INDEX
AAA-rated securities, 33, 66, 73–75, 97n2
AA-rated securities, 73–75
AIG
bailout of, 3, 17, 19, 22
Goldman Sachs and, 3, 22
Akerlof, George, 29
Alt-A loans, 44, 59, 64, 65f, 92n6
appraisal process, 90n1
asset prices, Fed maintaining, 16–17, 37–38, 79
automated underwriting, 52–54
Bailout (Sprague), 14
bailouts
of AIG, 3, 17, 19, 22
of Chrysler, 13
of Continental Illinois, 13–15
creditors and, 87n1
expectations of, 22–24, 29, 33–34, 67, 76, 90n5
of government-sponsored enterprises, 17, 20–21
Greenspan on, xiv–xv
history of, 13–17
of Lockheed, 13
of Long-Term Capital Management, 16
of Mexico, 14–15
in poker analogy, 14, 17
profitability of, xvi
bank executives. See executives
Bank of America, 11, 63–64
Bank of England, 22–24, 67
Basel II, 73–74
Bear Stearns, 11–12, 22
collapse of, 17–19, 30, 76, 88nn13–14, 90n4
equity holders of, 26
executives of, 30–33, 71, 90n4
Long-Term Capital Management bailout and, 16
Schwartz of, 1
BearDirect, 26
Bebchuk, Lucian, 27–28, 31–32
Bernanke, Ben, 17, 80
Blankfein, Lloyd, 3, 32–33
Buiter, Willem, 15
Bush, George W., 43, 82
capital requirements, 73–74, 76, 78
investment banks and, 75
2008 crisis and changes in, 97n3
capitalism
crony, xii, xvii, 3, 78–80
natural restraints of, 79
as profit and loss system, xii, xvi–xvii, 2, 10, 77, 82–83
Cayne, Jimmy, 30–33, 90n4
Chinese government, 58, 63
Christian Science Monitor, 53
Chrysler, bailout of, 13
Cisneros, Henry, 43
Citibank, 11, 71
CitiGroup, 15
Clinton, Bill, 43, 82
Cohen, Alma, 31–32
collateralized debt obligations (CDOs), 66, 74–75, 97n2
commercial banks, 11
Basel II and, 73–74
failure of, 14
government-sponsored enterprises and, 63–64
mortgage-backed securities issued by, 63
in poker analogy, 63–64
ratings agencies and, 74
subprime crisis role of, 62–65
Community Reinvestment Act (CRA), 95n3
compensation, 31–32, 70–71
conduit, government-sponsored enterprises as, 45–47, 57–58
conforming loans, 48, 51, 74
Continental Illinois bailout, 13–15
Countrywide, 31
credit default swaps, 19, 20f, 88nn13–14, 97n2
Credit Suisse, 16, 64
creditors, bailout of, 87n1
crony capitalism. See capitalism
crowd-out, 60, 95n4
Cuomo, Andrew, 90n1
Currency, Comptroller of, 13–14
Desktop Underwriter, 52–54
Dimon, Jamie, 32–33
diversification
by bank executives, 30–31
of equity holders, 25–26, 30–31
government-sponsored enterprises and, 26
Dodd-Frank, xvii
down payments. See government-sponsored enterprises
Drexel Burnham, 14
Eddins, Sam, 94n25
EMC, 26
equity holders
of Bear Stearns, 26
diversification of, 25–26, 30–31
risk and, 25–26
wiped out, 3–4, 13
executives
of Bear Stearns, 30–33, 71, 90n4
compensation of, 31–32, 70–71
diversification by, 30–31
of Lehman Brothers, 30–33, 71
in poker analogy, 27
risk of, 27–33
of Wall Street, on Federal Reserve board, xiii
expectations
of bailout, 22–24, 29, 33–34, 67, 76, 90n5
in housing market, 35–36, 90n1
Peltzman effect of, 89n21
exuberance
Fed promoting, 80
irrational, 60, 66–67, 75–76
rational, 76
Fannie Mae. See government-sponsored enterprises
Federal Deposit Insurance Corporation (FDIC), 14, 29
federal funds rate, 37
Federal Home Loan Mortgage Corporation. See government-sponsored enterprises
Federal Housing Administration (FHA), 60
Federal National Mortgage Association. See government-sponsored enterprises
Federal Reserve (Fed), 81. See also Greenspan, Alan
asset prices maintained by, 16–17, 37–38, 79
board of, Wall Street executives on, xiii
exuberance promoted by, 80
housing market and, 16–17, 37–38
Lehman and, 88n14
restraining, 80
2008 crisis and, 17, 79–80
Federal Reserve Bank of New York, 16
financial crisis (2008), xi
capital requirement changes leading to, 97n3
Fed and, 17, 79–80
government intervention in, 17
Lehman Brothers in, 17–19, 20f, 21, 30, 80, 88nn13–15
monetary policy causing, Taylor on, 91n4
perverse incentives leading to, 5
Financial Crisis Inquiry Commission, 1, 86n3
Financial Services Authority (FSA), 23
Freddie Mac. See government-sponsored enterprises
Friedman, Milton, 2, 77, 82–83
Fuld, Richard, 30–33
Gabriel, Stuart, 95n4
Gaussian distribution, 32
Geithner, Timothy, 80
Getting off Track (Taylor), 88n15, 91n4
Ginnie Mae, 40f
Glass-Steagall Act, repeal of, 4
Goldman Sachs, 71
AIG and, 3, 22
Blankfein of, 3, 32–33
with government, revolving door of, 86n7
virtuous cycle and, 22
government-sponsored enterprises (GSEs), 3, 12, 77, 79
advantages of, 47–48
appraisal process corrupted by, 90n1
automated software of, 52–54
bailout of, 17, 20–21
commercial, investment banks and, 63–64
Community Reinvestment Act and, 95n3
as conduit, 45–47, 57–58
conforming loans and, 48, 51, 74
constraints on, 48–50, 52, 59, 78, 82
credit risk of, 20–21, 26, 89n18
crowd-out and, 60, 95n4
diversification and stock of, 26
down payments and, 54–57, 56t, 61, 96n6
earnings of, 47–48, 48f
history of, 44, 46
home purchase loans and, 50–51, 50f, 51f, 52f, 55, 56t
housing market and, 11, 41, 44–51, 59–61, 92n6
investment banks and, 63–64
loans bought by, 41, 44–45, 48–51, 50f, 51f, 52f, 55–58, 56t, 61, 64, 92n6, 93n13, 95n3
mortgage-backed securities bought by, 44–46, 59–61
Mudd of, 39
owner-occupied home loans, 56t
piggyback loans and, 55–57, 61, 94n22
politicians and, 47, 49–50, 52, 54, 61
in subprime crisis, role of, 44–45, 50, 59–61, 63–65, 92n6, 94n1
tax policy and bonds of, 94n25
Treasuries and, 20–21, 58, 89n18, 94n25
Treasury credit line for, 47
Greenspan, Alan
on bailouts, xiv–xv
federal funds rate lowered by, 37
Long-Term Capital Management and, xiv
monetary policy of, xiv, 17, 37
Greenspan put, xiv, 22
Haldane, Andrew, 22–24
Hayek, F. A., 78
home purchase loans. See government-sponsored enterprises
Housing and Urban Development, Department of (HUD), 59, 90n1
housing market. See also Massachusetts, mortgage market in
expectations in, 35–36, 90n1
Federal Reserve and, 16–17, 37–38
federal role in, history of, 43–44
first-time homebuyers in, 96n6
government-sponsored enterprises and, 11, 41, 44–51, 59–61, 92n6
interest rates and, 37–38, 38f
leveraging of, 35–39
mortgage-backed securities and, 40f, 41
in poker analogy, 35–36
tax policy and, 37, 94n22
in Washington, DC, 39, 91n7
investment banks, 11
Basel II and, 73–74
capital requirements and, 75
financing each other, 63–64
government-sponsored enterprises and, 63–64
mortgage-backed securities issued by, 63
in poker analogy, 63–64
ratings agencies and, 74
regulatory changes and, 73–74, 97n3
risk models of, 66
subprime crisis role of, 62–68
IronBridge Capital Management, 94n25
irrational exuberance. See exuberance
J. P. Morgan Chase, 17, 32–33, 71
Katz, Alyssa, 94n24
Krugman, Paul, 44
Lehman Brothers, xiii, 11
credit default swap and, 19, 20f, 88nn13–14
executives of, 30–33, 71
Fed and, 88n14
Long-Term Capital Management bailout and, 16
Paulson and, 88n15
Reserve Primary and, 18–19
in 2008 crisis, 17–19, 20f, 21, 30, 80, 88n13–15
liquidity, 45–46
Loan Prospector, 52
Lockheed, 13
Long-Term Capital Management (LTCM), 70
Greenspan and, xiv
Lehman Brothers and bailout of, 16
Massachusetts, mortgage market in, 55–56
McDonough, William, 16
Merrill Lynch, 16, 63–64, 78
executives of, 27
housing market and, 11
risk taken on by, 25
Mexico
American banks lending to, xiv–xv
bailout of, 14–15
Treasury Department and, 15
moral hazard
equity holders and, 4
Fed exacerbating, 80
Greenspan on, xv
in Peltzman effect, 89n21
risk-taking and, 89n22
mortgage originations, value of, 65f
mortgage-backed securities (MBS), xi, 65. See also private mortgage insurance
appeal of, 69, 73
commercial, investment banks issuing, 63
government-sponsored enterprises buying, 44–46, 59–61
housing market and, 40f, 41
in poker analogy, 69
regulatory changes in, 73–74
risk assessments of, 66
Treasuries and, 66
Mozilo, Angelo, 31
Mudd, Daniel, 39
National Association of Home Builders, 79
National Association of Realtors, 79, 96n6
non-recourse loan, 36
options, 27–28
Our Lot (Katz), 94n24
owner-occupied home loans, 56t
Parker, Charles, 15
Paulson, Hank, 3, 80, 88n15
Peltzman, Sam, 89n21
piggyback loan, 55–57, 61, 94n22
Plight of the Fortune Tellers, The (Rebonato), 66–67
poker, analogy with, 7–8, 70, 86n1
bailouts in, 14, 17
commercial, investment banks in, 63–64
executives in, 27
government in, 9–11
housing market in, 35–36
mortgage-backed securities in, 69
politicians, government-sponsored enterprises and, 47, 49–50, 52, 54, 61
private mortgage insurance (PMI), 55–57, 94n22
profitability, of bailouts, xvi
publicly traded firms, 90n5
Raines, Frank, 53–55
ratings agencies, 74
Reagan, Ronald, 2
Rebonato, Riccardo, 66–67
reform
difficulty of, 78
recommendations for, 78–81
rescue. See bailouts
Reserve Primary, 18–19
risk. See also Value at Risk
assessment models of, 66–67
of bank executives, 27–33
equity holders and, 25–26
Gaussian distributions of, 32
of government-sponsored enterprises, 20–21, 26, 89n18
moral hazard and, 89n22
of publicly traded firms, 90n5
Roaring Nineties, The (Stiglitz), 46
Romer, Paul, 29, 86n1
Rosenthal, Stuart, 95n4
Royal Bank of Scotland (RBS), 66–67
Samuelson, Paul, 2
savings and loan (S&L) crisis, 14, 29
Schwartz, Alan, 1
Securities and Exchange Commission, 47
Spamann, Holger, 27–28, 32
Sprague, Irvine, 14
Stiglitz, Joseph, 46
stress-testing, 22–23
subprime crisis, 65f. See also financial crisis
commercial banks role in, 62–65
economists underestimating, 86n2
extreme leverage and, 11, 35
government-sponsored enterprises role in, 44–45, 50, 59–61, 63–65, 92n6, 94n1
investment banks role in, 62–68
risk assessment models and, 66–67
Taleb, Nassim Nicholas, xv
tax policy
GSE bonds and, 94n25
housing market and, 37, 94n22
Taxpayer Relief Act of 1997, 37
Taylor, John, 88n15, 91n4
Taylor rule, 80
too big to fail, 87n1
Treasuries
government-sponsored enterprises and, 20–21, 58, 89n18, 94n25
mortgage-backed securities, collateralized debt obligations and, 66
Treasury Department, 81
credit line of, for government-sponsored enterprises, 47
Mexican bailout and, 15
Wall Street staffing, 3
United Kingdom, 24
Value at Risk (VaR), 67, 97n3
virtuous cycle, 22
Washington, DC, housing market in, 39, 91n7
Washington Mutual, xiii, 17, 21, 90n1
wealth, transfers of, 80–81