Guide to Financial Innovation, The (Marshall/Bansal), 329 Composite models, usage, 80 Compound returns, 72 Compustat, 219, 313 Computers, usage, 113–117 Conditional orders, 76–77 Conditional value-at-risk (CVAR), 195 Contingent claims, publicly traded markets (growth), 249 Continuous markets, 76 Continuous value at risk, 256 Conventional value trading, combined value trading (contrast), 78t Convexity, examination, 38–39 INDEX Cooper, Richard, 321, 322 Cooper, Tom, 314 Copulas.


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

They bought the mortgages from brokers and other mortgage lenders and packaged them into mortgage-backed securities. 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.

., 248–49 Chaos (Gleick), 70, 234 chaos theory, 67, 134, 301–2, 304 Chase Financial Policy, 163–64 Chicago Board of Options Exchange, 145 Chicago Board of Trade, 40 Chicago Mercantile Exchange, 145, 194, 219,227–28, 230 Chicago Tribune, 35–36 Cisco Systems, 261–62, 262–63, 278, 284 Citrin, Robert, 362n. 17 Clinton, Bill, 244 CNA Financial, 125 Coca-Cola, 270–71 coin-flip game, 26, 212–13 collateralized debt obligations (CDOs), 314 Collins, Jim, 284 Colorado Springs, Colorado, 35–36 Columbia Business School, 211 Columbia University, 47–48 Commodities Corp., 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.


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

Anarcho-capitalist Jeffrey Tucker wrote an amazing apologia, “A Theory Of The Scam,”66 in which he admits Bitcoin is suffused with fraud, but posits that “scam artists are the evil cousins of genuine entrepreneurs” and are actually a sign of health for an area – so, since good things had scams, this scam-riddled thing must therefore be good! (With all this horse poop there’s gotta be a pony in here.) No doubt subprime-mortgage-backed collateral debt obligations, Business Consulting International and Bernard L. Madoff Investment Securities LLC were just severely underpriced investment opportunities. Pirateat40: Bitcoin Savings & Trust Now that Pirateat40 closed down his operatations thanks to all the fud that was going on and growing on the forum, I expect everyone that spreads this fud, accused and insulted Pirate and the people that supported him to apologize.


pages: 172 words: 54,066

The End of Loser Liberalism: Making Markets Progressive by Dean Baker

Alan Greenspan, Asian financial crisis, banking crisis, Bear Stearns, Bernie Sanders, business cycle, collateralized debt obligation, collective bargaining, corporate governance, currency manipulation / currency intervention, Doha Development Round, financial innovation, full employment, Glass-Steagall Act, Home mortgage interest deduction, income inequality, inflation targeting, invisible hand, low interest rates, manufacturing employment, market clearing, market fundamentalism, medical residency, patent troll, pets.com, pirate software, price stability, public intellectual, quantitative easing, regulatory arbitrage, rent-seeking, Robert Shiller, Silicon Valley, too big to fail, transaction costs

Since they could sell these loans in the secondary market, they had little concern about the default risk.[37] The secondary market for subprime issuers was the major investment banks, which were eager to buy up as many mortgages as possible and resell them as mortgage-backed securities. These securities, as well as derivative instruments based on them, like collateralized debt obligations, could then be sold all over the world. The investment banks cared little about the quality of the mortgages they stuffed into these securities, since they knew they could get an investment-grade rating on almost anything they put together. (The bond rating agencies are paid by the issuers, so the agencies had a major financial stake in keeping Goldman Sachs, Citigroup, and other major investment banks happy.)


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: 549 words: 147,112

The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History by Kirsten Grind

"World Economic Forum" Davos, Alan Greenspan, asset-backed security, bank run, banking crisis, Bear Stearns, big-box store, call centre, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, financial engineering, fixed income, fulfillment center, Glass-Steagall Act, housing crisis, junk bonds, low interest rates, Maui Hawaii, money market fund, mortgage debt, naked short selling, NetJets, Savings and loan crisis, shareholder value, short selling, Shoshana Zuboff, Skype, too big to fail, Y2K

Three years later over half of the mortgages would be delinquent and a quarter would be in foreclosure.24 None of this turmoil seemed to faze WaMu’s Capital Markets Group, which had ballooned to 200 employees, with offices in New York, Los Angeles, Chicago, and Seattle. The division presented plans to package and sell Collateralized Debt Obligations (CDOs), a type of security whose popularity had grown over the previous five years and which was even more complicated than a regular mortgage-backed security. CDOs were packaged with any kind of debt, causing the authors of a later book about the financial crisis to describe them as “asset-backed securities on steroids.”25 WaMu wanted to package its CDOs with home equity loans, credit card debt, and slices of mortgage-backed securities.

See JPMorgan Chase Chase Home Finance, 104 Chicago, Illinois Jenne’s delinquent homeowner tour and, 171–72 WaMu branches in, 86, 108, 109 chief operating officer (COO), WaMu Pepper’s advice to Killinger about, 103–4 Rotella hired as first, 104–5, 106 Chrysler Financial, 235 Citigroup Dimon at, 230 as largest U.S. bank, 104 naked short selling protection for, 247 near failure of, 314, 314n OTS defense of oversight and, 317, 318 as potential buyer of WaMu, 3, 271, 282, 283, 289, 290, 298 TARP and, 315 Clark, Susie, 224 Clinton, Bill, 64, 113, 155 CNBC, 212, 267 CNN, 267 Coburn, Tom, 135 Cohen, H. Rodgin, 232, 233 Collateralized Debt Obligations (CDOs), 158, 295, 295n commercial real estate loans, 26–27 community banks: closure of, 319–20 Community Fulfillment Centers, WaMu, 142–43, 144–45, 144n, 159, 166 Community Reinvestment Act, 59 compensation Countrywide-WaMu competition and, 160 five emissaries–Killinger discussion about, 204–5 for fixed-rate loans/mortgages, 128, 129, 197 for Goldman Sachs board members, 164 for loan consultants, 117, 128–29, 188, 196, 197 at Long Beach Mortgage, 69–70, 78, 166–67 for Option ARMs sales, 117, 197 Pepper’s advice to Killinger about, 103–4 for real estate agents, 143 for salespeople, 140, 166–67 shareholders concerns about WaMu, 187–88 for subprime loans, 197 for WaMu board members, 164 for WaMu senior executives, 131, 187–88 See also specific person Congress, U.S.


pages: 585 words: 151,239

Capitalism in America: A History by Adrian Wooldridge, Alan Greenspan

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, agricultural Revolution, air freight, Airbnb, airline deregulation, Alan Greenspan, American Society of Civil Engineers: Report Card, Asian financial crisis, bank run, barriers to entry, Bear Stearns, Berlin Wall, Blitzscaling, Bonfire of the Vanities, book value, Bretton Woods, British Empire, business climate, business cycle, business process, California gold rush, Charles Lindbergh, cloud computing, collateralized debt obligation, collective bargaining, Corn Laws, Cornelius Vanderbilt, corporate governance, corporate raider, cotton gin, creative destruction, credit crunch, debt deflation, Deng Xiaoping, disruptive innovation, Donald Trump, driverless car, edge city, Elon Musk, equal pay for equal work, Everybody Ought to Be Rich, Fairchild Semiconductor, Fall of the Berlin Wall, fiat currency, financial deregulation, financial engineering, financial innovation, fixed income, Ford Model T, full employment, general purpose technology, George Gilder, germ theory of disease, Glass-Steagall Act, global supply chain, Great Leap Forward, guns versus butter model, hiring and firing, Ida Tarbell, income per capita, indoor plumbing, informal economy, interchangeable parts, invention of the telegraph, invention of the telephone, Isaac Newton, Jeff Bezos, jimmy wales, John Maynard Keynes: technological unemployment, Joseph Schumpeter, junk bonds, Kenneth Rogoff, Kitchen Debate, knowledge economy, knowledge worker, labor-force participation, land bank, Lewis Mumford, Louis Pasteur, low interest rates, low skilled workers, manufacturing employment, market bubble, Mason jar, mass immigration, McDonald's hot coffee lawsuit, means of production, Menlo Park, Mexican peso crisis / tequila crisis, Michael Milken, military-industrial complex, minimum wage unemployment, mortgage debt, Myron Scholes, Network effects, new economy, New Urbanism, Northern Rock, oil rush, oil shale / tar sands, oil shock, Peter Thiel, Phillips curve, plutocrats, pneumatic tube, popular capitalism, post-industrial society, postindustrial economy, price stability, Productivity paradox, public intellectual, purchasing power parity, Ralph Nader, Ralph Waldo Emerson, RAND corporation, refrigerator car, reserve currency, rising living standards, road to serfdom, Robert Gordon, Robert Solow, Ronald Reagan, Sand Hill Road, savings glut, scientific management, secular stagnation, Silicon Valley, Silicon Valley startup, Simon Kuznets, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, stem cell, Steve Jobs, Steve Wozniak, strikebreaker, supply-chain management, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, total factor productivity, trade route, transcontinental railway, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, union organizing, Unsafe at Any Speed, Upton Sinclair, urban sprawl, Vannevar Bush, vertical integration, War on Poverty, washing machines reduced drudgery, Washington Consensus, white flight, wikimedia commons, William Shockley: the traitorous eight, women in the workforce, Works Progress Administration, Yom Kippur War, young professional

The number of people being offered subprime mortgages accelerated even as vetting of those people collapsed: by 2004, more than a third of subprime mortgages were being offered without a meaningful assessment of borrowers’ financial status.5 Financial firms began to accelerate the pooling and packaging of subprime mortgages into securities. The firms had no difficulty finding buyers. Demand for subprime- mortgage-backed collateralized debt obligations was particularly heavy in Europe, thanks to attractive yields and a decline in foreclosure rates that set in in the late 1990s. Indeed, in a reverse of normal business practices, many securitizers actually encouraged mortgage lenders to produce new mortgages and then sell them on. At the same time, the Department of Housing and Urban Development pressed Fannie Mae and Freddie Mac to increase the number of poorer Americans who owned their own homes.

., 433 Case, Anne, 399 Cass, George, 114–15 catalogues, 140–42 cattle industry, 113, 115–17, 119 Cavaliers, 60 census, decennial, 13, 35, 195, 452 census data, 13, 451–52 Central Pacific Railroad, 16, 90, 114 Chandler, Alfred, 137, 139 chartered companies, 134–35 Chase Bank, 79 checks and balances, 157–58, 178–79 Cheney, Richard, 306, 368 Chernow, Ron, 131 Chetty, Raj, 393 Chevalier, Michel, 45 Chicago Board of Trade, 120, 340 Chicago Fire of 1871, 91 Chicago World’s Fair (1933), 418 child labor, 160 China, 370–71, 391, 448–49 exports (1971–2016), 370, 370–71 GDP, 448–49 gold reserves, 229 hypothetical Davos forum, 1–2, 447–48 infrastructure, 394, 395 trade, 346, 347, 370–71, 376–77, 416 “China shock,” 368, 370–71 Chinese Exclusion Act of 1882, 157 Chrysler, 313, 314 Chrysler Building (New York City), 195 Churchill, Winston, 126, 228–29, 239, 394 churn rate, 393 Cisco Systems, 347 Citicorp, 337 Citigroup, 382 Citizens Bank of Louisiana, 79 Civilian Conservation Corps (CCC), 244 Civil Rights Act of 1964, 303 Civil War, 9, 81–85, 161, 266, 267, 455 Clark, Edward, 48 Clark, Jim, 354 Clark, John Bates, 136 Clark, William, 168 class warfare, 259–60 Clayton Antitrust Act of 1914, 184 Cleveland, Grover, 152, 153–56, 158–59, 162, 165, 166, 173, 178, 325 Clifford, Clark, 277 Clifton, Robert, 116 climate, 33–34 Clinton, Bill, 331–32, 343, 344, 346, 367, 372, 406 Clinton, Hillary, 415 closing of the frontier, 179–81 Club of Rome, 300 coal, 10, 19, 49, 51, 55, 88, 127–28, 173, 229 Coca-Cola, 91, 215 Cody, William F., 110–11 Cogan, John, 306 Coinage Act of 1792, 32 Cold War, 279–80, 283–84 Colfax, Schuyler, 167 collateralized debt obligations (CDOs), 379 collective bargaining, 209, 250, 251, 255 college education, 281–82, 364, 365, 400–402 Colonial America, 5–6, 29–34 Colt, Samuel, 72 Columbus Buggy Company, 110 Committee for Industrial Organization (CIO), 261, 290 communism, 25, 193, 202, 277, 278, 279 Comstock Lode, 162 ConAgra, 324 condensed milk, 119–20 Confederate States of America, 69–90 Civil War and, 9, 81–85 collapse of agriculture, 83–86 farms and farm output, 85, 85–86 GDP, 81, 81–82 money stock and price level, 82–83, 83 role of slavery, 74–87 taxable property, 78, 78 conglomerates, 319–20, 335–36 consolidation, 144, 396–98 conspicuous consumption, 169–70 Constitution, U.S., 7–8, 25–26, 30–31, 32, 35, 40, 187 consumer debt, 216–17, 366 consumer electronics, 316–17 consumer research, 290–91 consumer society (consumerism), 92, 126, 295–96 containerization, 292–93 Continental Congress, 30, 38–39 continental currency, 38–39, 39 Coolidge, Calvin, 188, 189–92, 194, 330 Corn Laws, 232 corporate imperialism, 294–97 corporate restructurings, 335–36 corporate taxes, 329, 416 corporations, 133–34, 135–42, 156 advent of widespread ownership, 206–9 evolution of, 146–49 Great Merger Movement, 142–45 cotton, 73–79, 76, 86–89 Cotton, Calvin, 164 cotton gin, 15, 46, 74, 75 Coughlin, Charles, 204, 246 Council of Economic Advisers, 275, 302–3 Countrywide Financial, 378 cowboys, 113, 116 Cowen, Tyler, 4 Cox, Michael, 431 Crain, Nicole and Mark, 413 creative destruction, 12, 14–21, 209, 324, 389, 390 downside of, 21–23 to mass prosperity, 426–32 political resistance and, 24–26 problems with, 420–26 Crédit Mobilier, 167 credit rating agencies, 383–84 Criscuolo, Chiara, 397 Crissinger, Daniel, 235 Croly, Herbert, 178 Cross of Gold speech, 150–52 culture of growth, 43–57 Custer, George, 110 Dalrymple, Oliver, 115 DARPA (Defense Advanced Research Projects Agency), 349–50 Darrow, Clarence, 196, 256 Darwin, Charles, 163–64 data and methodology, 451–55 Data General, 353 David, Paul, 13, 35, 202, 403 Davis, Francis, 212 day traders, 340 Deaton, Angus, 399 DeBartolo, Edward J., 292 Debs, Eugene V., 154, 184, 186 debt.


pages: 462 words: 150,129

The Rational Optimist: How Prosperity Evolves by Matt Ridley

"World Economic Forum" Davos, 23andMe, Abraham Maslow, agricultural Revolution, air freight, back-to-the-land, banking crisis, barriers to entry, Bernie Madoff, British Empire, call centre, carbon credits, carbon footprint, carbon tax, Cesare Marchetti: Marchetti’s constant, charter city, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, colonial exploitation, colonial rule, Corn Laws, Cornelius Vanderbilt, cotton gin, creative destruction, credit crunch, David Ricardo: comparative advantage, decarbonisation, dematerialisation, demographic dividend, demographic transition, double entry bookkeeping, Easter island, Edward Glaeser, Edward Jenner, electricity market, en.wikipedia.org, everywhere but in the productivity statistics, falling living standards, feminist movement, financial innovation, flying shuttle, Flynn Effect, food miles, Ford Model T, Garrett Hardin, Gordon Gekko, greed is good, Hans Rosling, happiness index / gross national happiness, haute cuisine, hedonic treadmill, Herbert Marcuse, Hernando de Soto, income inequality, income per capita, Indoor air pollution, informal economy, Intergovernmental Panel on Climate Change (IPCC), invention of agriculture, invisible hand, James Hargreaves, James Watt: steam engine, Jane Jacobs, Jevons paradox, John Nash: game theory, joint-stock limited liability company, Joseph Schumpeter, Kevin Kelly, Kickstarter, knowledge worker, Kula ring, Large Hadron Collider, Mark Zuckerberg, Medieval Warm Period, meta-analysis, mutually assured destruction, Naomi Klein, Northern Rock, nuclear winter, ocean acidification, oil shale / tar sands, out of africa, packet switching, patent troll, Pax Mongolica, Peter Thiel, phenotype, plutocrats, Ponzi scheme, precautionary principle, Productivity paradox, profit motive, purchasing power parity, race to the bottom, Ray Kurzweil, rent-seeking, rising living standards, Robert Solow, Silicon Valley, spice trade, spinning jenny, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, supervolcano, technological singularity, Thales and the olive presses, Thales of Miletus, the long tail, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, Tragedy of the Commons, transaction costs, ultimatum game, upwardly mobile, urban sprawl, Vernor Vinge, Vilfredo Pareto, wage slave, working poor, working-age population, world market for maybe five computers, Y2K, Yogi Berra, zero-sum game

(That said, there is little doubt that finance is one area of human activity in which too much innovation can be a bad thing. As Adair Turner has put it, whereas the loss of the knowledge of how to make a vaccine would harm human welfare, ‘if the instructions for creating a CDO squared [a collateral debt obligation of collateral debt obligations] had somehow been mislaid, we will I think get along quite well without it.’) See Turner, A. 2009. ‘The Financial Crisis and the Future of Financial Regulation’. Inaugural Economist City Lecture, 21 January 2009. Financial Services Authority. p. 254 ‘Lewis Mandell discovered’.


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

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. CDOs were derivatives based on repackaged middle-ranking “mezzanine” tiers of other securitized mortgage deals. By combining them together and tranching, you could make a large pool of BBB assets yield further tranches of AAA securities. Once you had done that you could then go one step further.

., 131, 135, 136, 192 supports Paulson’s bailout plans, 173 UN General Assembly address of, 1–2 Bush, Jeb, 568 Bush administration budget deficits of, 27–29, 30, 36, 282–83 defense and security spending during, 28 G20 formation and, 262–63 loses support of congressional Republicans, 170 tax cuts passed by, 27–28 BZW, 83 Cable, Vince, 273 California, 65–66 CalPERS, 209 Cameron, David, 350, 354, 417, 538, 540, 543, 545, 546 Canada, 594 Cantor, Eric, 182–83, 353, 568 capital controls, 475 capital flows, 11 collapse in, 2008-2009, 162–63 cross-border, in eurozone, 103–5 into developing economies, 473–74 into Eastern Europe, 126–28 into Orban’s Hungary, 492 into Ukraine, 493–94 Capital in the Twenty-First Century (Piketty), 462 Capital Purchase Program facility, 196–97 capital ratios, 85, 303, 312 capital requirements, 84–88 Basel I accord, 85 Basel II accord, 86 Basel III requirements, 313–14 Dodd-Frank Act requirements, 307 Carney, Mark, 402, 404, 555 Carrier, 577 Carville, James, 29 Case, Anne, 457 CDOs. See collateralized debt obligations (CDOs) CDS. See credit default swaps (CDS) CDU, 97, 113, 287, 329, 430, 512, 534 Central Document No. 18 (Chinese Communist Party), 243–44, 247 central banks Asian central bank swap arrangements, 483 dollar reserves of Europeans, 89–90 ECB swap lines with Sweden and Denmark, 229–30 Fed swap lines provided to, 9–10, 11–12, 210–15, 220–21 independence of, 10–11 temporary bilateral swap arrangements converted to standing arrangements, 482–83 See also Bank of England; European Central Bank (ECB); Federal Reserve; specific central banks centrist liberalism, 17, 18, 20, 25, 37, 278, 291, 295, 348, 351, 353, 445, 451, 459, 533, 535 Chaffetz, Jason, 392 Chamber of Commerce, American 469, 572 Chapel Funding LLC, 75 Cheney, Dick, 36 China, 4, 30–32, 118, 137, 600–607, 609, 611 allows currency to appreciate, 39–40 calls for new Bretton Woods arrangement, 266–68 consumption-boosting measures, 246–47 domestic investment of, 242 Eurogroup-Syriza debt restructuring confrontation and, 524 exchange rate 32, 33–34, 601–3 financial crisis of 2008 and, 7, 242–54 fiscal stimulus plan, 243–46, 247–51 foreign currency reserves of, 33–34, 602, 605–6 global trade collapse and, 242 growth of, 31–32 GSE exposure of, 73, 239, 240–41 health insurance expansion by, 244–45 high-speed rail network construction, 245 trade balance of, 33, 75, 241–42, 253-54 joins WTO, 31 military spending of, 252–53 PBoC, 249, 267, 543, 600, 612 reserves of, 604, 612 Russia and, 509 sovereign wealth fund of, 35 unemployment in, 242–43 US Treasury purchases of, 30, 241, 392 yuan panic of 2015, 601–8 China Construction Bank, 249 CHOICE Act, 588–90 Chopra, Ajai, 364, 368, 382–83 Chrysler, 157–58, 449 Citigroup, 54, 55, 59–60, 60, 69, 73, 88, 170, 292, 316 bonuses paid by, 306 breakup of, considered by Obama administration, 295–96 capital injections, 197, 199 exits TARP program, 300 liquidity provided to, 207, 209, 217 stress test of, 299–300 City of London, 6, 79, 80–84, 540–45 Brexit and, 549, 550, 556 financial crisis of 2008 and, 541 passporting agreements and, 548–49, 558 post-crisis state of financial industry in, 541–42 renmimbi trading in, 542–43 transatlantic financial system, role in, 79–84 Clinton, Bill, 25, 29 Clinton, Hillary, 486, 565–66, 567–68, 577 Clinton administration budget deficits inherited by, 27, 29 Chinese entrance into WTO and, 31 deregulation under, 68, 82 legacy of, for Democrats, 25–27, 29, 36–37, 199–201, 281, 284 relations with European centerists, 98 Club for Growth, 174 CMOs.

See credit default swaps (CDS) CDU, 97, 113, 287, 329, 430, 512, 534 Central Document No. 18 (Chinese Communist Party), 243–44, 247 central banks Asian central bank swap arrangements, 483 dollar reserves of Europeans, 89–90 ECB swap lines with Sweden and Denmark, 229–30 Fed swap lines provided to, 9–10, 11–12, 210–15, 220–21 independence of, 10–11 temporary bilateral swap arrangements converted to standing arrangements, 482–83 See also Bank of England; European Central Bank (ECB); Federal Reserve; specific central banks centrist liberalism, 17, 18, 20, 25, 37, 278, 291, 295, 348, 351, 353, 445, 451, 459, 533, 535 Chaffetz, Jason, 392 Chamber of Commerce, American 469, 572 Chapel Funding LLC, 75 Cheney, Dick, 36 China, 4, 30–32, 118, 137, 600–607, 609, 611 allows currency to appreciate, 39–40 calls for new Bretton Woods arrangement, 266–68 consumption-boosting measures, 246–47 domestic investment of, 242 Eurogroup-Syriza debt restructuring confrontation and, 524 exchange rate 32, 33–34, 601–3 financial crisis of 2008 and, 7, 242–54 fiscal stimulus plan, 243–46, 247–51 foreign currency reserves of, 33–34, 602, 605–6 global trade collapse and, 242 growth of, 31–32 GSE exposure of, 73, 239, 240–41 health insurance expansion by, 244–45 high-speed rail network construction, 245 trade balance of, 33, 75, 241–42, 253-54 joins WTO, 31 military spending of, 252–53 PBoC, 249, 267, 543, 600, 612 reserves of, 604, 612 Russia and, 509 sovereign wealth fund of, 35 unemployment in, 242–43 US Treasury purchases of, 30, 241, 392 yuan panic of 2015, 601–8 China Construction Bank, 249 CHOICE Act, 588–90 Chopra, Ajai, 364, 368, 382–83 Chrysler, 157–58, 449 Citigroup, 54, 55, 59–60, 60, 69, 73, 88, 170, 292, 316 bonuses paid by, 306 breakup of, considered by Obama administration, 295–96 capital injections, 197, 199 exits TARP program, 300 liquidity provided to, 207, 209, 217 stress test of, 299–300 City of London, 6, 79, 80–84, 540–45 Brexit and, 549, 550, 556 financial crisis of 2008 and, 541 passporting agreements and, 548–49, 558 post-crisis state of financial industry in, 541–42 renmimbi trading in, 542–43 transatlantic financial system, role in, 79–84 Clinton, Bill, 25, 29 Clinton, Hillary, 486, 565–66, 567–68, 577 Clinton administration budget deficits inherited by, 27, 29 Chinese entrance into WTO and, 31 deregulation under, 68, 82 legacy of, for Democrats, 25–27, 29, 36–37, 199–201, 281, 284 relations with European centerists, 98 Club for Growth, 174 CMOs. See collateralized mortgage obligations (CMOs) Coelho, Pedro Passos, 396, 535 Cohn, Gary, 579 collateralized debt obligations (CDOs), 56 collateralized mortgage obligations (CMOs), 49 collateral rehypothecation, 81–82 Collins, Susan, 307 commercial banks, 54 Commercial Paper Funding Facility, 209 Commerzbank, 171, 198 Committee of European Banking Supervisors, 315 commodity price collapse.


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

The very idea of such a list flies in the face of nearly every millennial notion about good regulatory practice. But Graham defends it thus: “Since the selection of high-grade bonds has been shown to be in good part a process of exclusion, it lends itself reasonably well to the application of definite rules and standards designed to disqualify unsuitable issues.” (p. 169) No collateralized debt obligations stocked with subprime mortgages for the father of value investing! The 1930s ushered in a revolution in financial disclosure. The new federal securities acts directed investor-owned companies to brief their stockholders once a quarter as well as at year-end. But the new standards were not immediately applicable to all public companies, and more than a few continued doing business the old-fashioned way, with their cards to their chests.

Into the Future Few books can be read nearly 70 years after their publication with the reasonable expectation that everything they say—and the way they say it—will be thoroughly up-to-date. General wisdom and occasional nuggets of insight are usually the most that can be hoped for. Anyone wondering how the 1940 edition of Security Analysis comes through in this regard needs only consider Graham and Dodd’s discussion of mortgage investing in the light of the subprime and collateralized debt obligation (CDO) experience of 2007: During the great and disastrous development of the real estate mortgage-bond business between 1923 and 1929, the only datum customarily presented to support the usual bond offering—aside from an estimate of future earnings—was a statement of the appraised value of the property, which almost invariably amounted to some 66% in excess of the mortgage issue.

What if their limited partners are not satisfied with results and don’t re-up? What is the correct P/E for a business model facing such risk of destruction? Investment in these companies would seem the very embodiment of the term “speculation.” Similarly, what would Graham and Dodd make of today’s collateralized debt obligations that have been bought, not based on due diligence but on the AAA rubber stamp from a credit rating agency? Or lenders rushing to scoop up “covenant-light,” “pay-in-kind” loans used in 90%-levered capital structures? Institutional appetite for hedge funds and “2-and-20” fees? Investment theses built around ever-rising valuations and continued “global liquidity”?


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

“We are one of the last to get our money out of Rhineland,” Röthig told Risk magazine, “but we’re so confident of our ability to advise it in the right way that we still make a profit.” Röthig further explained that IKB had invested in special tools to analyze the complicated bonds, called collateralized debt obligations (CDOs), that Wall Street was now peddling. “I would say it has proven a worthwhile investment because we have not faced a loss so far,” he said. In February 2004 all this seemed like a good idea—so good that lots of other German banks copied IKB, and either rented IKB’s conduit or set up their own offshore vehicles to buy subprime mortgage bonds.


pages: 261 words: 10,785

The Lights in the Tunnel by Martin Ford

Alan Greenspan, Albert Einstein, Bear Stearns, Bill Joy: nanobots, Black-Scholes formula, business cycle, call centre, carbon tax, cloud computing, collateralized debt obligation, commoditize, Computing Machinery and Intelligence, creative destruction, credit crunch, double helix, en.wikipedia.org, factory automation, full employment, income inequality, index card, industrial robot, inventory management, invisible hand, Isaac Newton, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, knowledge worker, low skilled workers, mass immigration, Mitch Kapor, moral hazard, pattern recognition, prediction markets, Productivity paradox, Ray Kurzweil, Robert Solow, Search for Extraterrestrial Intelligence, Silicon Valley, Stephen Hawking, strong AI, technological singularity, the long tail, Thomas L Friedman, Turing test, Vernor Vinge, War on Poverty, warehouse automation, warehouse robotics

As housing prices continued to climb during the bubble, the subprime loans were packaged into mortgage-backed securities so that they could be traded like bonds. This had become standard practice for mortgages. However, in addition to that, new types of derivatives were created based on the packaged subprime loans. Most notable were “collateralized debt obligations” (or CDOs), which attempted to siphon off the lowest risk loans and repackage them into a security that could be marketed as a high quality investment. These new derivative securities were then sold to banks and financial institutions all over the world, with the understanding that they were very low risk investments.


pages: 256 words: 60,620

Think Twice: Harnessing the Power of Counterintuition by Michael J. Mauboussin

affirmative action, Alan Greenspan, asset allocation, Atul Gawande, availability heuristic, Benoit Mandelbrot, Bernie Madoff, Black Swan, butter production in bangladesh, Cass Sunstein, choice architecture, Clayton Christensen, cognitive dissonance, collateralized debt obligation, Daniel Kahneman / Amos Tversky, deliberate practice, disruptive innovation, Edward Thorp, experimental economics, financial engineering, financial innovation, framing effect, fundamental attribution error, Geoffrey West, Santa Fe Institute, George Akerlof, hindsight bias, hiring and firing, information asymmetry, libertarian paternalism, Long Term Capital Management, loose coupling, loss aversion, mandelbrot fractal, Menlo Park, meta-analysis, money market fund, Murray Gell-Mann, Netflix Prize, pattern recognition, Performance of Mutual Funds in the Period, Philip Mirowski, placebo effect, Ponzi scheme, power law, prediction markets, presumed consent, Richard Thaler, Robert Shiller, statistical model, Steven Pinker, systems thinking, the long tail, The Wisdom of Crowds, ultimatum game, vertical integration

The promise of Li’s equation was that it could, with a single number, measure the likelihood that two or more assets within a portfolio would default at the same time. This opened the floodgates for new products, as financial engineers had a method for quantifying the safety or riskiness of a security that bundled lots of assets. For example, an investment bank could bundle corporate bonds into a pool, known as a collateralized debt obligation, and summarize the default correlation with Li’s equation rather than worry about the details of how each corporate bond within the pool would behave. While market participants described the formula as “beautiful, simple, and tractable,” it had a fatal flaw because correlations change.


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

I should add that assigning a specific industry to a particular analyst had not been part of the company’s original organizational structure (and is not necessarily in the DNA of all hedge funds). The process by which we became specialized by industry came about around 2001 and solidified in the ensuing years; we had been industry agnostics until then. That year marked Canyon’s foray into a new business with the issuance of a collateralized debt obligation, or CDO, a securitization product that I will come back to in a few chapters. Suffice it to say for now that it requires assembling a large portfolio of bonds, diversified by industry and companies. Hence, the head of research ascribed a handful of industries to each analyst with the mandate to find the best bonds for the CDO.


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

It would be very much like taking out an insurance policy on a neighbor’s house because his negligent smoking habits indicated that sooner or later the house would burn down. As an insurance company, AIG witnessed a rush of contracts from investors who wanted to insure their investments in securitized mortgages. With sophisticated computer models designed to estimate risk, this conservative firm plunged into the turbulent waters of collateralized debt obligations on its way to almost drowning. In a 2004 coda, the Securities and Exchange Commission unanimously voted to exempt America’s biggest investment banks—those with assets greater than five billion dollars—from a regulation that limited the amount of debt they could take on.3 The rest, as they say, is history.

The market in futures not only is volatile but must always cope with this uncertainty.6 And in the case of the securitized mortgages, the number of claimants grew exponentially. The American Dialect Society voted “subprime” the word of 2007.7 During the euphoria over rising housing prices, the lexicon of global finance migrated out of Wall Street into daily newspapers, where you could find references to option adjustable interest rate mortgages, collateralized debt obligations, interest rate swaps, swaptions, and special purpose vehicles! Hedge funds grew fivefold in the first decade of the twenty-first century, attracting managers of pension money, university endowments, and municipal investments, all now suffering with the retraction. Those people who ran hedge funds, established derivatives, and created option adjustable rate mortgages had built a house of cards with mortgage paper.


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

What he did not know was that Merrill Lynch, which had more than doubled its balance sheet to $1 trillion in assets over the previous two years, had been mortally wounded by the wipeout of the subprime mortgage market. O’Neal only tuned in to the problem in late July, after the implosion of two hedge funds run by a competing firm, Bear Stearns. The funds had been gigantic, multi-billion-dollar bets on collateralized debt obligations—CDOs, for short—which were securities constructed from subprime mortgages. Following the collapse of the Bear Stearns funds, other Wall Street firms, including Merrill Lynch, scoured their own balance sheets for any signs of exposure to the subprime market. Then on August 9, 2007, a French bank, BNP Paribas, announced it would suspend the valuation of three subprime mortgage–based investment funds because liquidity in the market had disappeared.

There were two forces driving the increased losses. Like other large Wall Street investment banks, Merrill Lynch held hundreds of billions of dollars’ worth of assets on its balance sheet. But the problem with Merrill Lynch’s balance sheet was that it contained more than $30 billion of collateralized debt obligations and billions more in other arcane investments, the underlying value of which was difficult to determine. The CDOs may have been worth an aggregate $30 billion at the time they were securitized, but there was no way they were still worth that amount. As 2007 came to a close, the U.S. real estate market was in free fall.


pages: 552 words: 168,518

MacroWikinomics: Rebooting Business and the World by Don Tapscott, Anthony D. Williams

"World Economic Forum" Davos, accounting loophole / creative accounting, airport security, Andrew Keen, augmented reality, Ayatollah Khomeini, barriers to entry, Ben Horowitz, bioinformatics, blood diamond, Bretton Woods, business climate, business process, buy and hold, car-free, carbon footprint, carbon tax, Charles Lindbergh, citizen journalism, Clayton Christensen, clean water, Climategate, Climatic Research Unit, cloud computing, collaborative editing, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, commoditize, corporate governance, corporate social responsibility, creative destruction, crowdsourcing, death of newspapers, demographic transition, digital capitalism, digital divide, disruptive innovation, distributed generation, do well by doing good, don't be evil, en.wikipedia.org, energy security, energy transition, Evgeny Morozov, Exxon Valdez, failed state, fault tolerance, financial innovation, Galaxy Zoo, game design, global village, Google Earth, Hans Rosling, hive mind, Home mortgage interest deduction, information asymmetry, interchangeable parts, Internet of things, invention of movable type, Isaac Newton, James Watt: steam engine, Jaron Lanier, jimmy wales, Joseph Schumpeter, Julian Assange, Kevin Kelly, Kickstarter, knowledge economy, knowledge worker, machine readable, Marc Andreessen, Marshall McLuhan, mass immigration, medical bankruptcy, megacity, military-industrial complex, mortgage tax deduction, Netflix Prize, new economy, Nicholas Carr, ocean acidification, off-the-grid, oil shock, old-boy network, online collectivism, open borders, open economy, pattern recognition, peer-to-peer lending, personalized medicine, radical decentralization, Ray Kurzweil, RFID, ride hailing / ride sharing, Ronald Reagan, Rubik’s Cube, scientific mainstream, shareholder value, Silicon Valley, Skype, smart grid, smart meter, social graph, social web, software patent, Steve Jobs, synthetic biology, systems thinking, text mining, the long tail, the scientific method, The Wisdom of Crowds, transaction costs, transfer pricing, University of East Anglia, urban sprawl, value at risk, WikiLeaks, X Prize, Yochai Benkler, young professional, Zipcar

Yet in a deregulated marketplace, you can hide this inconvenient fact by offering the NINJA customer a nice line of credit, so that they could make their mortgage payments and avoid going into default, at least for a while. Then Wall Street’s investment bankers step in with what sounds like an ingenious method for getting these risky mortgages off the bank’s books: you bundle the mortgages up with a bunch of other similar mortgages into a CDO—a collateralized debt obligation—that will be sold to investors for the promised cash flows or even for the potential profit on the underlying assets, the mortgaged houses. However, a lack of transparency about the underlying assets and associated risks makes these financial products hard to understand and evaluate, even for the financial advisers who retail them.

Going forward, the mathematics behind the value and risk calculations for new financial instruments should be open and vetted by a crowd of experts, applying the wisdom of many to the problem. They should know, for example, whether the VaR (Value at Risk) analysis is based on information from only a couple of years, which would not cover the consequences of a once-in-a-generation event. The underlying data and the algorithms for complex derivatives such as collateralized debt obligations should be placed on the Internet, where investors could “fly over” and “drill down” into an instrument’s underlying assets. With full data, they could readily graph the payment history and correlate information such as employment histories, recent appreciations (or depreciations), location, neighborhood pricings, delinquency patterns, and recent neighborhood offer and sales activities.


pages: 526 words: 160,601

A Generation of Sociopaths: How the Baby Boomers Betrayed America by Bruce Cannon Gibney

1960s counterculture, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, AlphaGo, American Society of Civil Engineers: Report Card, Bear Stearns, Bernie Madoff, Bernie Sanders, Black Lives Matter, bond market vigilante , book value, Boston Dynamics, Bretton Woods, business cycle, buy and hold, carbon footprint, carbon tax, Charles Lindbergh, classic study, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate personhood, Corrections Corporation of America, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, dark matter, DeepMind, Deng Xiaoping, Donald Trump, Downton Abbey, Edward Snowden, Elon Musk, ending welfare as we know it, equal pay for equal work, failed state, financial deregulation, financial engineering, Francis Fukuyama: the end of history, future of work, gender pay gap, gig economy, Glass-Steagall Act, Haight Ashbury, Higgs boson, high-speed rail, Home mortgage interest deduction, Hyperloop, illegal immigration, impulse control, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, junk bonds, Kitchen Debate, labor-force participation, Long Term Capital Management, low interest rates, Lyft, Mark Zuckerberg, market bubble, mass immigration, mass incarceration, McMansion, medical bankruptcy, Menlo Park, Michael Milken, military-industrial complex, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, Neil Armstrong, neoliberal agenda, Network effects, Nixon triggered the end of the Bretton Woods system, obamacare, offshore financial centre, oil shock, operation paperclip, plutocrats, Ponzi scheme, price stability, prosperity theology / prosperity gospel / gospel of success, quantitative easing, Ralph Waldo Emerson, RAND corporation, rent control, ride hailing / ride sharing, risk tolerance, Robert Shiller, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, school choice, secular stagnation, self-driving car, shareholder value, short selling, side project, Silicon Valley, smart grid, Snapchat, source of truth, stem cell, Steve Jobs, Stewart Brand, stock buybacks, survivorship bias, TaskRabbit, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, War on Poverty, warehouse robotics, We are all Keynesians now, white picket fence, Whole Earth Catalog, women in the workforce, Y2K, Yom Kippur War, zero-sum game

The Boomers’ ersatz neoliberalism emphasizes consumption over production, dogmatic deregulation instead of thoughtful oversight, permanent deficits instead of fiscal prudence, and capitalism liberated from the bounds of the state, though always free to replenish itself at the federal trough in the event “sub-prime mortgages,” “junk bonds,” or “collateralized debt obligations” somehow lived up to their names. The heart of the book then details the implementation of the Boomers’ sociopathic agenda and its consequences. It starts with the wholly democratic means by which the revolution was achieved, courtesy of the Boomers’ vast numbers, which made the generation an outright majority of the electorate by the early 1980s.

Enron’s collapse in 2001 should have served as a warning about these practices. Instead, OBS liabilities grew dramatically, spreading to the center of American finance, now totaling many trillions, though it is impossible to calculate (which is part of the point).11 Of great utility to the practice was the creation of special derivatives—including collateralized debt obligations, swaps, structured products, and so on—that purported to allow the precise division and reallocation of risk for every taste and budget but which in actuality allowed for huge amounts to be wagered against very little capital, through incredibly complex means, on balance sheet and off.


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

The shock in the United States in the 1990s was the revolution in information technology and the sharp declines in the costs of communication. The shock in the US housing market in the 2002 was securitization which involved the packaging of mortgages with similar attributes into bundles that provided the basis for issuing collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs); the amount of money available for purchases of homes increased sharply. The shock in Iceland after 2000 was the privatization of the banks. At times the shock has been outbreak of war or the end of a war, a bumper harvest or a crop failure, the widespread adoption of an invention with pervasive effects – canals, railroads.

Securitization accelerated after 2000; the second round involved ‘slicing and dicing’ groups of CMOs into four or five different tranches that differed in terms of whether they had the first, last or an intermediate priority to the interest income of the CMOs. The tranches with the first priority to the interest income of the CMOs were placed in one trust, the tranches with the second priority to the interest income were placed in a second trust, and so on. Conservative investors could buy the CDOs (collateralized debt obligations) that had the first claim to the interest income because they were the least risky, while investors that wanted higher yields could buy those that had lower priority to the interest income of the CMOs – and hence were riskier. A priori it would seem that the CDOs that had the first claim to the income of the CMOs would be less risky than the CMOs, while the CDOs that had the last claim to the their income would be riskier.


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

When investigating complex fraud perpetrated by sophisticated, well-advised actors able to bury disclosures in mountains of paper, anything less than timely and full commitment won’t be enough. Increasingly, it looked like this third possibility was the sad answer to our question. 6: WHAT HAD GONE WRONG? FINALLY, IN APRIL 2010, the SEC announced that it had a case. It filed charges against Goldman Sachs for the Abacus collateralized debt obligation. The case alleged that Goldman had failed to disclose the involvement of a hedge fund (which intended to short, or bet against, the security) in the portfolio selection process. This news gave us hope that the SEC was back on the job and that even the most powerful on Wall Street would be held accountable.


pages: 272 words: 64,626

Eat People: And Other Unapologetic Rules for Game-Changing Entrepreneurs by Andy Kessler

23andMe, Abraham Maslow, Alan Greenspan, Andy Kessler, bank run, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bob Noyce, bread and circuses, British Empire, business cycle, business process, California gold rush, carbon credits, carbon footprint, Cass Sunstein, cloud computing, collateralized debt obligation, collective bargaining, commoditize, computer age, Cornelius Vanderbilt, creative destruction, disintermediation, Douglas Engelbart, Dutch auction, Eugene Fama: efficient market hypothesis, fiat currency, Firefox, Fractional reserve banking, George Gilder, Gordon Gekko, greed is good, income inequality, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, Joseph Schumpeter, junk bonds, Kickstarter, knowledge economy, knowledge worker, Larry Ellison, libertarian paternalism, low skilled workers, Mark Zuckerberg, McMansion, Michael Milken, Money creation, Netflix Prize, packet switching, personalized medicine, pets.com, prediction markets, pre–internet, profit motive, race to the bottom, Richard Thaler, risk tolerance, risk-adjusted returns, Silicon Valley, six sigma, Skype, social graph, Steve Jobs, The Wealth of Nations by Adam Smith, transcontinental railway, transfer pricing, vertical integration, wealth creators, Yogi Berra

It’s nerve-wracking, everyone second-guessing themselves as they get whacked by the market again and again. But the stock market performs the most important function in a capitalist system—it mercilessly allocates capital to those that deserve it and starves those that don’t. That’s pretty much it. IPOs and options and collateralized debt obligation derivatives are all, well, derivatives of this allocation task. It’s almost always government policy that misallocates capital and causes markets to go haywire. Be forewarned, there is no such thing as a perfect market, but you can get pretty close. Free Radicals should embrace markets.


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

21 Three out of the four could not even be bothered to actually address the posited question, so concerned were they to foster the impression that they personally had not been caught with their pants down by the crisis. The fourth thought that simply augmenting his existing textbook with another chapter defining collateralized debt obligations and some simple orthodox finance theory would do the trick. Things got even worse in the subsequent year, with figures such as Alan Blinder and John B. Taylor touting new editions of their undergraduate macrotheory textbooks by reassuring instructors that the crisis did not require them to change anything they had been teaching for years.22 No second thoughts for us foxes, thank you.

The critique of the role of science studies in helping reify this interpretation of financial innovation can be found in Engelen et al., “Reconceptualizing Financial Innovation.” 42 I refer here to a paper by Donald MacKenzie (“The Credit Crisis as a Problem in the Sociology of Knowledge”), who argues that a shift in cultures of evaluation within the ratings agencies, from older corporate collateralized debt obligations to the newer CDOs composed of mortgage-backed securities, accounted for a number of “slips” when it came to evaluation of the dangers posed by the latter. Of course, MacKenzie realized that the narrative of “technological error” seems on its face implausible (pp. 1830–32); but by focusing so intently upon the narrowly confined world of the low-level analysts and traders, he misses most of the action surveyed in this volume. 43 Shiller, Finance and the Good Society, p. 13. 44 In Norris, “The Crisis Is Over, but Where’s the Fix?”


pages: 193 words: 19,478

Memory Machines: The Evolution of Hypertext by Belinda Barnet

augmented reality, Benoit Mandelbrot, Bill Duvall, British Empire, Buckminster Fuller, Charles Babbage, Claude Shannon: information theory, collateralized debt obligation, computer age, Computer Lib, conceptual framework, Douglas Engelbart, Douglas Engelbart, game design, hiring and firing, Howard Rheingold, HyperCard, hypertext link, Ian Bogost, information retrieval, Internet Archive, John Markoff, linked data, mandelbrot fractal, Marshall McLuhan, Menlo Park, nonsequential writing, Norbert Wiener, Project Xanadu, publish or perish, Robert Metcalfe, semantic web, seminal paper, Steve Jobs, Stewart Brand, technoutopianism, Ted Nelson, the scientific method, Vannevar Bush, wikimedia commons

The current state of networked, computational media may be as ugly and benighted as Nelson says (some of us remain thickly optimistic), but it is hard to see here the failure of a single vision. Many other culprits could be named. My list includes business and academic interests who imagine that intellect can be property; the financial illusionists behind collateralized debt obligations, who pervert hypertext into cryptomoney; and of course, an undiscerning, terminally amused consumer culture whose idea of a good time is a status update or a cow click (Bogost 2010). If anyone has failed, it’s surely the rest of us, who sit some distance from the edge of revelation, blinking into the light.


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

Snake oil vendors, of course, are as old as history, and in previous real estate bubbles unwitting buyers ended up with swampland and stacks of false deeds. But this time the power of modern computing fueled fraud at a scale unequaled in history. 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.


pages: 275 words: 77,017

The End of Money: Counterfeiters, Preachers, Techies, Dreamers--And the Coming Cashless Society by David Wolman

addicted to oil, Bay Area Rapid Transit, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, bitcoin, Bretton Woods, carbon footprint, cashless society, central bank independence, collateralized debt obligation, corporate social responsibility, credit crunch, cross-subsidies, Diane Coyle, fiat currency, financial innovation, floating exchange rates, German hyperinflation, greed is good, Isaac Newton, Kickstarter, M-Pesa, Mahatma Gandhi, mental accounting, mobile money, Money creation, money: store of value / unit of account / medium of exchange, offshore financial centre, P = NP, Peter Thiel, place-making, placebo effect, Ponzi scheme, Ronald Reagan, seigniorage, Silicon Valley, special drawing rights, Steven Levy, the payments system, transaction costs, WikiLeaks

Despite money’s dull textbook definition—medium of exchange, unit of account, store of value, and method of deferred payment—it is by way of cash that we first come to have any understanding of or relationship to this civilization-powering invention. When the word money reaches the ears, even Wall Streeters who hawk collateralized debt obligations will, at some level, picture a pile of Benjamins. (The language of money, by the way, is easily garbled. You may stop at the ATM to get some cash, but when you read in the Wall Street Journal that Intel or Boeing has a lot of cash, that obviously doesn’t mean physical notes and coins.


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

During this time, the fund’s managers, Ralph Cioffi and Matthew Tannin, purported to be as shocked as anybody at the bad results. They had invested primarily in high-quality assets that were ranked AAA by ratings agencies. Sure, they had some exposure to subprime mortgages through sophisticated securities known as CDOs, or collateralized debt obligations. But their risk models revealed those investments to be safe, and had generated positive returns for several years. In fact, the managers had never experienced a down month until now. Cioffi, a two-decade Bear veteran and father of four, was beloved within the firm. A hardworking mortgage salesman, he had pleaded for the chance to open his own fund, and after a six-month trial that had led to impressive returns, Bear agreed.


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

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. But like Easter eggs hidden in sundry parts of the garden, it wasn’t long before everyone forgot where they were hidden—or precisely what color or shape the eggs were.


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

In her book ECONned, Yves Smith—who spent much of her career on Wall Street, including a stint at Goldman—extensively details the fraudulent accounting practices that preceded the downfall of Lehman Brothers and other banks. As she notes, “What went on at Lehman and AIG, as well as the chicanery in the CDO [collateralized debt obligation] business, by any sensible standard is criminal.” Smith points out in particular the proliferation of the kind of pay-for-play that was exposed in the JPMorgan/Jefferson County case discussed earlier in this chapter. Municipal finance has long been a cesspool, but blatantly corrupt behavior was, not that long ago, for the most part limited to backwaters and bucket-shop operators.


Raw Data Is an Oxymoron by Lisa Gitelman

23andMe, collateralized debt obligation, computer age, continuous integration, crowdsourcing, disruptive innovation, Drosophila, Edmond Halley, Filter Bubble, Firefox, fixed income, folksonomy, Google Earth, Howard Rheingold, index card, informal economy, information security, Isaac Newton, Johann Wolfgang von Goethe, knowledge worker, Large Hadron Collider, liberal capitalism, lifelogging, longitudinal study, Louis Daguerre, Menlo Park, off-the-grid, optical character recognition, Panopticon Jeremy Bentham, peer-to-peer, RFID, Richard Thaler, Silicon Valley, social graph, software studies, statistical model, Stephen Hawking, Steven Pinker, text mining, time value of money, trade route, Turing machine, urban renewal, Vannevar Bush, WikiLeaks

Along the same lines, Matthew Fuller argues that surveillance is no longer about visual apprehension but is instead a “socio-algorithmic process” that captures and calculates “flecks of identity,” the data trails of our everyday actions, such as our browsing history, financial transactions, and our movements as they are recorded by GPS coordinates on our mobile devices and RFID tags in passports and identity cards.30 The “flecks” concept emerges in some respect from Gilles Deleuze’s outline of the emergence of the “dividual” in the context of the control society; if the individuated self was both product and figure of modernity, “dividuals” are rather fragmented and dispersed data bodies. They are, as Tiziana Terranova explains, “what results from the decomposition of individuals into data clouds subject to automated integration and disintegration.”31 Put another way, they are the CDOs (collateralized debt obligations) of the data market, in which bits and pieces of a supposed composite profile, which is itself an operative fiction, are sliced and diced into different tranches, such that a stable referential link to a singular entity becomes lost in a sea of user intent data. The noworthodox market position is that the value of data does not depend on its connection 127 128 Rita Raley to an actual person, until expedience requires that a claim be made for the truth of that data.


pages: 251 words: 76,128

Borrow: The American Way of Debt by Louis Hyman

Alan Greenspan, asset-backed security, barriers to entry, big-box store, business cycle, cashless society, collateralized debt obligation, credit crunch, deindustrialization, deskilling, diversified portfolio, financial engineering, financial innovation, Ford Model T, Ford paid five dollars a day, Home mortgage interest deduction, housing crisis, income inequality, low interest rates, market bubble, McMansion, mortgage debt, mortgage tax deduction, Network effects, new economy, Paul Samuelson, plutocrats, price stability, Ronald Reagan, Savings and loan crisis, statistical model, Tax Reform Act of 1986, technology bubble, transaction costs, vertical integration, women in the workforce

(Illustration Credits 3.2) The “Mortgage Racket,” as it was termed in a 1931 Collier’s exposé by the assistant attorney general, Nugent Dodds, had “taken advantage of the traditional reputation for safety which the real estate mortgage [had] justly enjoyed.”24 That reputation was no more. Many fraudulent mortgage securities had been issued against existing securities—like the CDO2 and CDO3 of today, collateralized debt obligations (CDOs) made of CDOs (squared) made of CDOs (cubed). In a boom era, when demand outstrips supply, it is all too easy to find the next sucker. The foreclosure crisis of the Great Depression, it turned out, was more a problem of mortgage funds than unemployment. The “permanent mortgage,” as the balloon mortgage was described, turned out to be fleeting.25 After the crash, investors became bearish.


pages: 183 words: 17,571

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

Alan Greenspan, banking crisis, banks create money, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, bond market vigilante , Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, compensation consultant, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, currency risk, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, Glass-Steagall Act, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, junk bonds, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, low interest rates, market bubble, market clearing, Martin Wolf, means of production, Michael Milken, mobile money, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nixon triggered the end of the Bretton Woods system, Paul Volcker talking about ATMs, Ponzi scheme, profit motive, proprietary trading, prudent man rule, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, Savings and loan crisis, seigniorage, shareholder value, Silicon Valley, SoftBank, Solyndra, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

If some debt instruments offer better yields than prime corporate and government bonds, you are probably taking on a lot more risk. The Fed policy is literally forcing institutional investors to take on more and more risk in search of returns, and certain exotic structured products such as collateralized debt obligations are creeping back into the market. With the central banks flooding the market with liquidity, the market is too distorted and the yield curves too flat (long-term and short-term rates are about the same) for ordinary investors to navigate. Also, don’t take for granted that money market funds are risk free in today’s world.


pages: 245 words: 75,397

Fed Up!: Success, Excess and Crisis Through the Eyes of a Hedge Fund Macro Trader by Colin Lancaster

"World Economic Forum" Davos, Adam Neumann (WeWork), Airbnb, Alan Greenspan, always be closing, asset-backed security, beat the dealer, Ben Bernanke: helicopter money, Bernie Sanders, Big Tech, Black Monday: stock market crash in 1987, bond market vigilante , Bonfire of the Vanities, Boris Johnson, Bretton Woods, business cycle, buy the rumour, sell the news, Carmen Reinhart, Chuck Templeton: OpenTable:, collateralized debt obligation, coronavirus, COVID-19, creative destruction, credit crunch, currency manipulation / currency intervention, deal flow, Donald Trump, Edward Thorp, family office, fear index, fiat currency, fixed income, Flash crash, George Floyd, global macro, global pandemic, global supply chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Growth in a Time of Debt, housing crisis, index arbitrage, inverted yield curve, Jeff Bezos, Jim Simons, junk bonds, Kenneth Rogoff, liquidity trap, lockdown, Long Term Capital Management, low interest rates, low skilled workers, margin call, market bubble, Masayoshi Son, Michael Milken, Mikhail Gorbachev, Minsky moment, Modern Monetary Theory, moral hazard, National Debt Clock, Nixon triggered the end of the Bretton Woods system, Northern Rock, oil shock, pets.com, Ponzi scheme, price stability, proprietary trading, quantitative easing, Reminiscences of a Stock Operator, reserve currency, Ronald Reagan, Ronald Reagan: Tear down this wall, Sharpe ratio, short selling, short squeeze, social distancing, SoftBank, statistical arbitrage, stock buybacks, The Great Moderation, TikTok, too big to fail, trickle-down economics, two and twenty, value at risk, Vision Fund, WeWork, yield curve, zero-sum game

And then everyone was on board: underwriters, appraisers, lenders, rating agencies. And finally, Wall Street took it to a new level. They built and sold the weapons of mass destruction: subprime mortgages, and all of their derivative by-products that exploded on the scene and took in and funded these real estate loans. They invented collateralized debt obligations (CDOs) and added an unimaginable degree of leverage.” I tell Jerry to go watch The Big Short. “Watch the bathtub scene and learn about these things,” I say. “Then, in the summer of 2007, the subprime mortgage market began to fall apart. In September 2008, Lehman filed for bankruptcy.


pages: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, benefit corporation, Black Swan, blood diamond, blue-collar work, Bolshevik threat, bonus culture, British Empire, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, company town, compensation consultant, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, disruptive innovation, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial engineering, financial innovation, fixed income, Ford Model T, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Glass-Steagall Act, Gordon Gekko, Greenspan put, hiring and firing, Ida Tarbell, income inequality, independent contractor, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, Money creation, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, Paul Volcker talking about ATMs, pension reform, performance metric, Pershing Square Capital Management, pirate software, plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, prosperity theology / prosperity gospel / gospel of success, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, rolling blackouts, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, stock buybacks, subprime mortgage crisis, The Chicago School, 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, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

Moreover, he spent $1.22 million redecorating the office he was soon to vacate. “Surreptitious” in this instance means Thain rushed out the unwarranted bonuses in the lawless three-day interregnum following bankruptcy, but before Merrill was taken over by (a displeased) Bank of America.42 A broker named Chris Ricciardi pioneered the sale of opaque Collateralized Debt Obligations (CDOs) at Credit Suisse First Boston and then greatly expanded their marketing by Merrill Lynch, which sold $28 billion alone in the first six months of 2007. CDOs are securities whose return is dependent on another asset, such as mortgages, and their risk level can be impossible to accurately assess.

Investors like Parkes subsequently suffered grievous losses when the credit crisis unfolded. A report in Euromoney magazine said that Parkes was “among some of the 150-odd Australian councils, churches, universities, charities, hospitals, and community groups nursing a $2-billion black eye after buying now-toxic collateralized debt obligations from Grange … wasting years of rural thrift at the worst possible time in Australian agricultural history as the country copes with a crippling decade-long drought.”82 Only belatedly did these trusting souls realize they were dealing with reincarnations of Albert Wiggins, the Depression-era president of Chase National Bank who shorted his own bank stock to reap millions at the expense of his shareholders.


pages: 302 words: 83,116

SuperFreakonomics by Steven D. Levitt, Stephen J. Dubner

agricultural Revolution, airport security, An Inconvenient Truth, Andrei Shleifer, Atul Gawande, barriers to entry, behavioural economics, Bernie Madoff, Boris Johnson, call centre, clean water, cognitive bias, collateralized debt obligation, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, deliberate practice, Did the Death of Australian Inheritance Taxes Affect Deaths, disintermediation, endowment effect, experimental economics, food miles, indoor plumbing, Intergovernmental Panel on Climate Change (IPCC), John Nash: game theory, Joseph Schumpeter, Joshua Gans and Andrew Leigh, longitudinal study, loss aversion, Louis Pasteur, market design, microcredit, Milgram experiment, Neal Stephenson, ocean acidification, oil shale / tar sands, patent troll, power law, presumed consent, price discrimination, principal–agent problem, profit motive, randomized controlled trial, Richard Feynman, Richard Thaler, selection bias, South China Sea, Stanford prison experiment, Stephen Hawking, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, ultimatum game, urban planning, William Langewiesche, women in the workforce, young professional

We all witness acts of altruism, large and small, just about every day. (We may even commit some ourselves.) So why didn’t a single person exhibit altruism on that night in Queens? A question like this may seem to fall beyond the realm of economics. Sure, liquidity crunches and oil prices and even collateralized debt obligations—but social behaviors like altruism? Is that really what economists do? For hundreds of years, the answer was no. But around the time of the Genovese murder, a few renegade economists had begun to care deeply about such things. Chief among them was Gary Becker, whom we met earlier, in this book’s introduction.


pages: 296 words: 78,112

Devil's Bargain: Steve Bannon, Donald Trump, and the Storming of the Presidency by Joshua Green

4chan, Affordable Care Act / Obamacare, Ayatollah Khomeini, Bernie Sanders, Biosphere 2, Black Lives Matter, business climate, Cambridge Analytica, Carl Icahn, centre right, Charles Lindbergh, coherent worldview, collateralized debt obligation, conceptual framework, corporate raider, crony capitalism, currency manipulation / currency intervention, data science, Donald Trump, Dr. Strangelove, fake news, Fractional reserve banking, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, guest worker program, hype cycle, illegal immigration, immigration reform, Jim Simons, junk bonds, liberation theology, low skilled workers, machine translation, Michael Milken, Nate Silver, Nelson Mandela, nuclear winter, obamacare, open immigration, Peace of Westphalia, Peter Thiel, quantitative hedge fund, Renaissance Technologies, Robert Mercer, Ronald Reagan, Silicon Valley, social intelligence, speech recognition, Steve Bannon, urban planning, vertical integration

The industry’s focus was on getting films made and collecting producers’ fees—the glitzy stuff of stars, directors, red-carpet premieres, and Variety headlines. For investors, however, the real money was made on the back end, in licensing the rights to broadcast and distribute those films in the United States and abroad. In the same way that a collateralized-debt obligation is the sum of hundreds of individual mortgages, the real value of a film is the outstanding sum of its individual licensing deals: both products can quickly ruin investors who don’t understand them. When Bannon dug into the financials, he discovered that many of the assets owned by MGM and the Dirty Thirty were toxic and had little value.


pages: 360 words: 85,321

The Perfect Bet: How Science and Math Are Taking the Luck Out of Gambling by Adam Kucharski

Ada Lovelace, Albert Einstein, Antoine Gombaud: Chevalier de Méré, beat the dealer, behavioural economics, Benoit Mandelbrot, Bletchley Park, butterfly effect, call centre, Chance favours the prepared mind, Claude Shannon: information theory, collateralized debt obligation, Computing Machinery and Intelligence, correlation does not imply causation, diversification, Edward Lorenz: Chaos theory, Edward Thorp, Everything should be made as simple as possible, Flash crash, Gerolamo Cardano, Henri Poincaré, Hibernia Atlantic: Project Express, if you build it, they will come, invention of the telegraph, Isaac Newton, Johannes Kepler, John Nash: game theory, John von Neumann, locking in a profit, Louis Pasteur, Nash equilibrium, Norbert Wiener, p-value, performance metric, Pierre-Simon Laplace, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, Richard Feynman, Ronald Reagan, Rubik’s Cube, statistical model, The Design of Experiments, Watson beat the top human players on Jeopardy!, zero-sum game

Preis and colleagues analyzed share prices in the Dow Jones Industrial Average between 1939 and 2010 and found that stocks would go down together as the market came under more stress. “The diversification effect which should protect a portfolio melts away in times of market losses,” they noted, “just when it would most urgently be needed.” The problem isn’t limited to stocks. In the run-up to the 2008 crisis, more and more investors began to trade “collateralized debt obligations.” These financial products gathered together outstanding loans such as home mortgages, making it possible for investors to earn money by taking on some of the lenders’ risk. Although there might have been a high probability that a single person would default on a loan, investors assumed it was extremely unlikely everyone would default at the same time.


pages: 283 words: 85,824

The People's Platform: Taking Back Power and Culture in the Digital Age by Astra Taylor

"World Economic Forum" Davos, A Declaration of the Independence of Cyberspace, Aaron Swartz, Alan Greenspan, American Legislative Exchange Council, Andrew Keen, AOL-Time Warner, barriers to entry, Berlin Wall, big-box store, Brewster Kahle, business logic, Californian Ideology, citizen journalism, cloud computing, collateralized debt obligation, Community Supported Agriculture, conceptual framework, content marketing, corporate social responsibility, creative destruction, cross-subsidies, crowdsourcing, David Brooks, digital capitalism, digital divide, digital Maoism, disinformation, disintermediation, don't be evil, Donald Trump, Edward Snowden, Evgeny Morozov, Fall of the Berlin Wall, Filter Bubble, future of journalism, Gabriella Coleman, gentrification, George Gilder, Google Chrome, Google Glasses, hive mind, income inequality, informal economy, Internet Archive, Internet of things, invisible hand, Jane Jacobs, Jaron Lanier, Jeff Bezos, job automation, John Markoff, John Perry Barlow, Julian Assange, Kevin Kelly, Kickstarter, knowledge worker, Laura Poitras, lolcat, Mark Zuckerberg, means of production, Metcalfe’s law, Naomi Klein, Narrative Science, Network effects, new economy, New Journalism, New Urbanism, Nicholas Carr, oil rush, peer-to-peer, Peter Thiel, planned obsolescence, plutocrats, post-work, power law, pre–internet, profit motive, recommendation engine, Richard Florida, Richard Stallman, self-driving car, shareholder value, sharing economy, Sheryl Sandberg, Silicon Valley, Silicon Valley billionaire, Silicon Valley ideology, slashdot, Slavoj Žižek, Snapchat, social graph, Steve Jobs, Stewart Brand, technological solutionism, technoutopianism, TED Talk, the long tail, trade route, Tragedy of the Commons, vertical integration, Whole Earth Catalog, WikiLeaks, winner-take-all economy, Works Progress Administration, Yochai Benkler, young professional

Walking listeners through the numbers on a recent action movie, they show how executives claim that the film lost money even though it grossed almost a quarter of a billion dollars at the box office. The trick lies in a series of maneuvers that the Wall Street Journal has likened to a “tranche of collateralized debt obligations,” including the levy of a hefty fee, around 30 percent, by the very studio that produces the movie.25 The result, according to the book The Hollywood Economist, “is that a film, after paying this enormous tariff, rarely shows a profit, even if the studio is making a profit from the distribution fee, and so the writers, directors, actors and other participants in the profit rarely see anything but red ink on their semi-annual statements.”26 Steve Albini, the legendary music producer, exposed the similarly unsavory practices of the record industry in his blistering critique of industry misconduct, “The Problem with Music.”


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

This applies not only to particular institutions like Bear Stearns, or even to mortgage mega-firms like Fannie and Freddie, but to finance in general. When it seemed necessary, public monies were indeed funneled in the general direction of the banking/brokerage community to shore up the whole rickety structure. This allowed one burst bubble—the dot-com debacle—to be replaced by another, namely our late, lamented mortgage/collateralized-debt-obligation bonanza, just now dramatically going down the tubes. Backstopping the present bailout is the ever-credulous, put-upon American public with its presumably inexhaustible resources. Even while Washington was instituting the periodic “socialization” of bad debts, it was systematically abandoning the New Deal’s commitment to regulation.


pages: 258 words: 83,303

Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization by Jeff Rubin

addicted to oil, air freight, banking crisis, Bear Stearns, big-box store, BRICs, business cycle, carbon footprint, carbon tax, collateralized debt obligation, collective bargaining, creative destruction, credit crunch, David Ricardo: comparative advantage, decarbonisation, energy security, food miles, Ford Model T, hydrogen economy, illegal immigration, immigration reform, Intergovernmental Panel on Climate Change (IPCC), invisible hand, James Watt: steam engine, Jevons paradox, Just-in-time delivery, low interest rates, market clearing, megacity, megaproject, North Sea oil, oil shale / tar sands, oil shock, peak oil, profit maximization, reserve currency, South Sea Bubble, subprime mortgage crisis, the market place, The Wealth of Nations by Adam Smith, trade liberalization, work culture , zero-sum game

Even Merrill Lynch and its symbolic bull had to be rescued and in the process swallowed by Bank of America, which is now suffering a bad case of indigestion. How did Cleveland, once dubbed the mistake by the lake, get to pack so powerful a punch? The pundits will tell you about how subprime mortgages got bundled up and sold as fancy financial instruments with exotic names like “collateralized debt obligations” (CDOs), and how these came to be enormously leveraged on bank balance sheets. When the typical 24-month interest-free “teaser” period on your standard subprime mortgage came to an end, folks who couldn’t afford a mortgage in the first place simply walked away from their homes. And when what little equity they had had been wiped out by the decline in housing prices, the process only accelerated.


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.


Humble Pi: A Comedy of Maths Errors by Matt Parker

8-hour work day, Affordable Care Act / Obamacare, bitcoin, British Empire, Brownian motion, Chuck Templeton: OpenTable:, collateralized debt obligation, computer age, correlation does not imply causation, crowdsourcing, Donald Trump, fake news, Flash crash, forensic accounting, game design, High speed trading, Julian Assange, millennium bug, Minecraft, Neil Armstrong, null island, obamacare, off-by-one error, orbital mechanics / astrodynamics, publication bias, Richard Feynman, Richard Feynman: Challenger O-ring, selection bias, SQL injection, subprime mortgage crisis, Tacoma Narrows Bridge, Therac-25, value at risk, WikiLeaks, Y2K

Maths misunderstandings It would be remiss of me not to say something about the global financial crisis of 2007–8. It was kicked off with the subprime mortgage crisis in the US then rapidly spread to countries all around the world. And there are some interesting bits of mathematics which fed into it. My personal favourites are collateralized debt obligation (CDO) financial products. A CDO groups a bunch of risky investments together on the assumption that they couldn’t possibly all go wrong. Spoiler: they all went wrong. Once CDOs could themselves contain other CDOs, a mathematical web was built which few people understood. I love my maths but, looking back at the global financial crisis as a whole, I don’t claim to understand what went wrong.


pages: 301 words: 88,082

The Great Tax Robbery: How Britain Became a Tax Haven for Fat Cats and Big Business by Richard Brooks

accounting loophole / creative accounting, bank run, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, carried interest, Celtic Tiger, collateralized debt obligation, commoditize, Corn Laws, corporate social responsibility, crony capitalism, cross-border payments, Double Irish / Dutch Sandwich, financial deregulation, financial engineering, haute couture, information security, intangible asset, interest rate swap, Jarndyce and Jarndyce, mega-rich, Northern Rock, offshore financial centre, race to the bottom, shareholder value, short selling, supply-chain management, The Chicago School, The Wealth of Nations by Adam Smith, transfer pricing, two and twenty

‘Offshore financial centres’, as they prefer to be known, also provide the regulatory conditions that enable financiers to do things that they would find either impossible or more difficult onshore. By tailoring their corporate laws to the bankers’ demands and offering with trademark euphemism ‘tax neutrality’, offshore havens became, for example, perfect locations for the ‘special purpose vehicles’ that package up dodgy debt and dump it on the markets. The most notorious ‘collateralized debt obligation’ of the era, the Abacus 2007-AC1 sold by Goldman Sachs and profitably bet against by a related hedge fund – leading to a $500m regulatory settlement for the bank – was set up in the Cayman Islands. Serious reform of the malformed financial system therefore had to take in the tax havens that were pumping toxic financial products through its banking arteries.


pages: 250 words: 87,722

Flash Boys: A Wall Street Revolt by Michael Lewis

automated trading system, bash_history, Berlin Wall, Bernie Madoff, collateralized debt obligation, computerized markets, drone strike, Dutch auction, Fall of the Berlin Wall, financial intermediation, Flash crash, High speed trading, information security, latency arbitrage, National best bid and offer, pattern recognition, payment for order flow, Pershing Square Capital Management, proprietary trading, risk tolerance, Rubik’s Cube, Sergey Aleynikov, Small Order Execution System, Spread Networks laid a new fibre optics cable between New York and Chicago, the new new thing, too big to fail, trade route, transaction costs, Vanguard fund

It would keep paying off until someone said something about it; but no one who played the slot machine had any interest in pointing out that it was broken. Some large amount of what Wall Street had done with technology had been done simply so that someone inside the financial markets would know something that the outside world did not. The same system that once gave us subprime mortgage collateralized debt obligations no investor could possibly truly understand now gave us stock market trades that occurred at fractions of a penny at unsafe speeds using order types that no investor could possibly truly understand. That is why Brad Katsuyama’s most distinctive trait—his desire to explain things not so he would be understood but so that others would understand—was so seditious.


pages: 252 words: 80,636

Bureaucracy by David Graeber

a long time ago in a galaxy far, far away, Affordable Care Act / Obamacare, airport security, Albert Einstein, Alvin Toffler, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, David Graeber, Future Shock, George Gilder, High speed trading, hiring and firing, junk bonds, Kitchen Debate, late capitalism, Lewis Mumford, means of production, music of the spheres, Neal Stephenson, new economy, obamacare, Occupy movement, Oklahoma City bombing, Parkinson's law, Peter Thiel, planetary scale, pneumatic tube, post-work, price mechanism, Ronald Reagan, self-driving car, Silicon Valley, South Sea Bubble, stock buybacks, technological determinism, transcontinental railway, union organizing, urban planning, zero-sum game

But the culture of evaluation is if anything even more pervasive in the hypercredentialized world of the professional classes, where audit culture reigns, and nothing is real that cannot be quantified, tabulated, or entered into some interface or quarterly report. Not only is this world ultimately a product of financialization, it’s really just a continuation of it. Since what is the world of securitized derivatives, collateralized debt obligations, and other such exotic financial instruments but the apotheosis of the principle that value is ultimately a product of paperwork, and the very apex of a mountain of assessment forms which begins with the irritating caseworker determining whether you are really poor enough to merit a fee waiver for your children’s medicine and ends with men in suits engaged in high-speed trading of bets over how long it will take you to default on your mortgage.


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

The popular backlash had started in the summer of 2009 with a Rolling Stone story, written by Matt Taibbi, that accused Goldman of being “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Then came a series of stories about Goldman’s crisis-era misdeeds, which centered on the firm’s creation of mortgage-backed collateralized debt obligations (CDOs), some of which Goldman was selling to its clients while simultaneously betting that they would tank. In April 2010, Goldman’s image problems boiled over when the Securities and Exchange Commission sued the firm, along with a midlevel mortgage trader named Fabrice Tourre, for defrauding investors in one such deal—a mortgage-backed CDO called Abacus 2007-AC1.


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

So bankers got creative: they generated an almost endless supply of MBSs by employing the simple but deceptive practice of bundling prime and subprime loans together. They were basically watering the whiskey, which is only marginally creative. But then the bankers created an even riskier product, called a CDO (collateral debt obligation), which was a bundle of MBSs, essentially a superbundle, comprised of many other bundles. These so-called exotic derivatives (the financial equivalent of those crushed-core samples from Guzman’s fake gold mine) were very dangerous investments. If property values ever dipped, huge losses for everyone were basically baked in.


pages: 302 words: 87,776

Dollars and Sense: How We Misthink Money and How to Spend Smarter by Dr. Dan Ariely, Jeff Kreisler

accounting loophole / creative accounting, Airbnb, Albert Einstein, behavioural economics, bitcoin, Burning Man, collateralized debt obligation, Daniel Kahneman / Amos Tversky, delayed gratification, endowment effect, experimental economics, hedonic treadmill, IKEA effect, impact investing, invisible hand, loss aversion, mental accounting, mobile money, PalmPilot, placebo effect, price anchoring, Richard Thaler, sharing economy, Silicon Valley, Snapchat, Stanford marshmallow experiment, Steve Jobs, TaskRabbit, the payments system, Uber for X, ultimatum game, Walter Mischel, winner-take-all economy

DOUBLE-TALK Language can not only create a perception of effort and a sense of value; it can also get us to attribute expertise to the people using these terms. Consider the professions of health care, finance, and law. We laypeople have no idea what some of their phrases mean—medial collateral ligament, collateral debt obligations, debtors’ prison—and we often can’t even read their handwriting. Obscure and impenetrable language conveys a sense of expertise. It reminds us that they have greater knowledge than we do, that they must have worked hard and long to gain all that knowledge and skill, and now they get to show it to us by using their overly complicated language.


pages: 324 words: 92,805

The Impulse Society: America in the Age of Instant Gratification by Paul Roberts

"Friedman doctrine" OR "shareholder theory", 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, Abraham Maslow, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Alan Greenspan, American Society of Civil Engineers: Report Card, AOL-Time Warner, asset allocation, business cycle, business process, carbon tax, Carl Icahn, Cass Sunstein, centre right, choice architecture, classic study, collateralized debt obligation, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, creative destruction, crony capitalism, David Brooks, delayed gratification, disruptive innovation, double helix, Evgeny Morozov, factory automation, financial deregulation, financial engineering, financial innovation, fixed income, Ford Model T, full employment, game design, Glass-Steagall Act, greed is good, If something cannot go on forever, it will stop - Herbert Stein's Law, impulse control, income inequality, inflation targeting, insecure affluence, invisible hand, It's morning again in America, job automation, John Markoff, Joseph Schumpeter, junk bonds, knowledge worker, late fees, Long Term Capital Management, loss aversion, low interest rates, low skilled workers, mass immigration, Michael Shellenberger, new economy, Nicholas Carr, obamacare, Occupy movement, oil shale / tar sands, performance metric, postindustrial economy, profit maximization, Report Card for America’s Infrastructure, reshoring, Richard Thaler, rising living standards, Robert Shiller, Rodney Brooks, Ronald Reagan, shareholder value, Silicon Valley, speech recognition, Steve Jobs, stock buybacks, technological determinism, technological solutionism, technoutopianism, Ted Nordhaus, the built environment, the long tail, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, Tyler Cowen, Tyler Cowen: Great Stagnation, value engineering, Walter Mischel, winner-take-all economy

”20 What was “going on” was that Goldman Sachs,21 Merrill Lynch, and other big investment banks had discovered new territory in the hunt for yield: the manic, limbic realm of consumer real estate. By the early 2000s, investment banks were buying up tens of thousands of home mortgages and bundling them into securities called collateralized debt obligations, or CDOs, and selling these to pensions and other institutional investors. Demand for these new “financial technologies” was strong: with the CDO, the investor got a high return, the stream of interest and principal payments from each mortgage, but with the supposedly low risk associated with a collateral-backed asset: a house.


pages: 332 words: 89,668

Two Nations, Indivisible: A History of Inequality in America: A History of Inequality in America by Jamie Bronstein

Affordable Care Act / Obamacare, back-to-the-land, barriers to entry, basic income, Bernie Sanders, big-box store, Black Lives Matter, blue-collar work, Branko Milanovic, British Empire, Capital in the Twenty-First Century by Thomas Piketty, clean water, cognitive dissonance, collateralized debt obligation, collective bargaining, Community Supported Agriculture, corporate personhood, crony capitalism, deindustrialization, desegregation, Donald Trump, ending welfare as we know it, Frederick Winslow Taylor, full employment, Gini coefficient, Glass-Steagall Act, income inequality, interchangeable parts, invisible hand, job automation, John Maynard Keynes: technological unemployment, labor-force participation, land reform, land tenure, longitudinal study, low skilled workers, low-wage service sector, mandatory minimum, mass incarceration, minimum wage unemployment, moral hazard, moral panic, mortgage debt, New Urbanism, non-tariff barriers, obamacare, occupational segregation, Occupy movement, oil shock, plutocrats, price discrimination, race to the bottom, rent control, road to serfdom, Ronald Reagan, Sam Peltzman, scientific management, Scientific racism, Simon Kuznets, single-payer health, Strategic Defense Initiative, strikebreaker, the long tail, too big to fail, trade route, transcontinental railway, Triangle Shirtwaist Factory, trickle-down economics, universal basic income, Upton Sinclair, upwardly mobile, urban renewal, vertical integration, W. E. B. Du Bois, wage slave, War on Poverty, women in the workforce, working poor, Works Progress Administration

In 1999, the repeal of the Glass-Steagall Act of 1933 removed federal oversight from large commercial banks that wished to branch out into speculative investments. During the Bush administration, mortgage lenders offered mortgages to many individuals who ordinarily would not have met income qualifications. Banks then packaged these “subprime” mortgages into instruments called collateralized debt obligations (CDOs), which were thought to be safe investments because generally, housing prices increased, and mortgage defaults were thought to be random. A housing crash in 2006, however, produced waves of mortgage defaults, showing that defaults were not random.11 The collapse of the housing market transformed CDOs into “toxic assets,” precipitating the failure of Lehman Brothers, one of the nation’s largest banks.


pages: 287 words: 92,118

The Blue Cascade: A Memoir of Life After War by Mike Scotti

Bear Stearns, call centre, collateralized debt obligation, Donald Trump, fixed income, friendly fire, index card, information security, London Interbank Offered Rate, military-industrial complex, rent control

“Shit, dude, Stephanie just got shot,” I said, stating the obvious to Kevin and to Brian McNamara, who sat on the other side of Stephanie. Word spread quickly as hundreds of other calls just like that one hit the bank in a massive wave. Carnage everywhere. A massacre. Some divisions that sold products that were at the center of the financial meltdown, like the collateralized debt obligation (CDO) desk, were completely wiped out. The heads of the desk were making the calls in the basement meeting rooms, flanked by HR people. They would summon the target to the basement. In front of them, folders detailing the conditions of the termination, the amount of severance, legal documents to sign, and a kit for job-placement assistance.


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.


The Data Revolution: Big Data, Open Data, Data Infrastructures and Their Consequences by Rob Kitchin

Bayesian statistics, business intelligence, business process, cellular automata, Celtic Tiger, cloud computing, collateralized debt obligation, conceptual framework, congestion charging, corporate governance, correlation does not imply causation, crowdsourcing, data science, discrete time, disruptive innovation, George Gilder, Google Earth, hype cycle, Infrastructure as a Service, Internet Archive, Internet of things, invisible hand, knowledge economy, Large Hadron Collider, late capitalism, lifelogging, linked data, longitudinal study, machine readable, Masdar, means of production, Nate Silver, natural language processing, openstreetmap, pattern recognition, platform as a service, recommendation engine, RFID, semantic web, sentiment analysis, SimCity, slashdot, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, smart grid, smart meter, software as a service, statistical model, supply-chain management, technological solutionism, the scientific method, The Signal and the Noise by Nate Silver, transaction costs

The consequence was to assume that novel securities that held massive systemic uncertainty were assets of low risk, an assumption that proved to be false. And in complex systems, such ‘mistakes are not measured in degrees but in whole orders of magnitude. S&P and Moody’s underestimated the default risk associated with CDOs (collateralized debt obligation) by a factor of two hundred’ (Silver 2012: 45). Whatever the quality of the underlying data, if the model is faulty, any conclusions drawn from the model will be erroneous. Granville (2013) and Taleb (2013) posit that the curse or tragedy of big data is multiple, falsely positive relationships between data; patterns in the dataset that are entirely coincidental, have no predictive power, are not replicable, and could be masking weaker patterns that are of significance.


pages: 342 words: 94,762

Wait: The Art and Science of Delay by Frank Partnoy

algorithmic trading, Atul Gawande, behavioural economics, Bernie Madoff, Black Swan, blood diamond, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, cotton gin, Daniel Kahneman / Amos Tversky, delayed gratification, Flash crash, Frederick Winslow Taylor, George Akerlof, Google Earth, Hernando de Soto, High speed trading, impulse control, income inequality, information asymmetry, Isaac Newton, Long Term Capital Management, Menlo Park, mental accounting, meta-analysis, MITM: man-in-the-middle, Nick Leeson, paper trading, Paul Graham, payday loans, Pershing Square Capital Management, Ralph Nader, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Saturday Night Live, scientific management, six sigma, social discount rate, Spread Networks laid a new fibre optics cable between New York and Chicago, Stanford marshmallow experiment, statistical model, Steve Jobs, systems thinking, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel, work culture

The definitive account of the recent financial crisis will require several more years, or perhaps decades, as was the case following the stock market crash of 1929. The three-part report of the Financial Crisis Inquiry Commission, the group Congress tasked to explain what happened, was, in my view, “a confusing and contradictory mess, part rehash, part mishmash, as impenetrable as the collateralized debt obligations at the core of the crisis.” See Frank Partnoy, “Washington’s Financial Disaster,” New York Times, January 29, 2011. And although there already have been nearly two dozen books published about the crisis, one meta-review concludes, “No single narrative emerges from this broad and often contradictory collection of interpretations, but the sheer variety of conclusions is informative, and underscores the desperate need for the economics profession to establish a single set of facts from which more accurate inferences and narratives can be constructed.”


pages: 262 words: 93,987

The Buy Side: A Wall Street Trader's Tale of Spectacular Excess by Turney Duff

asset-backed security, Bear Stearns, Berlin Wall, buy low sell high, collateralized debt obligation, fixed income, Gordon Gekko, high net worth, proprietary trading, urban sprawl, white picket fence

He starts talking about high-risk mortgages that were bundled and sold as asset-backed securities all over the world, particularly in Europe. I have no idea what he’s talking about. I think he means a derivative play on the underlying mortgages, but I’m not sure. But when he starts talking about collateralized debt obligations, I give up trying to figure it out. “What do you want me to do?” I ask. “Start monitoring the credit markets,” he tells me. “I’m a little worried.” The only thing I’m worried about is how to beat the traffic on the Long Island Expressway. Jenn and Lola are on the front porch when I get home.


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

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. At the end of the day, the purported solutions to the crisis were Welchian.


pages: 335 words: 89,924

A History of the World in Seven Cheap Things: A Guide to Capitalism, Nature, and the Future of the Planet by Raj Patel, Jason W. Moore

"World Economic Forum" Davos, agricultural Revolution, Anthropocene, Bartolomé de las Casas, biodiversity loss, British Empire, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, carbon footprint, classic study, clean water, collateralized debt obligation, colonial exploitation, colonial rule, company town, complexity theory, creative destruction, credit crunch, Donald Trump, double entry bookkeeping, energy transition, European colonialism, feminist movement, financial engineering, Food sovereignty, Ford Model T, Frederick Winslow Taylor, full employment, future of work, Glass-Steagall Act, global supply chain, Haber-Bosch Process, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, land reform, Lewis Mumford, liberal capitalism, low interest rates, means of production, Medieval Warm Period, megacity, Mercator projection, meta-analysis, microcredit, Naomi Klein, Nixon shock, Occupy movement, peak oil, precariat, scientific management, Scientific racism, seminal paper, sexual politics, sharing economy, source of truth, South Sea Bubble, spinning jenny, strikebreaker, surplus humans, The Theory of the Leisure Class by Thorstein Veblen, too big to fail, trade route, transatlantic slave trade, union organizing, Upton Sinclair, wages for housework, World Values Survey, Yom Kippur War

Banks make credit. They take an asset—such as metal, oil, a house, the Holy Grail—and turn it into more money. As long as these new means of payment circulate and are not cashed in, they are potential sources of pure profit. But whether those credits are Genoese compere backed by the Holy Grail or collateralized debt obligations backed by dodgy mortgages, some power is needed to endorse and encourage them, and the profits that follow. Hence the role of a credible “lender of last resort”—a state bank or, more recently, the International Monetary Fund (IMF)—an institution that, with hard currency and military connections, can guarantee a given hegemonic order.


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

That is not generally popular with these holders, for they get their money back just when they don’t want it—when interest rates are low. Instead of issuing one class of bonds, a pool of mortgages or of mortgage-backed bonds can be bundled and then split into different slices (or tranches), known as collateralized debt obligations or CDOs. For example, mortgage payments might be used first to pay off one class of security holders and only then will other classes start to be repaid. The senior tranches have first claim on the cash flows and therefore may be attractive to conservative investors such as insurance companies or pension funds.

Cash-deficiency arrangement Arrangement whereby a project’s shareholders agree to provide the operating company with sufficient net working capital. Catastrophe bond (CAT bond) Bond whose payoffs are linked to a measure of catastrophe losses such as the level of insurance claims. CAT bond Catastrophe bond. CBD Cash before delivery. CD Certificate of deposit. CDO Collateralized debt obligation. Also CLO (collateralized loan obligation) and CMO (collateralized mortgage obligation). CDS Credit default swap. CEO Chief executive officer. Certainty equivalent A certain cash flow that has the same present value as a specified risky cash flow. Certificate of deposit (CD) A certificate providing evidence of a bank time deposit.

Closed-end mortgage Mortgage against which no additional debt may be issued (cf. open-end mortgage). CMBS Commercial mortgage-backed security. CMOs Collateralized mortgage obligations. CoCo Contingent convertible bond. COD Cash on delivery. Collar An upper and lower limit on the interest rate on a floating-rate note. Collateral Assets that are given as security for a loan. Collateralized debt obligation (CDO) A security backed by a pool of loans and issued in tranches with different levels of seniority. Collateralized mortgage obligations (CMOs) A variation on the mortgage pass-through security in which the cash flows from a pool of mortgages are repackaged into several tranches of bonds with different maturities.


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

The report asserts that “restoring trust in banking is a public trust and economic imperative, as it is the bedrock of a safe and effective financial system.”56 A study by economists at the University of Zürich suggests that the culture in the banking industry undermines honesty.57 The lines between what’s inappropriate, unethical, and illegal are also blurred by the fact that bankers have become increasingly more detached from their clients because of the complexity of their products and the corresponding greater division of labor. Financial engineers who created the computer models for collateralized debt obligations were, for the most part, unaware of the robo-signing of subprime mortgages that took place further down the production chain half a world away. The resulting moral inertia encouraged a “catch me if you can” culture in which everything not explicitly prohibited was allowed, and executives pushed the boundaries to see what they could get away with.


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

The true lesson, as the official news sources made it out, was that here, before our eyes, in Nadya Suleman, we had the essence of the faceless ones who caused the crisis: the buyer of the five-thousand-square-foot home his family couldn’t afford, the taker of the $500,000 mortgage on $50,000 salary with no down payment (and perhaps a variable rate), now gambling with human life. Here was the new expanding lower middle class that didn’t save, but felt “entitled”; who inflated the bubble economy; who had tempted and motivated the poor financiers who traded those mortgages bundled into collateralized debt obligations, and written each other unfulfillable insurance against their default, and threatened to blow up everything unless the government, taking over failing banks, paid up. It helped that she was a “she,” the evil female consumer. Octomom was the fat spider at the center of a hanging web. Squash her!


pages: 349 words: 95,972

Messy: The Power of Disorder to Transform Our Lives by Tim Harford

affirmative action, Air France Flight 447, Airbnb, airport security, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, assortative mating, Atul Gawande, autonomous vehicles, banking crisis, Barry Marshall: ulcers, Basel III, Berlin Wall, Bletchley Park, British Empire, Broken windows theory, call centre, Cass Sunstein, Chris Urmson, cloud computing, collateralized debt obligation, Computing Machinery and Intelligence, crowdsourcing, deindustrialization, Donald Trump, Erdős number, experimental subject, Ferguson, Missouri, Filter Bubble, financial engineering, Frank Gehry, game design, global supply chain, Googley, Guggenheim Bilbao, Helicobacter pylori, high net worth, Inbox Zero, income inequality, industrial cluster, Internet of things, Jane Jacobs, Jeff Bezos, Loebner Prize, Louis Pasteur, machine readable, Marc Andreessen, Mark Zuckerberg, Menlo Park, Merlin Mann, microbiome, out of africa, Paul Erdős, Richard Thaler, Rosa Parks, self-driving car, side project, Silicon Valley, Silicon Valley startup, Skype, Steve Jobs, Steven Levy, Stewart Brand, Susan Wojcicki, tacit knowledge, TED Talk, telemarketer, the built environment, The Death and Life of Great American Cities, the strength of weak ties, Turing test, Tyler Cowen, urban decay, warehouse robotics, William Langewiesche

Rather than ask us to think or adapt, the Jennifer unit takes over the thought process and treats workers as an inexpensive source of some visual processing and a pair of opposable thumbs.17 You could even argue that the financial crisis of 2007–2008, which plunged the world into recession, was analogous to absentmindedly driving a car into the Pacific. One of the weaknesses that contributed to the crisis was the failure of financial products called collateralized debt obligations (CDOs)—hugely complex structures, whose value depended in an opaque way on the health of the U.S. mortgage market. A grizzled market participant might have looked at rapidly inflating house prices and mused that a house price crash was possible, even though the United States had not experienced a nationally synchronized crash before.


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

Quarterly Journal of Economics 117(4):1295–328. Marsh, Terry A., and Robert C. Merton. 1986. “Dividend Variability and Variance Bound Tests for the Rationality of Stock Prices.” American Economic Review 76(3):483–98. Mason, Joseph R., and Josh Rosner. 2007. “How Resilient are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?” Unpublished paper, Hudson Institute. Matsusaka, John G., and Argia M. Sbordone. 1995. “Consumer Confidence and Economic Fluctuations.” Economic Inquiry 33(2):296–318. McCabe, Kevin A., Mary Rigdon, and Vernon L. Smith. 2003. “Positive Reciprocity and Intentions in Trust Games.”


pages: 351 words: 100,791

The World Beyond Your Head: On Becoming an Individual in an Age of Distraction by Matthew B. Crawford

airport security, behavioural economics, Cass Sunstein, choice architecture, collateralized debt obligation, creative destruction, David Brooks, delayed gratification, dematerialisation, deskilling, digital Maoism, Google Glasses, hive mind, index card, informal economy, Jaron Lanier, large denomination, new economy, new new economy, Norman Mailer, online collectivism, Plato's cave, plutocrats, precautionary principle, Richard Thaler, Rodney Brooks, scientific management, self-driving car, Silicon Valley, Silicon Valley ideology, Stanford marshmallow experiment, tacit knowledge, the built environment, the scientific method, The Wisdom of Crowds, theory of mind, Walter Mischel, winner-take-all economy

So it isn’t really a gamble at all—in fact, it’s one of the few places I’m certain about anything … If you can’t rely on the machine, then you might as well be in the human world where you have no predictability either.”6 The appeal of machine gambling is apparently tied to an experience of the human world as lacking a basic intelligibility. Perhaps we are all becoming autistic, in this broad sense. If so, it is not without reason. As the world becomes more confusing, seemingly controlled by vast impersonal forces (e.g., “globalization” or “collateralized debt obligations”) that no single individual can fully bring within view; as the normative expectation becomes to land a cubicle job, in which the chain of cause and effect can be quite dispersed and opaque; as home life becomes deskilled (we outsource our cooking to corporations, our house repairs to immigrant guest workers); as the material basis of modern life becomes ever more obscured, and the occasions for skillful action are removed to sites overseas, where things are made; to sites nearby but socially invisible, where things are tended and repaired; and to sites unknown, where elites orchestrate commercial and political forces—when all of this is the case, the experience of individual agency becomes somewhat elusive.


pages: 328 words: 96,678

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them by Nouriel Roubini

"World Economic Forum" Davos, 2021 United States Capitol attack, 3D printing, 9 dash line, AI winter, AlphaGo, artificial general intelligence, asset allocation, assortative mating, autonomous vehicles, bank run, banking crisis, basic income, Bear Stearns, Big Tech, bitcoin, Bletchley Park, blockchain, Boston Dynamics, Bretton Woods, British Empire, business cycle, business process, call centre, carbon tax, Carmen Reinhart, cashless society, central bank independence, collateralized debt obligation, Computing Machinery and Intelligence, coronavirus, COVID-19, creative destruction, credit crunch, crony capitalism, cryptocurrency, currency manipulation / currency intervention, currency peg, data is the new oil, David Ricardo: comparative advantage, debt deflation, decarbonisation, deep learning, DeepMind, deglobalization, Demis Hassabis, democratizing finance, Deng Xiaoping, disintermediation, Dogecoin, Donald Trump, Elon Musk, en.wikipedia.org, energy security, energy transition, Erik Brynjolfsson, Ethereum, ethereum blockchain, eurozone crisis, failed state, fake news, family office, fiat currency, financial deregulation, financial innovation, financial repression, fixed income, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, future of work, game design, geopolitical risk, George Santayana, Gini coefficient, global pandemic, global reserve currency, global supply chain, GPS: selective availability, green transition, Greensill Capital, Greenspan put, Herbert Marcuse, high-speed rail, Hyman Minsky, income inequality, inflation targeting, initial coin offering, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invention of movable type, Isaac Newton, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, junk bonds, Kenneth Rogoff, knowledge worker, Long Term Capital Management, low interest rates, low skilled workers, low-wage service sector, M-Pesa, margin call, market bubble, Martin Wolf, mass immigration, means of production, meme stock, Michael Milken, middle-income trap, Mikhail Gorbachev, Minsky moment, Modern Monetary Theory, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Mustafa Suleyman, Nash equilibrium, natural language processing, negative equity, Nick Bostrom, non-fungible token, non-tariff barriers, ocean acidification, oil shale / tar sands, oil shock, paradox of thrift, pets.com, Phillips curve, planetary scale, Ponzi scheme, precariat, price mechanism, price stability, public intellectual, purchasing power parity, quantitative easing, race to the bottom, Ralph Waldo Emerson, ransomware, Ray Kurzweil, regulatory arbitrage, reserve currency, reshoring, Robert Shiller, Ronald Reagan, Salesforce, Satoshi Nakamoto, Savings and loan crisis, Second Machine Age, short selling, Silicon Valley, smart contracts, South China Sea, sovereign wealth fund, Stephen Hawking, TED Talk, The Great Moderation, the payments system, Thomas L Friedman, TikTok, too big to fail, Turing test, universal basic income, War on Poverty, warehouse robotics, Washington Consensus, Watson beat the top human players on Jeopardy!, working-age population, Yogi Berra, Yom Kippur War, zero-sum game, zoonotic diseases

From 2014 on it was the time when corporate debt exploded, especially among risky and leveraged firms as well as “fallen angels,” a term for companies whose high debt caused their credit ratings to plummet from investment grade to junk bond levels. Non-bank financial institutions created new forms of risk lending. Covenant-lite loans had weak protections for lenders in case of default. Collateralized loan obligations (CLOs) that securitized bundles of corporate loans resembled infamous securitized collateralized debt obligations (CDOs) of the subprime crisis. Toxic schemes make risky debt fashionable in the short run but soon wreak havoc. By 2019, before the COVID-19 crisis, even the Fed and the IMF were sending warnings about the rising and risky forms of corporate borrowing. Here we go again, starting the next bubble that down the line will precipitate the next crash and bust.


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

Chapter 1 1. https://www.stlouisfed.org/financial-crisis/full-timeline; http://historyofbitcoin.org/. 2. http://www.gao.gov/assets/660/651322.pdf. 3. http://wayback.archive.org/web/20120529203623/http://p2pfoundation.ning.com/profile/SatoshiNakamoto. 4. http://observer.com/2011/10/did-the-new-yorkers-joshua-davis-nail-the-identity-of-bitcoin-creator-satoshi-nakamoto/. 5. https://en.wikipedia.org/wiki/Satoshi_Nakamoto#cite_note-betabeat-12. 6. http://www.economist.com/news/business-and-finance/21698060-craig-wright-reveals-himself-as-satoshi-nakamoto. 7. https://www.wired.com/2016/05/craig-wright-privately-proved-hes-bitcoins-creator/. 8. http://www.economist.com/news/finance-and-economics/21698294-quest-find-satoshi-nakamoto-continues-wrightu2019s-wrongs. 9. http://www.nytimes.com/2008/03/17/business/17bear.html?_r=0. 10. https://www.federalreserve.gov/newsevents/reform_bearstearns.htm. 11. http://www.wsj.com/articles/SB123051066413538349. 12. The situation was even worse, as CMOs were not the only culprit. More complex instruments like collateralized debt obligations (CDOs) made the situation even stickier. 13. http://www.wsj.com/articles/SB123051066413538349. 14. http://historyofbitcoin.org/. 15. http://blogs.wsj.com/deals/2008/09/10/live-blogging-the-lehman-conference-call/. 16. http://www.nytimes.com/2008/09/10/business/10place.html?_r=1&hp&oref=slogin; http://old.seattletimes.com/html/businesstechnology/2008171076_weblehman10.html. 17. http://www.wsj.com/articles/SB123051066413538349. 18. http://som.yale.edu/sites/default/files/files/001-2014-3A-V1-LehmanBrothers-A-REVA.pdf. 19. https://www.stlouisfed.org/financial-crisis/full-timeline. 20. https://bitcoin.org/bitcoin.pdf. 21. http://www.mail-archive.com/cryptography@metzdowd.com/msg09980.html. 22. https://www.fdic.gov/news/news/press/2006/pr06086b.pdf. 23. http://www.mail-archive.com/cryptography@metzdowd.com/msg09959.html. 24. http://www.mail-archive.com/cryptography@metzdowd.com/msg09971.html. 25. http://www.mail-archive.com/cryptography@metzdowd.com/msg10006.html. 26. http://www.nytimes.com/packages/html/national/200904_CREDITCRISIS/recipients.html. 27. https://en.bitcoin.it/wiki/Genesis_block. 28. http://www.thetimes.co.uk/tto/business/industries/banking/article2160028.ece. 29. http://historyofbitcoin.org/. 30. http://p2pfoundation.ning.com/forum/topics/bitcoin-open-source?


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

The reality of transaction costs, however, suggests that we should pay more attention to total trading volume—including both purchases and sales—an incredible $5.4 trillion in total transactions, not far from one-and-a-half times the $3.8 trillion of equity fund assets of the group. 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: 354 words: 26,550

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial engineering, financial intermediation, fixed income, global macro, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, Jim Simons, law of one price, Long Term Capital Management, Louis Bachelier, machine readable, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, Performance of Mutual Funds in the Period, pneumatic tube, profit motive, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, tail risk, trade route, transaction costs, value at risk, yield curve, zero-sum game

., 208–209 Chicago Board Options Exchange (CBOE), 9 Chicago Mercantile Exchange (CME), 9, 198 Choi, B.S., 98 Chordia, T., 192, 195, 279 Chriss, N., 274, 275, 295 Chung, K., 67–68 Citadel, 13 Clearing, broker-dealers and, 25 CME Group, 41 Cohen, K., 130 Co-integration, 101–102 Co-integration-based tests, 89 Coleman, M., 89 Collateralized debt obligations (CDOs), 263 Commercial clients, 10 Commodities. See also Futures fundamental analysis and, 14 liquidity and, 38 suitability for high-frequency trading, 46–47 Comparative ratios, performance measurement and, 51–57 Computer-aided analysis, 25 Computer-driven decisions, as challenge, 4–5 Computer generation of trading signals, 25 Conditional VaR (CVaR), 56 Connolly, Robert A., 180 Constant proportion portfolio insurance (CPPI), 211–213 Convertible bonds, 42 Copeland, T., 130 Corporate clients, 10 Corporate news, event arbitrage, 173–175 Corsi, Fulvio, 120–121 Cost analysis, post-trade, 283–295 latent costs, 284, 288–294 transparent costs, 284, 285–288 Cost variance analysis, post-trade, 294–295 329 Counterparty risk.


pages: 338 words: 106,936

The Physics of Wall Street: A Brief History of Predicting the Unpredictable by James Owen Weatherall

Alan Greenspan, Albert Einstein, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Apollo 11, Asian financial crisis, bank run, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Bonfire of the Vanities, book value, Bretton Woods, Brownian motion, business cycle, butterfly effect, buy and hold, capital asset pricing model, Carmen Reinhart, Claude Shannon: information theory, coastline paradox / Richardson effect, collateralized debt obligation, collective bargaining, currency risk, dark matter, Edward Lorenz: Chaos theory, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, Financial Modelers Manifesto, fixed income, George Akerlof, Gerolamo Cardano, Henri Poincaré, invisible hand, Isaac Newton, iterative process, Jim Simons, John Nash: game theory, junk bonds, Kenneth Rogoff, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, Market Wizards by Jack D. Schwager, martingale, Michael Milken, military-industrial complex, Myron Scholes, Neil Armstrong, new economy, Nixon triggered the end of the Bretton Woods system, Paul Lévy, Paul Samuelson, power law, prediction markets, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk free rate, risk-adjusted returns, Robert Gordon, Robert Shiller, Ronald Coase, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical arbitrage, statistical model, stochastic process, Stuart Kauffman, The Chicago School, The Myth of the Rational Market, tulip mania, Vilfredo Pareto, volatility smile

While perhaps some derivatives have spurred growth, many people have criticized their widespread use on account of how complicated they can be, and how difficult to understand. The suggestion seems to be that at least some derivatives are intentionally constructed to confuse or even defraud unsophisticated investors. For instance, this criticism has been leveled against certain derivatives based on consumer loans, such as collateralized debt obligations (CDOs), that played a major role in the 2008 crash. These products involve repackaging mortgages and other loans into derivatives that were supposed to have carefully tailored risks and returns. In part, the reason these particular securities have been so heavily criticized is that many investors, including some major investment banks, were caught off guard when they rapidly declined in value — that is, when they became the “toxic assets” that have plagued U.S. and European banks.


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

But, from the early 1990s, ABSs made of other loans came on stream in the US and then gradually took off in other rich countries, as they abolished regulations that restricted the ability of lending banks to sell off their loans to a third party. You can make ABSs more complicated – and supposedly safer – through ‘structuring’ More recently, these financial products have become even more complex since ABSs have become ‘structured’ and been turned into Collateralized Debt Obligations (or CDOs). Structuring in this context involves combining a number of ABSs, such as RMBSs, into yet another composite bond, such as CDO, and dividing the new bond into a few tranches (slices) with differential risks. 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.


pages: 363 words: 105,689

The Power by Naomi Alderman

Adrian Hon, citizen journalism, collateralized debt obligation, dark pattern, false flag, Internet Archive, megacity

One of the men already has his hand up one of the women’s skirt, which Shanti could fucking do without. She knows her audience, though. ‘Something new’ is their rallying cry, their mating call, their 6 a.m. wake-up call with newspaper and organic pomegranate juice, because orange is so 1980s high glycaemic load. They love ‘something new’ more than they love collateralized debt obligations. ‘Free sample?’ says one of the men, counting out the pills they’ve already bought. Checking he hasn’t been cheated. Cunt. ‘Uh-uh,’ says Shanti. ‘Not for you. This is strictly for the ladies.’ There’s a crowing, whistling cheer at that. She shows them a little dime bag of powder; it’s white with a purplish sheen to it.


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

Many of the best American colleges until today have so-called legacy preferences, giving preferred admission to children of parents who also studied at the institution or, in some cases, gave money to it. And while US governments for decades promoted homeownership, opaque financial innovation with mortgage-backed securities and collateralized debt obligations led to a housing crisis in 2008, pushing millions of Americans out of their houses and out of their jobs. To this day, some people have not recovered financially from that crisis. Finally, some 28 million Americans, almost 10 percent of the total, did not have health insurance in 201819 (the last year for which data were available at the time of writing).


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

Many of the best American colleges until today have so-called legacy preferences, giving preferred admission to children of parents who also studied at the institution or, in some cases, gave money to it. And while US governments for decades promoted homeownership, opaque financial innovation with mortgage-backed securities and collateralized debt obligations led to a housing crisis in 2008, pushing millions of Americans out of their houses and out of their jobs. To this day, some people have not recovered financially from that crisis. Finally, some 28 million Americans, almost 10 percent of the total, did not have health insurance in 201819 (the last year for which data were available at the time of writing).


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

Maybe there could be some daylight through the cracks of his persistent bad mood. Only one thing could really dispel that mood, and day by day, that thing looked nearer. The market was finally starting to turn. Mortgage delinquencies were climbing. A new tangle of words had appeared alongside subprime: collateralized debt obligation. CDOs were bundles of many bonds—often, mortgage-backed ones—that were then sliced into “tranches” of risk, ranging from super-safe to super-risky. Any problems in the bonds would affect the more “junior” tranches first; the senior tranches would lose money only if there were many defaults at the same time.


pages: 489 words: 106,008

Risk: A User's Guide by Stanley McChrystal, Anna Butrico

"Hurricane Katrina" Superdome, Abraham Maslow, activist fund / activist shareholder / activist investor, airport security, Albert Einstein, Apollo 13, banking crisis, Bernie Madoff, Boeing 737 MAX, business process, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, computer vision, coronavirus, corporate governance, cotton gin, COVID-19, cuban missile crisis, deep learning, disinformation, don't be evil, Dr. Strangelove, fake news, fear of failure, George Floyd, Glass-Steagall Act, global pandemic, Googley, Greta Thunberg, hindsight bias, inflight wifi, invisible hand, iterative process, late fees, lockdown, Paul Buchheit, Ponzi scheme, QWERTY keyboard, ride hailing / ride sharing, Ronald Reagan, San Francisco homelessness, School Strike for Climate, Scientific racism, Silicon Valley, Silicon Valley startup, Skype, social distancing, source of truth, Stanislav Petrov, Steve Jobs, Thomas L Friedman, too big to fail, Travis Kalanick, wikimedia commons, work culture

The Great Depression, dot-com crash, and Great Recession were all followed by periods of increased scrutiny that attempted to identify and analyze the roots of the problems. In the wake of the 2008 financial crisis, risks were identified in the emergence and popularization of financial tools like CDOs—collateralized debt obligations—as well as other less publicized activities and products. Taken as a whole, these risks created an existential threat for global financial institutions that traditionally had portrayed themselves as being rock-solid. As a result, governments sought to restore the soundness of the financial sector by increasing oversight and demanding discipline from banks in maintaining liquidity and limiting exposure to risky loans or investments.


The Global Money Markets by Frank J. Fabozzi, Steven V. Mann, Moorad Choudhry

asset allocation, asset-backed security, bank run, Bear Stearns, Bretton Woods, buy and hold, collateralized debt obligation, credit crunch, currency risk, discounted cash flows, discrete time, disintermediation, Dutch auction, financial engineering, fixed income, Glass-Steagall Act, high net worth, intangible asset, interest rate derivative, interest rate swap, land bank, large denomination, locking in a profit, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, money market fund, moral hazard, mortgage debt, paper trading, Right to Buy, short selling, stocks for the long run, time value of money, value at risk, Y2K, yield curve, zero-coupon bond, zero-sum game

Nevertheless, it remains to be seen if the proposals are adopted in their current form. Under the proposals, capital relief can be obtained by the use of collateral, bank guarantees, and credit derivatives. These proposals should result in a rise in the use of synthetic securitizations such as synthetic collateralized debt obligations transactions, to reduce capital exposure of bank balance sheets. The Accord stipulates a haircut (denoted by H in the draft) to be applied to collateral, in accordance with its credit quality, as a protection against market risk. This is not controversial. Collateral, 9 This was introduced at the time of the second draft proposals.


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

October 12, 2005. 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.


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

Needless to say, however, those taking the least risk also earn the lowest interest rate; those at the most risky, most speculative end of the deal are (in theory) well compensated for the risk they take. (I say ‘in theory,’ because when in practice these edifices of crappy assets collapsed, those at the bottom of the food chain often received nothing at all.) Structures of this sort are known as collateralized debt obligations, or CDOs. When you finally understand the CDO structure and grasp the way that cash flows‌—‌and risks‌—‌cascade down the chain of bondholders, it’s easy to get seduced by the logic of it all. Yet when you stand back and think about it, the logic is extraordinary. Joe and Joella do not look (or smell?)


pages: 385 words: 123,168

Bullshit Jobs: A Theory by David Graeber

1960s counterculture, active measures, antiwork, basic income, Berlin Wall, Bernie Sanders, Bertrand Russell: In Praise of Idleness, Black Lives Matter, Bretton Woods, Buckminster Fuller, business logic, call centre, classic study, cognitive dissonance, collateralized debt obligation, data science, David Graeber, do what you love, Donald Trump, emotional labour, equal pay for equal work, full employment, functional programming, global supply chain, High speed trading, hiring and firing, imposter syndrome, independent contractor, informal economy, Jarndyce and Jarndyce, Jarndyce and Jarndyce, job automation, John Maynard Keynes: technological unemployment, knowledge worker, moral panic, Post-Keynesian economics, post-work, precariat, Rutger Bregman, scientific management, Silicon Valley, Silicon Valley startup, single-payer health, software as a service, telemarketer, The Future of Employment, Thorstein Veblen, too big to fail, Travis Kalanick, universal basic income, unpaid internship, wage slave, wages for housework, women in the workforce, working poor, Works Progress Administration, young professional, éminence grise

These days, it’s hard to recall the almost mystical aura with which the financial sector had surrounded itself in the years leading up to 2008. Financiers had managed to convince the public—and not just the public, but social theorists, too (I well remember this)—that with instruments such as collateralized debt obligations and high-speed trading algorithms so complex they could be understood only by astrophysicists, they had, like modern alchemists, learned ways to whisk value out of nothing by means that others dared not even try to understand. Then, of course, came the crash, and it turned out that most of the instruments were scams.


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

A bill implementing the agreement is currently before the Canadian parliament. 11 Conclusion 1 In the 1990s, the prevailing myth was that the boom in information technology made all other cycles obsolete; from 2000 to 2005 it was that property prices could only go up because land is in limited supply while population continues to grow. 2 The compensation principle really amounts to the claim that everyone is better off if everyone, on average, has more stuff. As we’ve noted, this is unconvincing for other reasons. 3 The ninth edition of Samuelson’s principles textbook, published in 1973, contains all of these topics. Postscript 1 Three of the better-known acronyms are SIVs (structured investment vehicles), CDOs (collateralized debt obligations) and ABCPs (asset-backed commercial paper). 2 This was the Depository Institutions Deregulation and Monetary Control Act of 1980. 3 This was the Alternative Mortgage Transaction Parity Act of 1982. 4 It also established the Federal Deposit Insurance Corporation (FDIC), which provided government insurance on bank deposits to prevent bank runs.


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

And the people who were supposed to be assessing the quality of securities built out of such loans were using models that blinded them to what was going on.30 Statistical Legitimacy—The Failure of the Rating Agencies It’s no surprise that financial institutions jumped with both feet at the chance to broker deals between the sellers and buyers of structured securities like MBSes (and combinations of MBSes, often called collateralized debt obligations [CDOs]). They made money no matter what happened to the securities they sold. But why did buyers purchase them so readily? Why did the government not counsel caution? They were novel, untested, and complex in ways that might have made investors very ner vous. Yet rating agencies managed to offer a reassuring seal of approval—thanks to their own, even more deficient modeling.31 FINANCE’S ALGORITHMS 109 There’s a delicate balance between government and the market in America’s investment landscape.


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

Scott Patterson details in his book The Quants how all of this was facilitated by quants who, with calculations based on academic financial theory, assured everyone that their model prices were accurate and the risks small. 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.


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.


pages: 460 words: 131,579

Masters of Management: How the Business Gurus and Their Ideas Have Changed the World—for Better and for Worse by Adrian Wooldridge

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, affirmative action, Alan Greenspan, barriers to entry, behavioural economics, Black Swan, blood diamond, borderless world, business climate, business cycle, business intelligence, business process, carbon footprint, Cass Sunstein, Clayton Christensen, clean tech, cloud computing, collaborative consumption, collapse of Lehman Brothers, collateralized debt obligation, commoditize, company town, corporate governance, corporate social responsibility, creative destruction, credit crunch, crowdsourcing, David Brooks, David Ricardo: comparative advantage, disintermediation, disruptive innovation, do well by doing good, don't be evil, Donald Trump, Edward Glaeser, Exxon Valdez, financial deregulation, Ford Model T, Frederick Winslow Taylor, future of work, George Gilder, global supply chain, Golden arches theory, hobby farmer, industrial cluster, intangible asset, It's morning again in America, job satisfaction, job-hopping, joint-stock company, Joseph Schumpeter, junk bonds, Just-in-time delivery, Kickstarter, knowledge economy, knowledge worker, lake wobegon effect, Long Term Capital Management, low skilled workers, Mark Zuckerberg, McMansion, means of production, Menlo Park, meritocracy, Michael Milken, military-industrial complex, mobile money, Naomi Klein, Netflix Prize, Network effects, new economy, Nick Leeson, Norman Macrae, open immigration, patent troll, Ponzi scheme, popular capitalism, post-industrial society, profit motive, purchasing power parity, radical decentralization, Ralph Nader, recommendation engine, Richard Florida, Richard Thaler, risk tolerance, Ronald Reagan, science of happiness, scientific management, shareholder value, Silicon Valley, Silicon Valley startup, Skype, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, Steven Levy, supply-chain management, tacit knowledge, technoutopianism, the long tail, The Soul of a New Machine, The Wealth of Nations by Adam Smith, Thomas Davenport, Tony Hsieh, too big to fail, vertical integration, wealth creators, women in the workforce, young professional, Zipcar

The crisis brought down many of the school’s most celebrated products, such as Stan O’Neal, the head of Merrill Lynch, and Andy Hornby, the head of HBOS (who, incidentally, had graduated top of his class). But it did more than this. Critics lambasted Harvard (and its fellow business schools) for inventing doomsday machines like collateralized debt obligations and for failing to give their charges any sense of risk and responsibility. The Financial Times headlined an article on the school’s centenary “blame it on Harvard.”1 Philip Delves Broughton suggested that his fellow Harvard MBAs should be known as “masters of the apocalypse” rather than masters of business administration.


pages: 421 words: 128,094

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone by David Carey

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, asset allocation, banking crisis, Bear Stearns, Bonfire of the Vanities, business cycle, Carl Icahn, carried interest, collateralized debt obligation, corporate governance, corporate raider, credit crunch, deal flow, diversification, diversified portfolio, financial engineering, fixed income, Future Shock, Gordon Gekko, independent contractor, junk bonds, low interest rates, margin call, Menlo Park, Michael Milken, mortgage debt, new economy, Northern Rock, risk tolerance, Rod Stewart played at Stephen Schwarzman birthday party, Sand Hill Road, Savings and loan crisis, sealed-bid auction, Silicon Valley, sovereign wealth fund, Teledyne, The Predators' Ball, éminence grise

Soon corporate bonds as well as loans were being bundled into new instruments. CLOs quickly came to drive the lending process, absorbing an estimated 60–70 percent of all big corporate loans between 2004 and 2007, including the riskier leveraged loans backing LBOs. Hedge funds and banks across the globe poured money into CLOs and their mortgage counterparts, collateralized debt obligations, or CDOs, because their leveraged structures allowed them to pay higher rates of return than the investors could earn buying straight loans and bonds, and the diversified pools of debt backing the securities provided a hedge against defaults. Demand for CLOs and CDOs was so strong, and the fees for creating them so great, that the banks couldn’t raise the money and lend it fast enough.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Ben Bernanke: helicopter money, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Dr. Strangelove, Edward Snowden, eurozone crisis, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global macro, global reserve currency, global supply chain, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Herman Kahn, high-speed rail, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, junk bonds, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, megaproject, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, Nixon triggered the end of the Bretton Woods system, obamacare, offshore financial centre, oil shale / tar sands, open economy, operational security, plutocrats, Ponzi scheme, power law, price stability, public intellectual, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, Solyndra, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

A WMP is a pool or fund in which investors buy small units. The pool then takes the aggregate proceeds and invests in higher-yielding assets. Not surprisingly, the assets often consist of mortgages, properties, and corporate debt. In the WMP, China has an unregulated version of the worst of Western finance. WMPs resemble the collateralized debt obligations, collateralized loan obligations, and mortgage-backed securities, so-called CDOs, CLOs, and MBSs, that nearly destroyed Western capital markets in 2008. They are being sold in China without even the minimal scrutiny required by America’s own incompetent rating agencies and the SEC. The WMPs are sponsored by banks, but the related assets and liabilities do not appear on the bank balance sheets.


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

It was still borrowing huge amounts every day and was exquisitely vulnerable to the slightest change in public perception about its soundness. As investigator Anton Valukas later explained in his report on the firm’s bankruptcy, even the slightest slowing in sales of things like subprime collateralized debt obligations (CDOs) would make Lehman’s lenders nervous about the hundreds of billions in cash loans they were forking over every day—and the instant those lenders lost confidence, the end would come, exploding-death-star style. “Confidence was critical,” Valukas wrote. “The moment that repo counterparties were to lose confidence in Lehman and decline to roll over its daily funding, Lehman would be unable to fund itself and continue to operate.”


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

See Credit bubble creation future Bond Trader prediction Professor prediction neutrality Buffett, Warren diversification Reader’s Digest franchise S&P index performance prediction California Public Employees’ Retirement System (CalPERS) contribution levels, increase equities allocation Equity Trader operation flexibility, impact fund, formula hedge funds, in-house operation investment performance, improvement target, increase methodology 1% effect peak-to-trough drawdown Pensioner control pension problems portfolio construction, assumption Predator operation unlevered pension fund CalPERS Model Cambridge Endowment, asset management Capital accumulation adequacy ratios allocation, determination availability compounding inflows, attraction loss, avoidance management tactical asset allocation models, usage pools preservation raising total destruction unlevered pool Capital Asset Pricing Model (CAPM) confusion Capitalism, stability Cash balance holding importance leverage, relationship obligations, meeting (difficulty) valuation quality Catastrophe risk options CDX generic credit spreads Central banker talent, Bond Trader perspective Central banks, alpha source Charitable foundation, running (example) China commodity market manipulation Commodity Super Cycle, importance Commodity Trader perspective decoupling examination FDI fiscal stimulus foreign exchange reserves future G7 demand reliance GDP GDP (2000-2008) global reserves acquisition growth rates, achievement importance, Commodity Investor perspective investment-to-GDP ratios Plasticine Macro Trader perspective problems renminbi (2005-2009) superpower Church of England, pension fund assets Client risk Closet dollar exposure Cocoa (1970-2009) Cohen, Abbey Joseph Collateralized debt obligations (CDOs) Commodities bearish view collapse, Commodity Hedger anticipation Commodity Investor focus curves pricing susceptibility equities Commodity Investor perspective exposure definition, application indices, usage impact investor participation long/short, ease meltdown options markets, liquidity price-induced inflation prices collapse financial flows, impact risk, equity risk (contrast) space, active manager search Commodities and oil (2008) Commodity Hedger, The big moves Cargill employment commodities collapse exposure, indices (usage) discipline endowment process full-risk positions, risk collars (requirement) globalization, meaning human bias, impact information arbitrage information flow, absence interview investment process investor focus lessons leverage, usage liquidity management valuation process market entry mistakes passive commodity indices, avoidance peak oil belief portfolio construction price dislocation identification real asset perspective real money fund operation redemptions, absence risk collars function impact risk management tactical approach tail hedging, impact time horizon, shortening trader development trades examination, events/news (impact) example execution hurdles/shortage ideas, origination one-year time horizon problems trading history volatility, dampening Commodity Investor, The active/tactical pension fund manager annual returns China, importance commodities/commodity equities focus cyclical/secular macro/micro thought process deferred oil trade downside risk, mitigation export land model false confidence hedge fund interaction hedge fund manager skill hyperinflation, worry ideas, trading interview investment process lessons liquidity, examination liquid net worth long-term investment horizon macro/micro domination macro theme mines, purchase oil fields, purchase pension fund, base currency philosophy positions, scaling process real money manager scenario resource nationalism risk-taking ability sovereign wealth fund, control speculative flows spot shortages/outages state pension fund, control tactical approach trade, problem trends triangulated conviction uncertainty, risk Commodity markets China manipulation Commodity Trader approach factors pricing structure stress test Commodity Super Cycle importance initiation trade selection Commodity Trader, The career trades China perspective commodities long/short, ease perspective trades global book, running global energy positions hedge fund money management inflation perspective interview liquidity, absence market coverage entry options, usage prop trader, hedge fund manager (contrast) prop trading, customer flow (impact) risk management failure second order effects short side Commodity trading advisers (CTAs), impact Constraints Consuelo Mack WealthTrack (Swensen) Consumer Price Index (CPI) Consumer price inflation (CPI) number, investment Contango Conundrum Speech (Greenspan) Convenience yield Copper (1989-2009) Core inflation, headline inflation (contrast) Core positions trading, indices/options (usage) Corn, yield expectations (increase) Corner solution Corn futures (2006-2009) Corn futures (2007) Corporate bonds, risky assets Corporate pensions funds, PBGC guarantees NLRB ruling Correlations analysis movement risk, increase Corruption Perceptions Index (CPI) Counterparty risk importance Country-related Eurobonds, usage Coxe, Don Crash (2008) banks, problems foresight CRB (2004-2009) CRB Commodity Index (2001) CRB Index (2009) Credit bubble future recognition trades Credit default swaps (CDSs) levels, examination payment usage Credit indices, tranches Credit pricing, example Credit spreads, tightness Crop yields, pollution (impact) Cross-correlation misunderstanding risk management Cross-sectional data sets Crowded positions, identification Crowding factor issue pervasiveness Crude oil inventory Cumulative returns (1990-2009) Currency hedge Currency valuation Cyclical analysis Data mining techniques, contrast Datastream, usage Debt.


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

And that’s a shame, because a 2015 survey of hundreds of high-level financial professionals found that more than a third had witnessed instances of malfeasance at their own firms and 38 percent disagreed that the industry puts a client’s best interests first.69 THE THEATER OF FINANCIALIZATION Of course, there are other theories about why financialization occurs. Nobel Prize winner Robert Shiller has described the “irrational exuberance” that he believes is a natural human tendency. The fact that we go repeatedly from boom to bust throughout history, moving like lemmings toward the New New Thing—be it tulips or collateralized debt obligations (CDOs)—points to the idea that there are strong psychological forces at work. (The neuroscience of traders’ brains, which respond to deal making similarly to how addicts’ brains respond to cocaine, is in itself a fascinating area of scholarly inquiry.)70 Other academics, like University of Michigan scholar Gerald Davis, focus on the importance of new management theories such as our notion of shareholder value that puts the investor before everyone and everything else in society, including customers, employees, and the public good.71 The changes in the financial system have gone hand in hand with changes in business culture.


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.


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

Sydney Futures Exchange Corporation. (2002) 2002 Annual Report. Sydney Futures Exchange Corporation. (2003a) 2003 Half-Year Financial Report. References 415 Sydney Futures Exchange Corporation. (2003b, June 25) “Full Participant Compliance Manual,” pp. 32–33. Tavakoli, J. M. (2003) Collateralized Debt Obligations and Structured Finance. New York: John Wiley & Sons. Thanassoulis, E., A. Boussofiane, and R. G. Dyson. (1995) “Exploring Output Quality Targets in the Provisions of Perinatal Care in England Using Data Envelopment Analysis.” European Journal of Operational Research, Vol. 80, No. 3, pp. 588–607.


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: 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

Like the earlier, more reasonable incarnations of subprime lending, the early mortgage-backed securities had mostly been healthy for the financial system—the claim that they allowed default risks to be dispersed widely was in fact true. But then this trend reached its extreme limits. Rather than merely turning mortgages into mortgage securities, financiers began to issue securities backed by other securities, creating strange instruments known as “collateralized debt obligations, squared.” A complex tiering was superimposed on these confections, with “senior” tranches of CDOs and CDOs-squared having the first claim on repayments and “junior” tranches accepting greater default risks in exchange for higher interest payments. The more byzantine the construction, the harder it became for investors to understand what they were purchasing.

., 9, 269, 425, 494, 506, 540 campaign goals of, 419, 422 description of, 421 and the Fed, 437, 448, 460, 627 and Greenspan, 460, 477–78, 484–85, 566, 569, 653 Greenspan advises, 418–24, 426, 431, 433, 436–37, 443, 486, 526–27, 576, 607 and Mexico bailout, 474–78 and midterm elections, 459–60, 499–500 reappoints Greenspan, 485–87, 563, 565–68 on reducing deficit, 423–24, 426–30, 433, 443, 573, 575, 579 reelection of, 420, 423, 499–500, 511 signs reform bill, 559 and South Korean crisis, 517, 519 state dinners of, 511, 564 State of the Union address, 429, 565, 579 CNBC, 528–29, 648 CNN, 565, 609 Cohen, Abby Joseph, 501–2 Cold War, 41 Coll, Steve, 669 collateralized debt obligations (CDOs), 618, 620 Colson, Charles, 141–42 Columbia University, 34, 36–39, 42, 46, 63, 84, 102, 125–26, 134, 221, 299–300, 496 Commager, Henry Steele, 63 commodities, 191–92 Greenspan trades in, 55, 130, 213, 350, 461 prices of, 54, 183–84, 186, 229, 522 trading in, 54–57, 202, 435 Commodity Futures Trading Commission (CFTC), 531–33, 560 competition, 72–75, 148, 150, 313–14, 460, 464, 495, 525–26 Comptroller of the Currency, 657 computers, 3, 77, 83, 113–14, 122, 130, 137, 221, 292, 311–12, 355, 443, 496–97, 530, 549, 561–62, 618 Congressional Budget Office, 216, 573, 576, 601 Connally, John, 141, 143 Conrad, Kent, 426–28, 431, 575–77 The Conscience of a Conservative (Goldwater), 93 conservatives/conservatism, 6, 28–30, 63–64, 69, 75, 95–97, 106, 108, 110, 123, 134, 159, 181–82, 200, 212, 224–27, 240, 254, 286–88, 376 The Constitution of Liberty (Hayek), 74 consumer boom, 593–94 price index, 35, 40, 153, 162, 207, 333, 396, 435, 461, 635 price inflation, 6, 219, 233, 414–15, 435–36, 463, 551, 554 protection, 160, 623–25 Continental Illinois National Bank and Trust Co., 297–302, 304, 312, 343, 347, 351–52, 361, 467, 470–73, 476, 545, 558, 620, 631, 662–63 Cooke, Jack Kent, 458–59 Cootner, Paul, 682–83 copper, 55, 66, 104, 191–92 corporate America, 63, 74–75 assets, 331, 598 boards, 292–94 buyouts, 385–86 debt, 136, 377 directorships, 292–94, 312, 314 investment, 49–50, 238, 604–6 profits, 344, 492–94, 496–97, 501, 524, 601, 638 reform, 598–600, 603, 626, 679 stock, 209, 294–95 corporations, 78, 209, 216, 343, 358, 531 bailouts of, 196, 200, 240, 303 bankruptcies of, 465–66, 558, 598 failure of, 135–36, 139–40 leveraged, 135–36, 145 mergers of, 522–26 and political power, 74–75 See also big business; specific names Corrado, Carol, 493 Corrigan, E.


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

The most exalted authority of all was the central banking Group of Ten in the Basel II process. This financial ultra-elite develops the rules for national banks. For the purposes of required bank reserves, Basel II mandated the purchase of the very sovereign bonds and subprime mortgage securities that remain at the heart of the crisis. While endorsing structured collateralized debt obligations, whereby the actual viability of the underlying assets was opaque, Basel II specifically opposed the ownership of individual mortgages for which information about owner finances and property values was readily available. The Basel committee espoused the crippling divorce of knowledge from power, information from capital, accountability from ownership.


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

., who said he earns about $150,000 a year, is adjusting his sights, too. After graduating from the Wharton School of the University of Pennsylvania in 2006, he spent a $10,000 signing bonus from Citigroup Inc. on a six-week trip to South America. He worked on an emerging-markets team at the bank that traded and marketed synthetic collateralized debt obligations. Wet T-Shirt His tastes for travel got “a little bit more lavish,” he said. Kullberg, a triathlete, went to a bachelor party in Las Vegas in January after renting a four-bedroom ski cabin at Bear Mountain in California as a Christmas gift to his parents. He went to Ibiza for another bachelor party in August, spending $3,000 on a three-day trip, including a fifteen-minute ride from the airport that cost a hundred dollars.


pages: 497 words: 144,283

Connectography: Mapping the Future of Global Civilization by Parag Khanna

"World Economic Forum" Davos, 1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 9 dash line, additive manufacturing, Admiral Zheng, affirmative action, agricultural Revolution, Airbnb, Albert Einstein, amateurs talk tactics, professionals talk logistics, Amazon Mechanical Turk, Anthropocene, Asian financial crisis, asset allocation, autonomous vehicles, banking crisis, Basel III, Berlin Wall, bitcoin, Black Swan, blockchain, borderless world, Boycotts of Israel, Branko Milanovic, BRICs, British Empire, business intelligence, call centre, capital controls, Carl Icahn, charter city, circular economy, clean water, cloud computing, collateralized debt obligation, commoditize, complexity theory, continuation of politics by other means, corporate governance, corporate social responsibility, credit crunch, crony capitalism, crowdsourcing, cryptocurrency, cuban missile crisis, data is the new oil, David Ricardo: comparative advantage, deglobalization, deindustrialization, dematerialisation, Deng Xiaoping, Detroit bankruptcy, digital capitalism, digital divide, digital map, disruptive innovation, diversification, Doha Development Round, driverless car, Easter island, edge city, Edward Snowden, Elon Musk, energy security, Ethereum, ethereum blockchain, European colonialism, eurozone crisis, export processing zone, failed state, Fairphone, Fall of the Berlin Wall, family office, Ferguson, Missouri, financial innovation, financial repression, fixed income, forward guidance, gentrification, geopolitical risk, global supply chain, global value chain, global village, Google Earth, Great Leap Forward, Hernando de Soto, high net worth, high-speed rail, Hyperloop, ice-free Arctic, if you build it, they will come, illegal immigration, income inequality, income per capita, industrial cluster, industrial robot, informal economy, Infrastructure as a Service, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, Jane Jacobs, Jaron Lanier, John von Neumann, Julian Assange, Just-in-time delivery, Kevin Kelly, Khyber Pass, Kibera, Kickstarter, LNG terminal, low cost airline, low earth orbit, low interest rates, manufacturing employment, mass affluent, mass immigration, megacity, Mercator projection, Metcalfe’s law, microcredit, middle-income trap, mittelstand, Monroe Doctrine, Multics, mutually assured destruction, Neal Stephenson, New Economic Geography, new economy, New Urbanism, off grid, offshore financial centre, oil rush, oil shale / tar sands, oil shock, openstreetmap, out of africa, Panamax, Parag Khanna, Peace of Westphalia, peak oil, Pearl River Delta, Peter Thiel, Philip Mirowski, Planet Labs, plutocrats, post-oil, post-Panamax, precautionary principle, private military company, purchasing power parity, quantum entanglement, Quicken Loans, QWERTY keyboard, race to the bottom, Rana Plaza, rent-seeking, reserve currency, Robert Gordon, Robert Shiller, Robert Solow, rolling blackouts, Ronald Coase, Scramble for Africa, Second Machine Age, sharing economy, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, six sigma, Skype, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, Stuxnet, supply-chain management, sustainable-tourism, systems thinking, TaskRabbit, tech worker, TED Talk, telepresence, the built environment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, Tim Cook: Apple, trade route, Tragedy of the Commons, transaction costs, Tyler Cowen, UNCLOS, uranium enrichment, urban planning, urban sprawl, vertical integration, WikiLeaks, Yochai Benkler, young professional, zero day

The effective use of friction such as medical checks, quarantines, and surging treatment to the source of outbreak helped limit the damage. Similarly, the precautionary principle dictates that we implement macro-prudential safeguards in high-risk areas of the world economy: separating commercial and investment banking, restricting the re-securitization of collateralized debt obligations and swaps, requiring banks to invest their own capital with client trades, and so forth. Such measures protect the financial system as a whole against the spread of contagion despite its growing integration and are superior to allowing all activities while attempting in vain to micromanage them.


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

Our main focus in this book will be the theory of option valuation, the study of the BSM model and its limitations, and a detailed introduction to the extensions of the BSM model that attempt to rectify its problems. Most of the book is devoted to these topics. A secondary motivation for writing this book originates in the great financial crisis of 2007–2008, which began with the collapse of the mortgage collateralized debt obligation (CDO) market, whose structured credit products were valued using financial engineering techniques. When the crisis began, some pundits blamed the practice of financial engineering for the mortgage market’s meltdown. Paul Volcker, whose grandson was a financial engineer, wrote the following paragraph as part of an otherwise sensible speech he gave in 2009: A year or so ago, my daughter had seen . . . some disparaging remarks I had made about financial engineering.


pages: 487 words: 147,238

American Girls: Social Media and the Secret Lives of Teenagers by Nancy Jo Sales

4chan, access to a mobile phone, agricultural Revolution, Albert Einstein, Black Lives Matter, British Empire, collateralized debt obligation, Columbine, dark pattern, digital divide, East Village, Edward Snowden, feminist movement, Golden Gate Park, hiring and firing, impulse control, invention of the printing press, James Bridle, jitney, Kodak vs Instagram, longitudinal study, Marc Andreessen, Mark Zuckerberg, meta-analysis, moral panic, San Francisco homelessness, Sheryl Sandberg, Silicon Valley, Skype, Snapchat, Social Justice Warrior, tech bro, TechCrunch disrupt, The Chicago School, women in the workforce

“It’s, What will doing this get me now? Not, What are the consequences?” But this depiction of teenagers’ lack of impulse control could also describe what Roberts believes has happened to American society overall, as seen in everything from the culture of Wall Street (“short-term performance” focus and collateralized debt obligations) to Washington’s failure to take serious action on the threat of global warming. As I read his book, it occurred to me that it’s as if we’ve become a nation of teenagers, from the limbic point of view. And this also could be said to be true of our collective behavior online—for it’s not only kids who are mean to each other on social media, not just kids who slight one another and get into fights; uncivil discourse has become a hallmark of online behavior for everyone.


pages: 561 words: 157,589

WTF?: What's the Future and Why It's Up to Us by Tim O'Reilly

"Friedman doctrine" OR "shareholder theory", 4chan, Affordable Care Act / Obamacare, Airbnb, AlphaGo, Alvin Roth, Amazon Mechanical Turk, Amazon Robotics, Amazon Web Services, AOL-Time Warner, artificial general intelligence, augmented reality, autonomous vehicles, barriers to entry, basic income, behavioural economics, benefit corporation, Bernie Madoff, Bernie Sanders, Bill Joy: nanobots, bitcoin, Blitzscaling, blockchain, book value, Bretton Woods, Brewster Kahle, British Empire, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, Captain Sullenberger Hudson, carbon tax, Carl Icahn, Chuck Templeton: OpenTable:, Clayton Christensen, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, computer vision, congestion pricing, corporate governance, corporate raider, creative destruction, CRISPR, crowdsourcing, Danny Hillis, data acquisition, data science, deep learning, DeepMind, Demis Hassabis, Dennis Ritchie, deskilling, DevOps, Didi Chuxing, digital capitalism, disinformation, do well by doing good, Donald Davies, Donald Trump, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, fake news, Filter Bubble, Firefox, Flash crash, Free Software Foundation, fulfillment center, full employment, future of work, George Akerlof, gig economy, glass ceiling, Glass-Steagall Act, Goodhart's law, Google Glasses, Gordon Gekko, gravity well, greed is good, Greyball, Guido van Rossum, High speed trading, hiring and firing, Home mortgage interest deduction, Hyperloop, income inequality, independent contractor, index fund, informal economy, information asymmetry, Internet Archive, Internet of things, invention of movable type, invisible hand, iterative process, Jaron Lanier, Jeff Bezos, jitney, job automation, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John Zimmer (Lyft cofounder), Kaizen: continuous improvement, Ken Thompson, Kevin Kelly, Khan Academy, Kickstarter, Kim Stanley Robinson, knowledge worker, Kodak vs Instagram, Lao Tzu, Larry Ellison, Larry Wall, Lean Startup, Leonard Kleinrock, Lyft, machine readable, machine translation, Marc Andreessen, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, McMansion, microbiome, microservices, minimum viable product, mortgage tax deduction, move fast and break things, Network effects, new economy, Nicholas Carr, Nick Bostrom, obamacare, Oculus Rift, OpenAI, OSI model, Overton Window, packet switching, PageRank, pattern recognition, Paul Buchheit, peer-to-peer, peer-to-peer model, Ponzi scheme, post-truth, race to the bottom, Ralph Nader, randomized controlled trial, RFC: Request For Comment, Richard Feynman, Richard Stallman, ride hailing / ride sharing, Robert Gordon, Robert Metcalfe, Ronald Coase, Rutger Bregman, Salesforce, Sam Altman, school choice, Second Machine Age, secular stagnation, self-driving car, SETI@home, shareholder value, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart contracts, Snapchat, Social Responsibility of Business Is to Increase Its Profits, social web, software as a service, software patent, spectrum auction, speech recognition, Stephen Hawking, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, stock buybacks, strong AI, synthetic biology, TaskRabbit, telepresence, the built environment, the Cathedral and the Bazaar, The future is already here, The Future of Employment, the map is not the territory, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Davenport, Tony Fadell, Tragedy of the Commons, transaction costs, transcontinental railway, transportation-network company, Travis Kalanick, trickle-down economics, two-pizza team, Uber and Lyft, Uber for X, uber lyft, ubercab, universal basic income, US Airways Flight 1549, VA Linux, warehouse automation, warehouse robotics, Watson beat the top human players on Jeopardy!, We are the 99%, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator, yellow journalism, zero-sum game, Zipcar

When Brad Katsuyama, one of the heroes of Lewis’s book, tried to create a new exchange “where every dollar stands the same chance,” by taking away the advantages of the speed traders, Lewis noted that “the banks and the brokers [who] are also paid a cut of what the high-frequency traders are taking out of investors’ orders . . . don’t want to send their orders on this fair exchange because there’s less money to be made.” Derivatives, originally invented to hedge against risk, instead came to magnify it. The CDOs (collateralized debt obligations) that Wall Street sold to unsuspecting customers in the years leading up to the 2008 crash could only have been constructed with the help of machines. In a 2009 speech, John Thain, the former CEO of the New York Stock Exchange who’d become CEO of Merrill Lynch, admitted as much. “To model correctly one tranche of one CDO took about three hours on one of the fastest computers in the United States.


pages: 597 words: 172,130

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

"World Economic Forum" Davos, Alan Greenspan, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Sanders, break the buck, Bretton Woods, business climate, business cycle, capital controls, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency peg, eurozone crisis, financial engineering, financial innovation, Flash crash, foreign exchange controls, George Akerlof, German hyperinflation, Google Earth, hiring and firing, inflation targeting, Isaac Newton, Julian Assange, low cost airline, low interest rates, market bubble, market design, middle-income trap, Money creation, money market fund, moral hazard, mortgage debt, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, Paul Samuelson, price stability, public intellectual, quantitative easing, rent control, reserve currency, Robert Shiller, Robert Solow, rolodex, Ronald Reagan, Savings and loan crisis, savings glut, Socratic dialogue, sovereign wealth fund, The Great Moderation, too big to fail, union organizing, WikiLeaks, yield curve, Yom Kippur War

It was formed when the Gurneys, a Quaker family from Norwich that ran the leading bank in the rural areas of East Anglia, sought to expand its reach into the fast-paced, big-money world of dealing bills—corporate debt, essentially—in the City of London. It wasn’t dissimilar to the successful regional American banks, like Bank of America and Wachovia, that in the 2000s dove into the sea of Wall Street. Samuel Gurney and his partner, John Overend, may have never heard of a subprime mortgage or a collateralized debt obligation, but that didn’t stop the company they created in 1809 from finding some exotic and unwise ways to lend money. There was the plantation in Dominica, a tiny island in the West Indies, for example, and the railroad line that connected the two bustling Irish metropolises of Portadown and Omagh.


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

They made fast, big profits from handsome closing fees. Then, Wall Street firms sliced, diced, and repackaged these mortgage loans into what became known as “synthetic” derivatives, or security pools with various levels of risk, and sold multibillion-dollar bundles of mortgages—or mortgage parts—known as “collateralized debt obligations,” to hedge funds, college endowments, pension funds, insurance companies, or investors in Germany, Japan, Abu Dhabi, or wherever. The investors loved them because mortgages used to be very safe investments and Wall Street bond-rating agencies still gave them AAA ratings. When Risk Is Everywhere, It’s Nowhere The growth of these pyramiding bank loans and derivatives followed the policy prescriptions of Fed chairman Alan Greenspan, who credited this process with diversifying risk and having “contributed to the stability of the banking system….”


pages: 575 words: 171,599

The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund by Anita Raghavan

"World Economic Forum" Davos, airport security, Asian financial crisis, asset allocation, Bear Stearns, Bernie Madoff, Boeing 747, British Empire, business intelligence, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, delayed gratification, estate planning, Etonian, glass ceiling, high net worth, junk bonds, kremlinology, Larry Ellison, locking in a profit, Long Term Capital Management, Marc Andreessen, mass immigration, McMansion, medical residency, Menlo Park, new economy, old-boy network, Ponzi scheme, risk tolerance, rolodex, Ronald Reagan, short selling, Silicon Valley, sovereign wealth fund, stem cell, technology bubble, too big to fail

Cox believed that financial players like investment banks and hedge funds could be trusted to regulate themselves. During his time, the agency missed some stunningly huge fraudsters, such as Bernie Madoff, who ran a Ponzi scheme for nearly two decades. It also overlooked troubling practices such as collateralized debt obligations that led to the financial system’s near meltdown in 2008. For a month, the SEC’s exam staff camped in Sedna’s offices. They turned up instant messages and emails that seemed to point to something suspicious. What exactly was going on was less clear. On September 21, 2006, Wadhwa received an order of investigation captioned “In the Matter of: Sedna Capital Management LLC,” giving the SEC the authority to subpoena documents and take testimony.


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

Securities –Bloomberg October 18, 2007 Core Inflation Remains Steady, Presenting a Puzzle to the Fed -New York Times October 19, 2007 Earnings Reports Trigger Steep Stock Sell-Off -New York Times October 22, 2007 China Bank to Buy $1 Billion Stake in Bear Stearns -New York Times October 24, 2007 Loss and Larger Write-Down at Merrill “Merrill Lynch, the brokerage firm, reported its first quarterly loss in nearly six years today, after it increased the amount of its write-down by $2.9 billion for a total of $7.9 billion...Much of the loss and write-down was tied to problems in the subprime mortgage market and writing down the value of collateralized debt obligations.” –New York Times October 25, 2007 Home Sales Slump at 8-Year Low -New York Times October 25, 2007 New Signs in Europe of U.S. Mortgage Fallout “The ill tidings came in several European capitals on Thursday: from a reduced growth forecast in Germany to a report by the Bank of England, which said financial markets were still vulnerable to shocks from the crisis that originated in the American home-mortgage market.”


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

The ratings agencies had given their AAA rating, normally reserved for a handful of the world’s most solvent governments and best-run businesses, to thousands of mortgage-backed securities, financial instruments that allowed investors to bet on the likelihood of someone else defaulting on their home. The ratings issued by these companies are quite explicitly meant to be predictions: estimates of the likelihood that a piece of debt will go into default.5 Standard & Poor’s told investors, for instance, that when it rated a particularly complex type of security known as a collateralized debt obligation (CDO) at AAA, there was only a 0.12 percent probability—about 1 chance in 850—that it would fail to pay out over the next five years.6 This supposedly made it as safe as a AAA-rated corporate bond7 and safer than S&P now assumes U.S. Treasury bonds to be.8 The ratings agencies do not grade on a curve.


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

Along with the dramatic rise in liquidity since the early 1980s has come the development of technologies that have enabled financial markets to revolutionize the spreading of risk, as we have seen. Three or four decades ago, markets could deal only with plain vanilla stocks and bonds. Financial derivatives were simple and few. But with the advent of the ability to do around-the-clock business real-time in today's linked worldwide markets, derivatives, collateralized debt obligations, and other complex products have arisen that can distribute risk across financial products, geography, and time. Although the New York Stock Exchange has become a lesser presence in world finance, its trading volume has risen from several million shares a day in the 1950s to nearly two billion shares a day in recent years.


pages: 976 words: 235,576

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite by Daniel Markovits

8-hour work day, activist fund / activist shareholder / activist investor, affirmative action, algorithmic management, Amazon Robotics, Anton Chekhov, asset-backed security, assortative mating, basic income, Bernie Sanders, big-box store, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, compensation consultant, computer age, corporate governance, corporate raider, crony capitalism, David Brooks, deskilling, Detroit bankruptcy, disruptive innovation, Donald Trump, Edward Glaeser, Emanuel Derman, equity premium, European colonialism, everywhere but in the productivity statistics, fear of failure, financial engineering, financial innovation, financial intermediation, fixed income, Ford paid five dollars a day, Frederick Winslow Taylor, fulfillment center, full employment, future of work, gender pay gap, gentrification, George Akerlof, Gini coefficient, glass ceiling, Glass-Steagall Act, Greenspan put, helicopter parent, Herbert Marcuse, high net worth, hiring and firing, income inequality, industrial robot, interchangeable parts, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kevin Roose, Kiva Systems, knowledge economy, knowledge worker, Kodak vs Instagram, labor-force participation, Larry Ellison, longitudinal study, low interest rates, low skilled workers, machine readable, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass incarceration, medical residency, meritocracy, minimum wage unemployment, Myron Scholes, Nate Silver, New Economic Geography, new economy, offshore financial centre, opioid epidemic / opioid crisis, Paul Samuelson, payday loans, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, purchasing power parity, rent-seeking, Richard Florida, Robert Gordon, Robert Shiller, Robert Solow, Ronald Reagan, Rutger Bregman, savings glut, school choice, shareholder value, Silicon Valley, Simon Kuznets, six sigma, Skype, stakhanovite, stem cell, Stephen Fry, Steve Jobs, stock buybacks, supply-chain management, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, The Theory of the Leisure Class by Thorstein Veblen, Thomas Davenport, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, traveling salesman, universal basic income, unpaid internship, Vanguard fund, War on Poverty, warehouse robotics, Winter of Discontent, women in the workforce, work culture , working poor, Yochai Benkler, young professional, zero-sum game

Meritocracy biases technological innovation toward skill because elaborately trained and intensely motivated superordinate workers can use skill-biased innovations in especially productive and profitable ways, in stark contrast to the aristocratic elite. (Imagine asking Bertie Wooster to trade collateralized debt obligations.) Meritocratic education both creates innovators and gives them a target to aim at. In this way, the home also remakes work in its image. The feedback loop between elite training and elite work does not of course account for all economic inequality, or even just for all meritocratic inequality.


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

Other important pillars of post–Great Depression financial regulations were dismantled, beginning with the 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act which relaxed interstate banking regulations and opened the way to a series of mergers leading to the formation of gargantuan banking corporations such as JPMorgan Chase, Citicorp, and Bank of America. In 1999, the Gramm-Leach-Bliley Act demolished most of the remaining barriers between commercial and investment banking. During the same period, even as complex financial derivatives were spreading, bankers strenuously opposed new regulations. 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.


pages: 827 words: 239,762

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

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Albert Einstein, Apollo 13, barriers to entry, Bayesian statistics, Bear Stearns, Bernie Madoff, Bob Noyce, Bonfire of the Vanities, business cycle, business process, butterfly effect, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, Clayton Christensen, cloud computing, collateralized debt obligation, collective bargaining, commoditize, compensation consultant, corporate governance, corporate raider, corporate social responsibility, creative destruction, deskilling, discounted cash flows, disintermediation, disruptive innovation, Donald Trump, eat what you kill, Fairchild Semiconductor, family office, financial engineering, financial innovation, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, Glass-Steagall Act, global pandemic, Gordon Gekko, hiring and firing, Ida Tarbell, impact investing, income inequality, invisible hand, Jeff Bezos, job-hopping, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, Kōnosuke Matsushita, London Whale, Long Term Capital Management, market fundamentalism, Menlo Park, Michael Milken, new economy, obamacare, oil shock, pattern recognition, performance metric, Pershing Square Capital Management, Peter Thiel, planned obsolescence, plutocrats, profit maximization, profit motive, pushing on a string, Ralph Nader, Ralph Waldo Emerson, RAND corporation, random walk, rent-seeking, Ronald Coase, Ronald Reagan, Sam Altman, Sand Hill Road, Saturday Night Live, scientific management, shareholder value, Sheryl Sandberg, Silicon Valley, Skype, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, Steve Jurvetson, survivorship bias, TED Talk, The Nature of the Firm, the scientific method, Thorstein Veblen, Tragedy of the Commons, union organizing, urban renewal, vertical integration, Vilfredo Pareto, War on Poverty, William Shockley: the traitorous eight, women in the workforce, Y Combinator

Levy hired him.22 Another: Jim Koch, a fellow HBS grad who had worked at BCG with Paulson, asked his classmate if he wanted to invest in his fledgling craft brewery. Paulson gave him $25,000. The brewery? Boston Beer, maker of Sam Adams. Paulson made several million dollars on the investment.23 Goldman comes back into his story when it later emerged that the bank had worked with Paulson to design a so-called synthetic collateralized debt obligation that would allow him to bet against subprime mortgages in 2007. Along with a key employee, Paolo Pellegrini (’85), Paulson even helped select the contents of the portfolios that went into the CDO, which was named ABACUS 2007-AC1. The only problem was that someone needed to be on the other side of the trade.


The Rough Guide to New York City by Rough Guides

3D printing, Airbnb, Bear Stearns, Berlin Wall, Bernie Madoff, bike sharing, Blue Bottle Coffee, Bonfire of the Vanities, Broken windows theory, Buckminster Fuller, buttonwood tree, car-free, centre right, Chuck Templeton: OpenTable:, clean water, collateralized debt obligation, colonial rule, congestion pricing, Cornelius Vanderbilt, crack epidemic, David Sedaris, Donald Trump, Downton Abbey, East Village, Edward Thorp, Elisha Otis, Exxon Valdez, Frank Gehry, General Motors Futurama, gentrification, glass ceiling, greed is good, haute couture, haute cuisine, Howard Zinn, illegal immigration, index fund, it's over 9,000, Jane Jacobs, junk bonds, Kickstarter, Lewis Mumford, Lyft, machine readable, Nelson Mandela, Norman Mailer, paper trading, Ponzi scheme, post-work, pre–internet, rent stabilization, ride hailing / ride sharing, Saturday Night Live, Scaled Composites, starchitect, subprime mortgage crisis, sustainable-tourism, The Death and Life of Great American Cities, the High Line, transcontinental railway, Triangle Shirtwaist Factory, uber lyft, upwardly mobile, urban decay, urban planning, urban renewal, white flight, Works Progress Administration, Yogi Berra, young professional

A series of crashes, starting with the dot-com bust and 9/11 attacks in 2001, battered the markets and began the physical move away from the Financial District and Wall Street (as much for security as high rental costs). The 2008–09 financial crisis proved the hardest blow. Investment banks had arranged hundreds of CDOs (Collateralized Debt Obligations), essentially bonds secured by subprime mortgages, since 1987; when overextended borrowers began to default on their mortgages all over the US, the money dried up. Insurer AIG was bailed out by the US government to the tune of $186 billion, and one by one the investment banks failed, unable to cope with mind-boggling losses.


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

But then the mobile-home makers began to sell their loans, handing off the risk of not getting paid back. That was now somebody else’s problem. The “somebody else” who had assumed the problem was an investor. In a process known as “securitization,” for some years, Wall Street had neatly packaged loans like these and sold them to investors through a “collateralized debt obligation,” or CDO—debt backed by the mortgages. They combined thousands of mortgage loans from all over the U.S. and sliced them into strips called “tranches.” The top-tier tranches got first dibs on all the cash flow from a pool of mortgages. The next tranches had second dibs, and so forth down the line.