13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (49 page)

80.
Steve Lohr, “Wall St. Pay Is Cyclical. Guess Where We Are Now,”
The New York Times,
February 4, 2009, available at
http://www.nytimes.com/2009/02/05/business/05bonus.html
.

81.
“The ORFE Department is currently the largest of the six undergraduate concentrations within Princeton’s School of Engineering and Applied Science (SEAS), accounting for approximately 30% of all undergraduate engineers.” Operations Research and Financial Engineering, Princeton University, “Undergraduate Program,” available at
http://orfe.princeton.edu/undergraduate
(as of November 2009).

82.
Kevin M. Murphy, Andrei Shleifer, and Robert W. Vishny, “The Allocation of Talent: Implications for Growth,”
The Quarterly Journal of Economics
106 (1991): 503–30.

83.
Jagdish Bhagwati, “The Capital Myth: The Difference Between Trade in Widgets and Trade in Dollars,”
Foreign Affairs,
May–June 1998, 7–12.

CHAPTER 5: THE BEST DEAL EVER

1.
U.S. Securities and Exchange Commission,
Final Rule: Alternative Net Capital Requirements for Broker-Dealers That Are Part of Consolidated Supervised Entities,
available at
http://www.sec.gov/rules/final/34-49830.htm
.

2.
For a more detailed discussion of structured finance, see Janet Tavakoli,
Structured Finance and Collateralized Debt Obligations: New Developments in Cash & Synthetic Securitization,
second edition (Hoboken, NJ: Wiley, 2008).

3.
Frank Partnoy,
F.I.A.S.C.O.: Blood in the Water on Wall Street
(New York: W. W. Norton, 2009), 215–31.

4.
Ibid., especially at 107–38.

5.
For more on CDOs and structured finance, see Joshua D. Coval, Jakub Jurek, and Erik Stafford, “The Economics of Structured Finance” (Harvard Business School Working Paper 09–060), available at
http://www.hbs.edu/research/pdf/09–060.pdf
.

6.
Gillian Tett,
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
(New York: Free Press, 2009), 51–56.

7.
Quoted in Michael Lewis, “The End,”
Portfolio,
November 11, 2008, avail-able at
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom/
.

8.
For an explanation of super-senior tranches, see Felix Salmon, “What’s a Super-Senior Tranche?” Market Movers Blog,
Portfolio,
December 1, 2008, available at
http://www.portfolio.com/views/blogs/market-movers/2008/12/01/whats-a-super-senior-tranche/
.

9.
Tett,
Fool’s Gold, supra
note 6, at 62–63.

10.
On the “Three Cs’ of mortgage lending, see several articles by Doris “Tanta” Dungey on
Calculated Risk,
such as Doris “Tanta” Dungey, “What Is ‘Subprime?,’ ”
Calculated Risk,
November 25, 2007, available at
http://www.calculatedriskblog.com/2007/11/what-is-subprime.html
.

11.
Chris Mayer and Karen Pence, “Subprime Mortgages: What, Where, and to Whom?” Finance and Economics Discussion Series 2008–29, Divisions of Research and Statistics and Monetary Affairs, Federal Reserve Board, Washington, D.C., available at
http://www.federalreserve.gov/pubs/feds/2008/200829/200829pap.pdf
.

12.
Based on HMDA data gathered by the Federal Financial Institutions Examination Council, matched with the HUD list of subprime lenders; cited in Kenneth Temkin, “Subprime Lending: Current Trends and Policy Issues,”
The NeighborWorks Journal,
Spring–Summer 2000, available at
http://www.knowledgeplex.org/kp/text_document_summary/article/
relfiles/partner_content/nrc/ht_nrc_temkin.pdf
.

13.
On the increase in subprime mortgages and the deterioration of lending standards, see Jesse M. Abraham, Andrey Pavlov, and Susan Wachter, “Explaining the United States’ Uniquely Bad Housing Market,” Institute for Law and Economics Research Paper No. 08–34, University of Pennsylvania Law School, available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1320197
.

14.
HMDA data matched with the HUD list of subprime lenders; in Mayer and Pence, “Subprime Mortgages,”
supra
note 11.

15.
Ronald J. Mann, “Bankruptcy Reform and the ‘Sweat Box’ of Credit Card Debt,”
University of Illinois Law Review,
2007: 375–404; Felix Salmon, “Adam Levitin on Credit Card Minimum Payments,” Market Movers Blog,
Portfolio,
December 17, 2008, available at
http://www.portfolio.com/views/blogs/market-movers/2008/12/17/adam-levitin-on-credit-card-minimum-payments/
.

16.
International Monetary Fund,
Global Financial Stability Report: Market Developments and Issues, April 2007
(Washington: International Monetary Fund, 2009), 7, available at
http://www.imf.org/External/Pubs/FT/GFSR/2007/01/index.htm
.

17.
Alyssa Katz,
Our Lot: How Real Estate Came to Own Us
(New York: Bloomsbury, 2009), 70; Center for Public Integrity,
Who’s Behind the Financial Meltdown? The Top 25 Subprime Lenders and Their Wall Street Backers,
available at
http://www.publicintegrity.org/investigations/
economic_meltdown/the_subprime_25/
.

18.
Bob Ivry, “ ‘Deal with Devil’ Funded Carrera Crash Before Bust,” Bloomberg, December 18, 2007, available at
http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=alNDZa.Hm6O0
.

19.
JPMorgan Chase marketing flyer, available at
http://graphics8.nytimes.com/images/blogs/executivesuite/ChaseFlyer
.pdf
; reported by Joe Nocera, “Subprime and the Banks: Guilty as Charged,” Executive Suite Blog,
The New York Times,
October 14, 2009, available at
http://executivesuite.blogs.nytimes.com/2009/10/14/subprime-and-the-banks-guilty-as-charged/
.

20.
Charles V. Bagli, “Sam Zell’s Empire, Underwater in a Big Way,”
The New York Times,
February 6, 2009, available at
http://www.nytimes.com/2009/02/07/business/07properties.html
.

21.
Terry Pristin, “Risky Real Estate Deals Helped Doom Lehman,”
The New York Times,
September 16, 2008, available at
http://www.nytimes.com/2008/09/17/realestate/commercial/17real.html
.

22.
See Robert J. Shiller,
The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It
(Princeton: Princeton University Press, 2008), 30–34. Data for Figure 5-1 are from Robert Shiller, available at
http://www.econ.yale.edu/~shiller/data.htm
and used with his permission. Shiller’s historical housing data series was first used in Robert Shiller,
Irrational Exuberance
(Princeton: Princeton University Press, 2000) and later in Shiller,
The Subprime Solution, supra.

23.
Press Release, Citigroup, “Citi Finalizes SIV Wind-down by Agreeing to Purchase All Remaining Assets,” November 19, 2008, available at
http://www.citibank.com/citi/press/2008/081119a.htm
.

24.
On the forms of recourse that banks provided to investors in their SIVs, see David Jones, “Emerging Problems with the Basel Capital Accord: Regulatory Capital Arbitrage and Related Issues,”
Journal of Banking and Finance
24 (2000): 35–58. This paper was brought to our attention by Arnold Kling.

25.
Eric Friedman, Simon Johnson, and Todd Mitton, “Propping and Tunnelling,”
Journal of Comparative Economics
31 (2003): 732–50.

26.
Shiller,
Subprime Solution, supra
note 22, at 45–47.

27.
Michael Pollan, “An Animal’s Place,”
The New York Times Magazine,
November 10, 2002, available at
http://www.michaelpollan.com/article.php?id=55
.

28.
Katz,
Our Lot, supra
note 17, at 116, 126–27.

29.
Mayer and Pence, “Subprime Mortgages,”
supra
note 11.

30.
Mark Pittman, “Subprime Securities Market Began as ‘Group of 5’ Over Chinese,” Bloomberg, December 17, 2007, available at
http://www.bloomberg.com/apps/news?pid ewsarchive&sid=aA6YC1xKUoek
.

31.
Hyman P. Minsky,
Stabilizing an Unstable Economy
(New York: McGraw-Hill, 2008), chapter 9 (originally published in 1986).

32.
On the day-to-day workings of this chain, see “The Giant Pool of Money,”
This American Life,
originally broadcast on May 9, 2008, available at
http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355
.

33.
Charles R. Geisst,
Undue Influence: How the Wall Street Elite Put the Financial System at Risk
(Hoboken, NJ: John Wiley & Sons, 2005), 256.

34.
Richard Scott Carnell, Jonathan R. Macey, and Geoffrey P. Miller,
The Law of Banking and Financial Institutions,
fourth edition (Austin: Wolters Kluwer Law & Business, 2009), 466–67.

35.
12 U.S.C. § 1843(k). See Carnell et al.,
Law of Banking, supra
note 34, at 465–70.

36.
Gary H. Stern and Ron J. Feldman,
Too Big to Fail: The Hazards of Bank Bailouts
(Washington: Brookings Institution Press, 2009), 30–31, 63–65.

37.
Frank Partnoy,
Infectious Greed: How Deceit and Risk Corrupted the Financial Markets
(New York: Henry Holt, 2004), 153–54.

38.
Cited in Tett,
Fool’s Gold, supra
note 6, at 39.

39.
Ibid. at 34–35.

40.
Saul Hansell, “Group Approves Use of Derivatives,”
The New York Times,
July 22, 1993, available at
http://www.nytimes.com/1993/07/22/business/market-place-group-approves-use-of-derivatives.html
.

41.
Jerry W. Markham,
A Financial History of the United States, Volume III: From the Age of Derivatives into the New Millennium (1970–2001)
(Armonk, NY: M. E. Sharpe, 2002), 202–4.

42.
See interview with Brooksley Born,
Frontline,
August 28, 2009, transcript available at
http://www.pbs.org/wgbh/pages/frontline/warning/interviews/born.html
.

43.
Press Release, U.S. Treasury Department, “Joint Statement by Treasury Secretary Robert E. Rubin, Federal Reserve Board Chairman Alan Greenspan and Securities and Exchange Commission Chairman Arthur Levitt,” May 7, 1998, available at
http://www.treas.gov/press/releases/rr2426.htm
.

44.
Hearings of the House Committee on Banking and Financial Services, July 17 and July 24, 1998, available at
http://commdocs.house.gov/committees/bank/hba50076.000/hba50076
_0f.htm
.

45.
“Over-the-Counter Derivatives Markets and the Commodity Exchange Act,” Report of the President’s Working Group on Financial Markets, November 1999, available at
http://www.ustreas.gov/press/releases/reports/otcact.pdf
.