next crash (bubble) reading room: Financial crisis of 2007-2008

resources:

https://en.wikipedia.org/wiki/Financial_crisis_of_2007–2008

https://www.bing.com/search?q=financial+crisis+of+2007-2008+chart

https://en.wikipedia.org/wiki/List_of_stock_market_crashes_and_bear_markets

https://en.wikipedia.org/wiki/Economic_bubble

https://en.wikipedia.org/wiki/Tulip_mania

https://www.bing.com/search?q=tulip+mania+chart

https://en.wikipedia.org/wiki/South_Sea_Company

https://www.bing.com/search?q=south+sea+bubble+chart

https://en.wikipedia.org/wiki/Mississippi_Company#Mississippi_Bubble

https://en.wikipedia.org/wiki/Dot-com_bubble

https://www.bing.com/search?q=dot+com+bubble+chart

https://en.wikipedia.org/wiki/Robert_E._Wright

https://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers

https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp

https://insight.kellogg.northwestern.edu/article/what-went-wrong-at-aig

https://www.institutionalinvestor.com/article/b150qdkrd30ggk/the-fall-of-aig-the-untold-story

https://www.insurancejournal.com/news/national/2008/10/10/94544.htm

https://www.npr.org/templates/story/story.php?storyId=5411422

https://en.wikipedia.org/wiki/Joseph_Cassano

https://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000

https://blogs.jamaicans.com/key-players-in-scandal-raked-in-billions-of-your-money/

https://www.npr.org/templates/story/story.php?storyId=102185942

https://www.corpwatch.org/article/us-10-enron-players-where-they-landed-after-fall

https://en.wikipedia.org/wiki/Subprime_mortgage_crisis

https://www.stephenhicks.org/2011/12/15/subprime-mortgage-crisishistory-flowchart/

https://www.stephenhicks.org/wp-content/uploads/2011/12/subprime-flow-chart-995.jpg

https://www.bing.com/images/search?q=charts+of+market+bubble

https://www.bing.com/images/search?q=charts+of+market+bubble&form=HDRSC2&tsc=ImageBasicHover

https://en.wikipedia.org/wiki/Robert_J._Shiller

https://en.wikipedia.org/wiki/Animal_Spirits:_How_Human_Psychology_Drives_the_Economy,_and_Why_It_Matters_for_Global_Capitalism

https://en.wikipedia.org/wiki/Case–Shiller_index

http://www.econ.yale.edu/~shiller/data.htm

https://en.wikipedia.org/wiki/Irrational_Exuberance_(book)

https://en.wikipedia.org/wiki/United_States_housing_bubble

https://en.wikipedia.org/wiki/Fannie_Mae#2000s

https://en.wikipedia.org/wiki/Freddie_Mac#The_mortgage_crisis_from_late_2007

https://en.wikipedia.org/wiki/David_Kellermann

https://en.wikipedia.org/wiki/2020_stock_market_crash

https://en.wikipedia.org/wiki/Black_Monday_(1987)

https://en.wikipedia.org/wiki/2020_congressional_insider_trading_scandal

https://publicintegrity.org/topics/inequality-poverty-opportunity/finance/whos-behind-the-financial-meltdown/

https://www.nytimes.com/2017/08/04/upshot/the-transformation-of-the-american-dream.html

____________________________________

"as a crisis unfolds"

George Soros, The new paradigm for financial markets, 2008 [ ]

p.82

United Kingdom, Spain, and Australia.

pp.82-83

p.82

the Federal Reserve lowered the federal funds rate to 1 percent and kept it there until June 2004. This allowed a housing bubble to develop in the United States. Similar bubbles could be observed in other parts of the world, notably the United Kingdom, Spain, and Australia.

p.82

What sets the United States housing bubble apart from the others is its size and importance for the global economy and the international financial system. The housing market turned down earlier in Spain than in the United States, but that passed unnoticed, except locally.

pp.82-83

By contrast, U.S. mortgage securities have been widely distributed all over the world with some European, particularly German, institutional holders even more heavily involved than American ones.

<< this biblio (book or codex) has no index >>

(The new paradigm for financial markets : the credit crisis of 2008 and what it means / George Soros., 1. financial crises──united states., 2. united states──economic policy., 3. united states──economic conditions──21st century., 4. credit──united states., HB3722.S673 2008, 332.0973──dc22, 2008, )

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Neil Irwin, The Alchemists : three central bankers and a world on fire, 2013

2007 August 9--BNP Paribas

1867 Walter Bagehot

1992 broke the Bank of England

2001 Bank of Japan, ZIRP (zero interest rate policy)

2005 Reghuram Rajan, Hyun Song Shin

2008 Before Asia Opens

2009 Mansion House Dinner

2010 QE2 [Over the next eight months, using newly created dollars, the Fed would buy $600 billion of longer-term debt U.S. Treasury bonds.]

(Irwin, Neil (2013), The Alchemists, the penguin press, new york, 2013 )

(The Alchemists : three central bankers and a world on fire, Neil Irwin, p.324)

____________________________________

1997 Christmas 1997

J.P. Morgan

A broad index secured trust offering (BISTRO) is a proprietary name used by J.P. Morgan for creating collateralized debt obligations (CDOs) from credit derivatives.

Initially created as a way for J.P. Morgan to hedge its credit risk

BISTRO (1997) were the predecessor of the synthetic collateralized debt products that later grew in popularity.

(BISTRO) was considered a landmark financial instrument at the time of its launch; it was believed to be one of the first synthetic collateralized debt obligation (CDO) instruments ever created.

These debt products were credited with contributing to the 2007-2008 financial crisis.

Consequences of Broad Index Secured Trust Offerings (BISTROs):: used credit derivatives to transfer credit risk in a portfolio.

https://www.investopedia.com/terms/b/broad-index-synthetic-trust-offering.asp

([ you transfer the risk by finding a counter-party who will enter into a credit default risk contract - like a life insurance, a disaster insurance, or a health insurance - an insurance contract that protects you against a default in this particular situation ])

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1997–2006 Lehman Brothers - rise of mortgage origination

In 1997, Lehman bought Colorado-based lender Aurora Loan Services, an Alt-A lender.

In 2000, to expand their mortgage origination pipeline, Lehman purchased West Coast subprime mortgage lender BNC Mortgage LLC.

Lehman had morphed into a real estate hedge fund disguised as an investment bank.[2]

From an equity position, its risky commercial real estate holdings were thirty times greater than capital.

In such a highly leveraged structure, a three- to five-percent decline in real estate values would wipe out all capital.[citation needed]

https://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers

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2000-2004 Faced with the bursting of the dot-com bubble, a series of corporate accounting scandals, and the September 11 terrorist attacks, the Federal Reserve lowered the federal funds rate from 6.5% in May 2001 to 1% in June 2003.2

May 2001 [6.5% fed funds]- June 2003 [1% fed funds]

https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp

2000 Commodity Futures Modernization Act of 2000 (CFMA)

The Commodity Futures Modernization Act of 2000 (CFMA) is United States federal legislation that ensured financial products known as over-the-counter (OTC) derivatives remained unregulated.

2000 Joseph Cassano sold hundreds of billions of credit protection in the form of CDSs without having to put up any real money as collateral as this form of insurance had been deregulated with the Phil Gramm-sponsored Commodity Futures Modernization Act of 2000, signed by Bill Clinton.[6]

https://en.wikipedia.org/wiki/Joseph_Cassano

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2004 the Federal Reserve lowered the federal funds rate to 1 percent and kept it there until June 2004., p.82 (George Soros, The new paradigm for financial markets, 2008)

2004 FBI warning of a looming financial crisis

the warning from an assistant FBI director that the growing mortgage fraud caseload could signal a problem with potentially wide economic repercussions

2005 Bankruptcy Reform Act, aka Bankruptcy Prevention and Fraud on Consumers Bill

For eight years (1997), the credit card industry pushed for new bankruptcy laws, and thanks to their intense lobbying efforts and high political contributions, they succeeded. The changes make it harder for consumers to file bankruptcy and have eliminated some of the benefits of prior law for consumers protection.

2005 Derivatives contracts are exempt from normal bankruptcy law

derivatives and other financial contracts

http://economicsofcontempt.blogspot.com/2009/03/special-treatment-of-derivatives-in.html

2005-2015 Afghanistan/ Iraq invasion (wars) (high intensity conflicts)

(major operational tempo)

2006 In the summer of 2006, [Nouriel] Roubini wrote that the U.S. was headed into a long and "protracted" recession due to the "collapse" of house prices, which he noted were already in freefall.[23]

https://en.wikipedia.org/wiki/Nouriel_Roubini#2006

2007 ‘On April 17, 2007, famed short-seller Jim Chanos and other hedge fund managers met under tight security at the World Bank in Washington for the G-8 meeting. Chanos and Paul Singer briefed prominent policy officials [including Gordon Brown] about the growing financial instability. They gave irrefutable evidence that a catastrophe was building. They told officials that banks

were about to sink the global economy. They called for decisive action. And they were ignored.’

2007 June 15, 2007 :: The failure of the two Bear Stearns mortgage hedge funds in June badly rattled the markets, but U.S. Federal Reserve Chairman Ben Bernanke and other senior officials reassured the public that the subprime problem was an isolated phenomenon. (p.xxi, George Soros, The new paradigm for financial markets, 2008)

2007 Gramlich [ - Former Federal Reserve governor Edward M. Gramlich - ] went public with his worries in 2007 and published a book on the subprime bubble just before the crisis first broke.

Edward M. Gramlich, Subprime Mortgages: America's Latest Boom and Bust, published 2007

Charles Kindleberger

Nouriel Roubini

(p.xix, George Soros, The new paradigm for financial markets, 2008)

____________________________________

Charles Kindleberger's book with Robert Z. Aliber;

Manias, Panics, and Crashes: A History of Financial Crises;

1978, 1989, 1996, 2000;

published in 2005

____________________________________

2007 ‘August 9--BNP Paribas announces it is unable to value mortgage-related assets on the books of three funds it manages, sparking a freeze-up in money markets and a 95 billion EUROs intervention by the ECB (European Central Bank)’ (Irwin, Neil (2013), The Alchemists, the penguin press, new york, 2013 )

[p.1, p.2, p.3]

[p.1]

Gigantic French bank BNP Paribas had announced that it was suspending withdrawls from three investment funds it managed. The funds were invested heavily in U.S. home-mortgage-backed securities that had become nearly impossible to value ([fraud]). Customers' money would be locked up until the bank could figure out exactly how much the investments were worth.

[p.2]

The three relatively obsure funds held only 1.6 billion EURO in assets.

[p.3]

By 10 a.m., the full Executive Board was on line. [Jean-Claude] Trichet was emphatic: "There is only one thing we can do, which is to give liquidity." The ECB, he insisted, must flood the banking system with euros. He was proposing that the central bank fulfill its traditional role as "lender of last resort," stepping in when private banks were pulling back, ... . The ECB would abandon its usual practice of pumping some fixed amount of money into the banking system and instead make an unlimited number of euros available to the banks that needed them. The technical term for what Trichet and the Executive Board did at 12:30 p.m. central European time is to offer a "fixed-rate tender with full allotment."

Translation: Come and get it, guys. We'll give you as many euros as you need at 4 percent. Some forty-nine banks took 95 billion EUROs.

(Irwin, Neil (2013), The Alchemists, the penguin press, new york, 2013 ) (The Alchemists : three central bankers and a world on fire, Neil Irwin, p.1, p.2, p.3 )

2007 (Why no financial panic? M3?)

(There should be a financial panic about now because of the huge spike in DJIA volume from 2001-2005.)

(Nouriel Roubini forecasts that the panic should happened about now.)

____________________________________

2008 September Fannie Mae and Freddie Mac is placed into custodianship

September of 2008, Fannie Mae and Freddie Mac were both placed into conservatorship of the Federal Housing Finance Agency (FHFA), which put Fannie Mae and Freddie Mac under direct government control. Today, the role of Fannie Mae and Freddie Mac has not changed very much.

https://en.wikipedia.org/wiki/Fannie_Mae

The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) (founded in 1938 during the Great Depression as part of the New Deal) - the corporation's purpose is to expand the secondary mortgage market by securitizing mortgage loans in the form of mortgage-backed securities (MBS)

https://en.wikipedia.org/wiki/Freddie_Mac

The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is a public government-sponsored enterprise (GSE)

The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with the Federal National Mortgage Association (Fannie Mae), Freddie Mac buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases.

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Simon Head, Mindless : why smarter machines are making dumber humans, 2014 [ ]

p.80

The US government──J. K. Galbraith's “countervailing power”──which might have set limits on the machine's operations, was in fact actively working on the machine's behalf.

p.80

mortgage-backed securities (MBSs)

underwrote the subprime mortgages, bundled them together, and passed them on to investment bankers as mortgage-backed securities (MBSs);

collateralized debt obligations (CDOs)

p.80

Simon Johnson and James Kwak, their book Thirteen Bankers

p.81

foundations, universities, pension funds, midwestern school districts, German regional banks, all very big losers once the MBSs and CDOs went bad.

p.82

Finally, the value-at-risk (VAR) indexes pioneered by Professor Philippe Jorion of the University of California were heavily relied on to assess the risk of CDOs.

(Mindless : why smarter machines are making dumber humans / Simon Head., 1. technology──social aspects., 2. business──data processing──psychological aspects., 3. industries──technological innovations──psychological aspects., 4. ──Mental efficiency., 5. knowledge management., T14.5.H445 2013, 303.48'3──dc23, 2014, )

____________________________________

Simon Head, Mindless : why smarter machines are making dumber humans, 2014 [ ]

pp.82-83

Goldman's handling of the Wall Street crash during its critical, formative months between the middle of 2006 and the end of 2007 must be among the most heavily documented events in modern business history.

p.83

Pride of place in this bibliography goes to the Senate Permanent Subcommitee on Investigations' (the Levin Committee's) 266-page report on Goldman, “Failing to manage conflicts of interest: a case study of Goldman Sachs”, which is just one section within a 639-page report on the role of investment banks in crisis.4

p.83

The report draws on tens of thousands of e-mails subpoenaed from Wall Street firms by the committee and provides a day-to-day, and sometimes hour-by-hour, account of what went on at Goldman during those months.

p.83

A companion volume to the report is the transcript and video footage of the hearings before the Levin Committee, which took place on October 27, 2010, when Goldman's crisis team, from CEO Lloyd Blankfein down to the humblest traders, gave their side of the story.5

pp.202-203

Notes to chapter 5: the case of Goldman sachs

1. Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York and London: Routledge, 2010), 117-118.

4. US Senate, Permanent subcommittee on investigations of the committee on homeland security and govermental affairs, “wall streets and the financial crisis: anatomy of a financial collapse”, sec. C, “Failing to manage conflicts of interest: case study of Goldman sachs”, www.hsgac.senate.gov/imo/media/doc/Financial_Crisis/FinancialCrisisReport.pdf?attempt=2, 376-639.

5. US Senate, Permanent subcommittee on investigations, “wall street and the financial crisis: the role of the investment banks”, hearings, April 27, 2010, www.google.co.uk

6. Basis Yield Alpha Fund, Plaintiff, v. Goldman Sachs Group, Inc.

SEC press release, July 15, 2010, “Goldman Sachs to pay record $550 million to settle SEC charges related to subprime mortgaged CDO”,

http://sec.gov/news/press/2010/2010-123.htm.

7. Goldman Sachs, “Risk management and the residential mortgage market”, http://online.wsj.com/public/resources/documents/goldman0424.pdf.

p.83

Abacus CDO

pp.83-84

But the Levin Committee's report and hearing provide, I believe, strong evidence that the deception and manipulation of clients eventually became an integral part of Goldman's trading strategy.6

p.84

By the early 2000s, Goldman's derivatives trading could no longer be called banking in any meaningful sense of the term, but had become an industrial activity, turning out virtual products whose fortunes depended on the efficient management and coordination of processes: the accumulation of mortgages and other forms of debt from bankers and brokers, their transformation into financial derivatives, and their selling on to clients.

p.85

But once the housing market turned, the system collapsed. The difference between Goldman and other leading players on Wall Street was that Goldman saw it coming and was able to recalibrate its machine so that not only did it avoid the catastrophic losses that destroyed Lehman Brothers and crippled Citicorp, but it actually came out ahead.

p.85

But to achieve this Goldman behaved, I will argue, with ruthless cynicism, above all in deceiving and exploting its clients.

p.85

mortgage brokers as New Century, Long Beach, and Countrywide

p.86

mortgage-backed securities (MBSs): securities backed by housing mortgage, residential mortgage-backed securities,

collateralized debt obligations (CDOs): debt

pp.87-88

One way of cutting through this obfuscation is to imagine for a moment that Goldman was a real industrial company making and selling real products, rather than a virtual industrial company making and selling virtual products.

____________________________________

Simon Head, Mindless : why smarter machines are making dumber humans, 2014 [ ]

p.91

The problem that then arose for Goldman was that in marketing the three kinds of financial derivatives, the company was acting as underwriter and placement agent and not simply as market maker or trader on its own behalf. As underwriter and placement agent, Goldman was subject to rules on fair disclosure that as market maker it was not.

p.92

The blurring of the distinction between market maker and underwriter was central to Blankfein's evasive strategy, as the following exchanges reveal:

p.94

To grasp the sheer chutzpah of Goldman's marketing, one needs to look at one of these deals in detail.

p.94

Timberwolf CDO between September 2006 and June 2007,

synthetic CDO

Basis Capital, an Australian hedge fund,

p.95

the pitch book

p.96

cash-flow analysis

p.96

p.97

“Goldman syndicate”, a subcommittee at New York headquarters responsible for coordinating sales efforts,

p.98

Meanwhile, the value of Timberwolf securities continued to fall.

p.98

Bank Hapoalim in Tel Avid, Israel, and a Korean insurance company call Hungkuk Life in Seoul.

p.99

Unbeknownst to Basis, 36 percent of the short interest on the Timberwolf CDSs was held by a single counterparty──Goldman. As the CDO lost value, Goldman made money.26

p.99

Timberwolf and Point Pleasant transactions.

p.99

extremely difficult to value.

p.99

residential mortgage-backed securities

p.100

overly negative and ahead of the market,

we could end up leaving some money on the table

p.101

According to a complaint filed against Goldman in New York courts by Basis in October 2011, Goldman consistently refused.31

“knowingly making materially false statements with the sale of Timberwolf” and Point Pleasant, another CDO.

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The Biggest Bank Heist Ever! | HD

https://www.youtube.com/watch?v=BuyrBRUsu9A

Uploaded on Feb 13, 2012

(49:42)

2:33 Chapter Two: Behind the Heist

Nouriel Roubini

Charles Morris

United States of America (economic sector)

5 investment banks

- goldman sachs

- morgan stanley

- lehman brothers (RIP)

- merrill lynch (part of Bank of America)

- bear stearns (RIP)

2 financial conglomerates

- citigroup

- jp morgan

3 security insurance companies

- AIG

- MBIA

- AMBAC

3 rating agencies

- moody's

- standard & poor's

- fitch

40 trillion dollars in credit defalt swap (oh, there is going to be a crash)

many interviews

13:59 less interesting after this

21:10 listen to this part, culpability

33:00 important to listen to this, credit insurance contract

CDO (Collateralized Debt Obligation) that caused the global financial crisis

https://www.youtube.com/watch?v=uM19CBGhhas

Published on Apr 3, 2012

(2:27)

It should be noted that the '2008 Financial crisis' label does not do justice to the event. The market literally froze.

2001-2007 prelude to the 2008 Financial crisis

for the insider 2006 was the start of the financial crisis

2005-2007 peak period of market activities before the 2008 drop off the cliff

Not all collateralized debt obligations (CDOs) are credit derivatives.

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http://www.ft.com/cms/s/2/e3b972fc-3aa6-11de-8a2d-00144feabdc0.html

May 8, 2009 11:48 am

How panic gripped the world’s biggest banks

By Gillian Tett

Gillian Tett reveals how the accumulation of mortgage-backed securities proved to be super-toxic

hen a young team at investment bank JP Morgan pioneered credit derivatives in the 1990s, it classified some of them as “super-senior”, safer even than a triple-A rating. But 10 years later, as the US housing crash gained momentum, the world’s biggest banks were awash with mortgage-backed securities that were proving to be super-toxic. In the second extract from her book, Fool’s Gold, the FT’s Gillian Tett reveals how subprime spoiled the banking binge.

On October 11 2007, Moody’s cut its credit ratings on some $32bn of mortgage-backed bonds. Those had largely been issued in 2006 with medium-risk ratings of A or double-B. The ratings agency also warned that it might downgrade more than $20bn of mortgage-backed bonds that carried the triple-A stamp, and also downgrade collateralised debt obligations (CDOs) – credit derivatives made up of those bonds. All told, the cuts affected $50bn of securities.

The statement caused alarm among investors. Worse still, Moody’s seemed unsure how much further the downgrades might go. “The performance, particularly in the US housing [and] mortgage sector, [has been] deteriorating more quickly and more deeply than the ratings agencies or most other participants in the market anticipated,” Raymond McDaniel, chief executive of Moody’s, told the Financial Times on October 12. The subprime mortgage market was not behaving as the models had predicted. The “class of 2005 and 2006” borrowers were defaulting much faster than households which had taken out mortgages before those dates.

A particularly pernicious aspect of the defaults was that when this new breed of subprime borrowers walked away from their homes, they often left them in such a bad state that it was hard for lenders to realise any value from the repossessed properties. Until the autumn of 2007, Moody’s had assumed, on the basis of past housing cycles, that lenders could recoup 70 per cent of their loans in case of default. By October 2007, it had slashed that projection to just 40 per cent.

To add to the confusion, by the autumn of 2007 it seemed that events in some US neighbourhoods were throwing the ratings agencies’ models off even further. As house prices fell, defaults were rising to such a degree that they were blighting entire areas. That was pushing house prices lower still, sparking yet more defaults. This vicious circle had never been witnessed in the world of corporate loan defaults; nor did it fit the traditional “bell curve” central to the statistical risk assessment systems that were ubiquitous inside banks and ratings agencies.

When the JP Morgan team had created its original, prototype CDO deals they had bundled up loans from a well-diversified pool of companies, specifically to minimise the chance of widespread defaults. In making CDOs out of mortgages, bankers had supposedly tried similarly to diversify by including loans from numerous regions of the US. The common assumption was that even if one region suffered a crash, the property market would never collapse across the country as a whole. But by the autumn of 2007, it had become clear that this theory wasn’t working in the subprime mortgage world. Defaults were rising everywhere.

A few days after Moody’s cut its credit ratings, Standard & Poor’s followed suit. Then a third agency, Fitch, warned it might cut the ratings on $37bn of CDOs. Most chilling of all, the agencies warned that these reviews did not just affect the junior – and riskiest – tranches of CDO debt. The senior, or supposedly safe, triple-A portion was at risk of downgrades as well. The shock to the market was immediate. After all, the entire structured credit business had been built on the assumption that triple-A rating was ultra-safe, and double-A almost rock solid, too. Now that pillar of faith was crumbling. It was impossible for anyone to know exactly how the downgrades might affect the value of particular CDOs. By autumn 2007, these were still not being widely traded, but there was one guide that could offer a clue – the so-called ABX index, which tracked the price of mortgage derivatives. By mid-October, the component of this index comprising triple B-rated securities had tumbled to 30 per cent of its face value, down from 95 per cent at the start of the year. Most ominously of all, the triple-A tranche of the ABX index was trading at around 90 per cent of face value, while the AA was falling towards 80 per cent. To a casual observer, such dips might not have looked extreme. But, bankers and investors had always assumed that the prices of triple-A or double-A assets would never move at all. They were utterly unprepared for the damage that such price falls might inflict.

. . .

The super-senior scourge

On November 4, Bill Demchak, senior vice-chairman at the Pittsburgh bank PNC, dialled into a conference call arranged by the mighty Citigroup. Demchak, a key member of the team at JP Morgan that a decade earlier had created the forerunner of the CDO, had spent the autumn following events in the credit derivatives world with mounting alarm. Back in 2006, when his team at PNC had made the ballsy decision to start cutting the bank’s credit risk, Demchak had done so largely because he reckoned that conditions in the corporate loan market looked dangerous. He assumed that when the credit bubble burst, that was where the pain would be felt first. By autumn 2007, it was becoming clear that his prediction was only half right.

Conditions in the corporate loan market had indeed deteriorated, because investors had become reluctant to purchase CDOs built out of risky corporate loans and derivatives. The banks were left with some $400bn of corporate loans on their books that they could not sell on. What was worse, the price of those loans had fallen sharply. Demchak had expected as much. But by November 2007, he could see other problems brewing. In the middle of October, Citigroup had revealed that its net income had slumped from $6.2bn in the second quarter of the year to $2.1bn. The reason, it reported, was that it had been forced to write down the value of its corporate and mortgage assets by $5.7bn. That number looked quite large, but most analysts were not too surprised. Citi had a vast loan book, and other banks were announcing similar losses.

On November 4, however, Citi suddenly warned that it would report additional losses of between $8bn and $11bn. That was such shocking news that chief executive Chuck Prince resigned. It was also baffling to analysts. Citi was supposed to be expert at measuring credit risk, so how had it managed to misjudge its losses so badly? And why was it still so uncertain about the total bill?

Demchak dialled into the conference call eager to find out. “The issue is super-senior,” one of the executives explained. The problem, he added, was that the bank held on its books $43bn of super-senior risk, linked to CDOs backed by mortgage debt. Citi had previously assumed that the value of those assets was 100 per cent of face value. Now the price was falling.

Super-senior? Demchak could hardly believe his ears. Almost a decade had passed since Krishna Varikooty, Demchak and the rest of the JP Morgan group had invented the term to describe the part of a CDO that was supposed never to default – according to the computer models. Back then, super-senior had seemed a geeky in-joke, so quirky and obscure that only a few technical experts knew what it meant. Now the Citi executives had casually tossed the word into a conference call with hundreds of mainstream investors, analysts and financiers. Demchak didn’t know whether to laugh, cry or just shake his head in wonder. In other circumstances, he might have felt almost proud that his team’s once-obscure brainchild had suddenly burst into the limelight. In fact, he was horrified: the way Citi told the story, super-senior had turned into a scourge that had created most of its unexpected losses.

“How could this happen?” Demchak wondered. During his days at JP Morgan, his team had considered super-senior so safe that it was “more than triple-A”. Even though Demchak himself had gone to great lengths to sell JP Morgan’s super-senior risk to AIG and other insurance groups, he had never imagined that it could pose more than a moderate risk. Nor had he guessed that Citi was holding so much super-senior risk on its own balance sheet. Citi had never discussed the issue before on conference calls nor highlighted it in previous results announcements. “How did this happen?” Demchak asked himself again and again. As he listened to the rest of the call, he got the distinct impression that the Citi managers were almost as baffled as he was.

To most Citi executives, the bottom-line hit was as stunning as if the ground had opened up under the bank. On the day of the announcement, Jamie Dimon, chief executive of JP Morgan, bumped into a former senior colleague at Citi. “What happened?” Dimon asked. “We are not entirely sure ourselves,” the man replied. Dimon had no reason to doubt him. By 2007, Citi operated as a vast empire so fragmented – and feuding – that the many businesses within it rarely interacted. As a result, few of the bankers outside the CDOs team knew how the operation worked. “Perhaps there were a dozen people in the bank who really understood all this before – I doubt it was more,” one senior Citi manager recalled bitterly.

Investors were equally shocked. Back in July, Citi had been on a roll, posting record profits and holding an extremely large capital cushion. Now the super-senior disaster was blasting through that cushion, and Citi was looking befuddled. More frightening still, Citi’s woes were hardly unique. In early October, Merrill Lynch unveiled a $5.5bn write-down on its credit assets. Again, analysts weren’t unduly concerned at first. But in late October, Merrill raised the estimate to $8.4bn, large enough to force the resignation of its chief executive, Stan O’Neal. The losses at the giant Swiss bank UBS were arguably even more shocking. In early October, it had announced it was writing off about $3.4bn in mortgage-linked losses. Investors were stunned, but they also congratulated the bank for having the courage to come clean. By late October, however, UBS was indicating to analysts that it would soon need to revise that loss up considerably, and in December it announced another $10bn of write-downs. As with Merrill Lynch and Citi, the scourge was super-senior CDOs. Back at the start of 2005, the Swiss bank had barely held a single super-senior note on its books – by early 2007 it held $50bn of them.

. . .

“Can you find more capital?”

By late November 2007, the banking sector was barrelling into a full-blown crisis. Bank shares were tumbling at a startling rate – since June alone, more than $240bn had been wiped off the market capitalisation of the largest dozen Wall Street banks – and worse still, it appeared that the banks no longer trusted each other. They were so nervous about the prospect of new shocks that they were either refusing to lend to each other or were hoarding the cash they had for fear of what lay ahead.

The bigger the write-downs became, the more they started to have an impact beyond the banks in the “real” world. Six months earlier, regulators and investors alike had blithely assumed that American and European banks would be extremely well protected from any future turn in the credit cycle. In the first half of 2007, large western banks had posted a record $425bn in aggregate profits, and had capital reserves that vastly exceeded the minimum required by international banking rules. Global banks alone were estimated to hold core capital (known as “tier one”) of $3,400bn. That was why the Federal Reserve and others had been so confident that the banks would be able to absorb the $100bn-odd hit that was expected to arise from the subprime sector. Moreover, precisely because banks had been parcelling out their risks so enthusiastically, most regulators and investors had also assumed that banks would be exposed to only a tiny part of any credit losses. Risk was supposedly scattered throughout the system. But the more the subprime scourge hit the banks, the more wrong-headed all those assumptions started to seem.

When regulators had celebrated the benefits of “risk dispersion”, they had assumed that the banks were selling almost all their collateralised debt obligations to other players. They had not realised that so much super-senior risk was piling up on some banks’ books, in a manner that left those banks exposed to entirely unexpected concentrations of risk. Worse, the super-senior losses were so gigantic that they were eating through the banks’ capital reserves – even though these had appeared so impressively large just a few months before. In late November, Timothy Geithner, president of the New York Federal Reserve, placed furtive phone calls to some of the Wall Street banks. The gist was: “Can you find more capital? You need to – now!” Frantically, Citi, Merrill and other large banks looked for ways to plug the holes, no one even daring to hope that the government would step in. The UK and US governments hated the idea of using taxpayer funds to recapitalise banks, and there seemed to be little chance of attracting western investors.

In mounting desperation, some bankers looked east for help. During the first seven years of the decade, China, Singapore, Korea and the oil-rich countries of the Middle East had all built up large so-called sovereign wealth funds, dedicated to managing vast pools of government money. By 2007, such funds were estimated to control more than $3,000bn, though the precise tally was unknown because the funds were highly secretive. Traditionally, much of their cash had been invested in US Treasury bonds and other safe assets – the funds had shied away from taking direct stakes in American companies, partly because doing so tended to provoke nationalist ire. However, as the panic intensified on Wall Street and in the City of London, bankers set aside that concern, and senior dealmakers from Wall Street, London and Zurich hopped on aircraft in a frantic effort to persuade Asian and Middle Eastern funds to help.

Citi was the first to clinch a deal. In late November, the Abu Dhabi Investment Fund, the world’s biggest sovereign wealth fund, announced plans to inject $7.5bn into the bank. Soon after, UBS raised $11bn from the GIC fund of Singapore and Middle Eastern investors. Then Merrill Lynch raised $5bn from a Chinese government fund, while Morgan Stanley garnered a similar sum from Singapore. It was an extraordinary turn of fortunes. The western banks had been the ones to bail out their emerging-market counterparts in the past. Humiliating as it may have been, though, bankers were too relieved to worry about the source. Regulators were privately relieved as well. “If the banks are finding fresh sources of capital, then that is very good. They need to recapitalise, as swiftly as they can,” one of America’s most senior regulators observed in December 2007. “Once they have done that, the banking system can then move on. Or that is what we all hope.”

Yet while the capital raising looked impressively large, the losses were even bigger. As 2008 got under way, UBS, Merrill and Citi all revealed more big write-downs on their holdings of credit assets, taking the total to $53bn for those three banks alone. Super-senior write-downs accounted for a stunning two-thirds of that figure. Gamely, all three insisted they were near the end of the process. Nobody quite believed them. The essential problem was that the system was becoming trapped in a vicious circle. The more the banks wrote down the value of their super-senior assets – or any other credit asset – the more scared investors became, causing the prices of these assets to fall still further, which forced the banks to make more write-downs.

A decade is a long time in banking As the losses mounted, the former members of the JP Morgan team that had originated the idea of building collateralised debt obligations out of credit derivatives reeled in shock. A full decade had passed since Demchak’s acolytes had invented the seemingly innocuous concept of super-senior. In the intervening years, they had scattered but many remained friends. They e-mailed regularly, and from time to time some of them would meet for dinner or visit each others’ holiday homes in Tuscany, the Hamptons and other choice retreats. Like any family, the group was also driven by petty rivalries yet they almost never criticised one another to outsiders. A deep intellectual bond and a remarkable sense of affection still linked most of them.

But by late 2007, the e-mails bouncing between their BlackBerries were expressions of disbelief. Like Demchak, most of them were stunned at how perverted their super-senior brainchild had become. “What kind of monster has been created here?” one of the former JP Morgan group wrote in a heartfelt e-mail. Another observed: “It’s like you’ve known a cute kid who then grew up and committed a horrible crime.”

Gillian Tett is an assistant editor at the FT. In March, she was named Journalist of the Year at the British Press Awards

This is an edited extract from ‘Fool’s Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe’ by Gillian Tett. It is published in the UK by Little, Brown, £18.99, and in the US by Simon & Schuster, where it will be available this week. To buy the book for £13.99, call the FT ordering service on 0870 429 5884 or go to www.ft.com/bookshop

To read the first extract from the book, “Genesis of the debt disaster”, click here

____________________________________

Bina Venkataraman., The optimist's telescope : thinking ahead in a reckless age, 2019

p.55, p.56

Daniel Rozas, a consultant

a credit bubble

Rozas was not clairvoyant. Nor was he relying on any insider knowledge or elusive data. He was simply looking beyond the metric of the high repayment rates on loans, a measure being summoned by microfinance lenders as a sign that all was well in Andhra Pradesh.

Rozas is an American expat in Brussels, and we spoke by phone in 2016,

p.55

the capacity of the state ── the number of potential borrowers, depending on its population and other factors

p.56

He made some coarse, back-of-the-napkin-style calculations at the time and concluded that it was not at all reassuring that people were repaying loans. It could mean that they were doing so by taking on yet more loans pushed on them by eager microfinance field officers, not by generating income through new businesses. At some point, when peole could not get any more credit to pay back their high-interest loans to the lenders, the house of cards would collapse. Families would be drowning in debt they could not repay. Companies would fail.

p.56

“Frankly, the numbers there concerns me”, Rozas

pp.217-218

In the lead-up to the 2008 financial crisis and Great Recession, Moody's, one of the three major agencies that gave mortgage-backed securities a top-notch AAA rating ── used models with American housing data going back only twenty years when estimating the risk of default.

Nate Silver ... did not convey the true risk because it did not show how mortgage defaults could be correlated with one another, causing chain reactions.

The agency neglected information from decades prior, including the Great Depression, which could have shown the danger of people defaulting on mortgages as housing prices plummet. In 2007, ...

Two rating agencies, Moody's and S&P, had rated the securities as having a risk of default two hundred times less than what they actually had.

p.218

(The agencies, of course, also had perverse financial incentives, with investment banks paying them fees to rate their financial instruments, including high-risk mortgage-backed securities and collateralized debt obligations.)

p.218

History clearly deceives us about the future.

p.218

Thucydides, oft-cited history of Peloponnesian war between Sparta and Athens that “the present, while never repeating the past exactly, must inevitably resemble it. Hence, so must the future.”

p.218

in what way does the future resemble the past, and how should we use history to avert catastrophe?

(The optimist's telescope : thinking ahead in a reckless age / Bina Venkataraman., New York : Riverhead books, 2019., decision making──social aspects. | risk──sociological aspects. | forecasting., ddc 153.8/3──dc23, https://lccn.loc.gov/2018046076, 2019, )

____________________________________

The bankers' new clothes : what's wrong with banking and what to do about it / Anat Admanti and Martin Hellwig.

preface (BNC)

xi-xii

Banking is not difficult to understand. Most of the issues are quite straight forward. Simply learning the precise meanings of some of the terms that care used, such as the word CAPITAL, can help uncover some of the nonsense. You do not need any background in economics, finance, or quantitative fields to read and understand this book.

. . . .

Do not believe those who tell you that things are better now than they had been prior to the financial crisis of 2007-2009 and that we have a safer system that is getting even better as reforms are put in place. Today's banking system, even with proposed reforms, is as dangerous and fragile as the system that brought us the recent crisis.

But this situation can change. With the right focus and a proper diagnosis of the problems, highly beneficial steps can be taken immediately.

Having a better financial system requires effective regulation and enforcement. Most essentially, it requires the political will to put the appropriate measures in place and implement them. Our hope in writing this book is that if more people understand the issues, politicians and regulators will be more accountable to the public. Flawed and dangerous narratives--"the bankers' new clothes"--must not win.

October 2012

speed limit (BNC)

p.191

The same considerations that apply to trucks, airplanes, or nuclear reactors should apply to banks. Public safety must be the focus. A remarkable difference, however, between much higher equity requirements and safety measures in many other contexts is that high equity requirement are such an incredible bargain to society: the significant benefits of much more equity are actually free!

If truck drivers had to drive more slowly or stop for thirty minutes every two hours and could not drive at night, they would drive fewer miles each day, and this might increase the cost of transportation. By contrast, increasing equity requirement from 3 per cent to 25 per cent of banks' total assets would involve only reshuffling of financial claims in the economy to create a better and safer financial system. There would be no cost to society what so ever.

shadow banking (BNC)

p.224, p.225

. . . convenient narratives that downplay problems and . . . . warning of unintended consequences meant to scare politicians and regulators out of tightening regulations.

. . .

. . . warning that tighter regulation might cause financial activities to move from regulated banking to the so-called shadow banking sector, where there is less regulation and possibly no regulation.52 A typical example is money market mutual funds, . . .

The arguement that we should not have regulation because banks might evade regulation is somewhat perverse. It turns the failure to enforce regulation into an argument against having regulation at all.

. . . Similarly, we do not give up on collecting taxes just because many try to take advantage of tax loopholes. Like law enforcement and collecting taxes, regulating banks and other financial institutions is essential for society, and enforcing regulation effectively is a challenge we must take on.

. . . The reason has NOT been

(1) excessive regulation,

(2) the inability of regulators and supervisors to enforce the regulation as needed, or

(3) a lack of tools at their disposal.

Rather the source of the problem has been that regulators and supervisors have been UNWILLING to apply the tools they have had and to enforce regulations effectively.

Regulators and supervisors, at least in Europe and the United States, have always had the authority to regulate and supervise deposit-taking institutions to maintain the safety of the financial system.

tax code, bankrupt, exemption (BNC)

pp.226-227

. . . Paradoxically, the tax codes subsidize borrowing, but then capital regulation tries to reduce it. It is as if we provided tax incentives that encouraged reckless driving or pollution while at the same time enacting laws forbidding these behaviors. Giving banks tax incentives to borrow is bad public policy. The tax code should not interfere with financial stability; if anything, it should reduce the distorted incentives.

Other laws also make it easier for banks to borrow too much. For example, many short-term debt contracts that are used in the financial system are exempt from normal bankruptcy procedures. These exemptions can play a role in enabling the type of “borrowing rat race” that we discussed in Chapter 10, which makes the banking system more fragile;57 they should be re examined.

Money market funds (BNC)

Note 46

p.299

46. Money market mutual funds were first invented in the 1970s to circumvent Regulation Q, . . .

promise of stable net asset value

they are shares

their donomination . . . is assigned a stable value of $1.

U.S. money market funds (money market mutual funds)

according to BIS (2012, 68)

$2.7 trillion (United States)

$1.5 trillion (Europe)

$400 billion (else where)

“Reform Still Looms over Money Market Funds”, Financial Times, August 23, 2012

Money market funds are attractive to investors because they appear safe and liquid and they pay relatively high returns. In fact, they are shifting risk to others, eventually to the government and taxpayers, and at the same time adding to the fragility of the financial system.

healthy banking system (BNC)

Note 53

p.310

“Healthy Banking System Is the Goal, Not Profitable Banks,” Financial Times, November 9, 2010,

at least 15 per cent equity relative to total assets,

the use of risk weights,

ban on dividends,

TEXT and FULL list available at

http://www.gsb.stanford.edu/news/research/admatiopen.html,

accessed October 20, 2012.

Senators Sherrod Brown and David Vitter

Note 54

p.239

We discuss the flaws in proposed capital regulations in Chapter 11. The tax code also encourages borrowing by allowing corporations to deduct interest paid on debt as an expense. Exemptions from normal bankruptcy provisions granted for derivatives and repurchase agreements used extensively in the finacial industry also encourage fragility. See our discussion of these issues in Chapters 9 and 10.

fail together or not at all (BNC)

Note 62

p.312

Under Basel III as well as Basel II, there are three “pillars” of banking supervision.

Pillar 1 concerns capital regulation,

pillar 2 the professional quality of banking, and

pillar 3 “market discipline.”

Of these three pillars, pillar 1 is most important because it involves hard rules for capital requirements. Pillar 1 distinguishes assets depending on whether they are held in the “banking book” or the “trading book” of the bank; assets in the banking book are meant to be held until they are repaid, where as assets in the trading book are available for resale at an opportune moment. For each category, banks can choose whether they want to use a “standard approach,” with risk weights specified in the regulations, or, for credit risks, an “internal ratings-based” approach and, for assets in the trading book, a model-based approach to determine the capital required. The zero-risk-weights rule for government debt is given in the regulations for the standard approach to credit risk. A major flaw of the entire approach is that it assumes that risks are independent. Cor relations are neglected, for example, those due to the fact that mortgage borrows often are likely to fail together or not at all.

leverage (BNC)

Note 66

p.313

1996 amendment, Basel I, use own risk models, for market risks,

market risks--risks of changes in the market prices of investments

Basel II, use own risk models, for credit risk,

credit risk--the risk of default by a borrower or another partner in a contract

IMF (2008a) and Acharya et al. (2011) show that leverage had increased in the decade before the crisis.

Authors (BNC)

Anat Admati is the George G. C. Parker Professor of Finance and Economics at Standford's Graduate School of Business. She serves on the FDIC Systemic Resolution Advisory Committee and has contributed to the Financial Times, Bloomberg News, and the New York Times.

Martin Hellwig is the director at the Max Planck Institute for Research on Collective Goods. He was the first chair of the Advisory Scientific Committee of the European Systemic Risk Board and the cowinner of the 2012 Max Planck Research Award for his work on financial regulation.

“Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is NOT expensive,”

a paper,

Authors, Peter DeMarzo, Paul Pfleiderer, Anat Admati, Martin Hellwig, Stanford, summer 2010,

“Debt Overhang and Capital Regulation,”

article,

Authors, Peter DeMarzo, Paul Pfleiderer, Anat Admati, Martin Hellwig,

____________________________________

Sebastian Mallaby., The Man Who Knew: the life and times of Alan Greenspan,

2016

p.444

the bond rally of 1993 had indeed been a bubble

p.444

FOMC conference call on the last day of February 1994

“I think we partially broke the back of an emerging speculation in equities .... In retrospect, we may well have done the same thing inadvertently in the bond market .... We pricked that bubble as well”, he concluded.

p.444

If the Greenspan of 2004 had acted on the Greenspan observation of 1994, the bubble of 2006 might have been less disastrous.51

p.469

derivatives two significant downsides

- exotic contracts made it easy to rip off clients: the abusive selling of toxic mortgage securities before the 2008 crash

• Banker Trust scandal.

- complexity made it possible for crazy risks to build up inside financial enterprises.

• 2008

• AIG insurance

• 1994 Charles Sanford

p.682

A clue to the answer can be found in the 1960s, when another school of economists found itself in an analogous position. At that time, the fathers of modern porfolio theory confronted a highly inconvenient truth: contrary to their efficient-market assumptions, price changes in asset markets do not follow the “normal distribution” depicted by a bell curve; rather, very large price moves occur far more frequently than the thin tails of the bell curve anticipate. At first the efficient marketers responded open-mindedly to this objection, acknowledging that its main proponent, the maverick mathematician Benoit Mandelbrot, was right.

p.682

But then they swept Mandelbrot's protests under the carpet because his message was too difficult to live with. Deprived of their bell-curved assumption, the efficient marketers' mathematical techniques would cease to work.

p.682

Paul Cootner, an efficient marketer,

“If he is right, almost all of our statistical tools are obsolete ── least square, spectral analysis, workable maximum-likelihood solution, all our established sample theory, closed distribution functions. Almost without exception, past econometric work is meaningless.”8

8. Donald Mackenzie, An Engine, Not a Camera: How Financial Models Shape Market (Cambridge, Mass.: MIT Press, 2006), 114.

(The Man Who Knew: the life and times of Alan Greenspan / Sebastian Mallaby.

New York: Penguin Press, 2016., “A council on foreign relations book.”, subjects: Greenspan, Alan, 1926─ | Economists──united states──biography. | government economists──united states──biography.| monetary policy ── united states. | board of governors of the federal resere system (u.s.), HB119.G74 M35 2016 (print), HB119.G74 (ebook), 332.1/1092 [B]──dc23, https://lccn.loc.gov/2016017300, 2016, )

____________________________________

Sebastian Mallaby., The Man Who Knew: the life and times of Alan Greenspan,

2016

p.666

“Where did you make a mistake?” he insisted.

“I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms”, Greenspan offered.

p.666

“So the problem here is something which looked to be a very solid edifice ... did break down. And I think that, as I said, shocked me.”

“Do you have any personal responsibility for the financial crisis?” Waxman asked.

pp.666-667

Greenspan set off on a new tack, seeking to put the record straight about his dealing with Edward Gramlich. He still spoke in the same mesmerizing way: he was dense, circuitous, and difficult to follow; yet somehow his listeners were encouraged to believe that the difficulty was their fault.

p.667

Five, ten, or fifteen years earlier, the magic of his manner might have worked ── Waxman himself had fallen under Greenspan's spell occasionally.

pp.667-668

p.667

“Dr. Greenspan, I am going to interrupt you”, the congressman broke in. “You had an ideology. You had a belief.” Then he quoted Greenspan's own admission on this score. “I do have an ideology”, Greenspan had once said. “My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We have tried regulation, none meaningfully worked.”

“That was your quote”, Waxman delared ... . “You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying the price. Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

p.667

an exaggeration of the Fed's power to enforce lending standards at nonbanks;

an exaggeration of the force with which Edward Gramlich had spoken; and

an exaggeration of the link between reckless mortgage lending and the collapse of leveraged finance. But his question was a master stroke.

p.667

Ideology, Greenspan explained earnestly, was “a conceptual framework ... [governing] ... the way people deal with reality

“Everyone has one”, Greenspan continued. “You have to. To exist, you need an ideology.

“The question is, whether is it accurate or not. What I am saying to you is, yes, I found a flaw, I don't know how significant or permanent it is, but I have been very distressed by that fact.”

p.668

It was an unremarkable observation. Of course, all ideologies had flaws; the fact that Greenspan had acknowledged his went only to show his pragmatism. By the same token, the opposite ideology had flaws.

p.668

How often had regulation failed?

Would proreguation ideologues match Greenspan's honesty in acknowledging the fissures in their framework?

In Greenspan's understanding, the statement that his ideology was flawed was almost a statement of the obvious.

Having offered his token philosophic concession, Greenspan wanted to return to the matter of Edward Gramlich.

p.668

“But if I may, may I just finish an answer to the question ──” Greenspan began.

“You found a flaw?” Waxman interrupted.

“A flaw, a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak”, Greenspan confirmed. He was impatient to move on to his next argument.

“In other words, you found that your view of the world, your ideology, was not right, it was not working?” Waxman said.

p.668

“Precisely”, Greenspan acknowledged. “That's precisely the reason I was shocked, because I had been going for forty years or more with very considerable evidence that it was working exceptional well.”44

p.754 notes

28. Financial Crisis Inquiry Commission, “The Financial Crisis Inquiry Report: The Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States” (Financial Crisis Inquiry Commission, January 2011), 150-53, http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf.

33. W. C. Varones, Greenspan's Body Count, n.d., http://greenspansbodycount.blogspot.com/.

42. “Had AIG been building derivatives exposures on-exchange rather than in the OTC markets, its reckless speculation would have been brought to a halt much earlier owing to minute-by-minute exposure tracking in the clearing house and unambiguous mark-to-market and margining rules.” See Benn Steil, “Derivatives Clearing houses: Opportunities and Challenges”: prepared statement by Dr. Benn Steil before the committee on banking, housing, and urban affairs; subcommittee on securities, insurance, and investment, May 25, 2001.

43. ... risk management at hedge funds ... the unaided survival of the hedge fund Citadel is instructive.

Sebatian Mallaby, “The Code Breakers”, chapter 13 in More Money Than God: Hedge Funds and the Making of a New Elite (New York: Penguin Group, 2010).

Sebatian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite, 2010

44. House committee on oversight and government reform,

The financial crisis and the role of federal regulators: hearing before the committee on oversight and government reform, 2008,

http://www.gpo.gov/fdsys/pkg/CHRG-110hhrg55764/html/CHRG-110hhrg55764.htm.

45. Steve Coll, “The Whole Intellectual Edifice”, New Yorker, October 23, 2008, http://www.newyorker.com/news/steve-coll/the-whole-intellectual-edifice.

47. Paul R. Krugman, “How did economists get it so wrong?”, New York Times Magazine, September 2, 2009, http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all&_r=0.

48.

50. Under questioning by Brooksley Born, Greenspan did reiterate his view that capital buffers should be thickened. “We were undercapitalizing the banking system probably for 40 or 50 years, and that has to be adjusted.” The Financial Crisis Inquiry Commission Hearing (Washington, D.C., 2010).

(The Man Who Knew: the life and times of Alan Greenspan / Sebastian Mallaby.

____________________________________

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