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Description edit
From award-winning Financial Times journalist Gillian Tett, who enraged Wall Street leaders with her newsbreaking warnings of a crisis more than a year ahead of the curve, Fool's Gold tells the astonishing unknown story at the heart of the 2008 meltdown. Drawing on exclusive access to J.P.... read more
Ridiculously Simplified Synopsis edit
People edit
- Jamie Dimon: Add a description of this character.
- Peter Hancock
- Bill Demchak
- Geithner
- Jerry Corrigan
- Timothy Geithner
- Harrison
- Steve Black
- Brickell
- Andrew Feldstein
- Duhon
- Dennis Weatherstone
- Alan Greenspan
- Chase
- Sandy Weill
- Bill Winters
- Henry Paulson
- Bear Stearns
- Tim Frost
- Merrill
- Bernanke
- J. Pierpont Morgan
- Ben Bernanke
- Citigroup
- Terr
- Goldman
- Blythe Masters
- Steagall
- Cioffi
- Clinton
- Cassano
- Wyman
- Peston
Quotes edit
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“Banks had typically been forced to hold $800 million in reserves for every $10 billion in corporate loans on their books”
- Popular Highlights from Kindle Customers
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As the name implies, a derivative is, on the most basic level, nothing more than a contract whose value derives from some other asset, such as a bond, a stock, or a quantity of gold. Key to derivatives is that those who buy and sell them are each making a bet on the future value of that asset. Derivatives provide a way for investors either to protect themselves—for example, against a possible negative future price swing—or to make high-stakes bets on price swings for what might be huge payoffs. At the heart of the business is a dance with time.
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The shell company would “insure” J.P. Morgan for the risk of the entire bundle of loans, with Morgan paying a stream of fees to the SPV and the SPV agreeing to pay Morgan for any losses from defaults. Meanwhile, the SPV would turn around and sell smaller chunks of that risk to investors, in synthetically sliced-out junior, mezzanine, and senior notes.
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For the first time in history, banks would be able to make loans without carrying all, or perhaps even any, of the risk involved themselves. That would, in turn, free up banks to make more loans, as they wouldn’t need to take losses if those loans defaulted. The derivatives buyers who had gambled on that risk would take the hit.
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Finance serves a public utility function, and the question government regulators must wrestle with is to what degree private financiers should be allowed to seek a profit and to what degree they must be required to ensure that money flows safely.
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The crucial point about derivatives was that they could do two things: help investors reduce risk or create a good deal more risk. Everything depended on how they were used and on the motives and skills of those who traded in them.
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Over time, bankers realized that they could use the cash flow from the mortgage payments being made on that bundle of loans to make a tidy extra profit. If they issued securities, such as bonds, they could back those securities with the cash flow from the mortgage payments—for example, making the regular payments to bondholders from that cash—and overall, they’d make money from both the mortgage payments and the sales of the securities. These became known as mortgage-backed securities—hence the term securitization—and the business boomed.
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That was the dream: credit derivatives would allow J.P. Morgan—and in due course all other banks, too—to exquisitely fine-tune risk burdens, releasing banks from age-old constraints and freeing up vast amounts of capital, turbo-charging not only banking but the economy as a whole.
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In 2000, the amount of nonconforming mortgage bonds that were sold was tiny, running at a mere $80 billion, or less than a tenth of all mortgage bonds. By 2005, sales of nonconforming mortgage bonds hit $800 billion. Remarkably, that meant that almost half of all mortgage-linked bonds in America that year were based on subprime loans.
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Demchak’s team in New York, however, preferred to focus on a different idea for turbo-charging the market. That was, essentially, to bundle lots of deals together, pooling all of their risk, and then to create derivatives carved out of that whole pool, rather than swapping loan by loan.
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Varikooty’s judgment on the mortgage debt was clear: he could not see a way to track the potential correlation of defaults with any level of confidence. Without that, he declared, no precise estimate of the risks of default in a bundle overall could be made. If defaults on mortgages were uncorrelated, then the BISTRO structure should be safe for mortgage risk, but if they were highly correlated, it might be catastrophically dangerous. Nobody could know.
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Series & Lists edit
This is book 40 of 100 in Top 100 Books That Defined The Noughties (Telegraph). (authoritative list)
Authors & Contributors edit
- Gillian Tett (Author)
First Edition edit
Original Language: English
Publisher: Free Press
Country: Add the country of publication.
Publication Date: 2009
ISBN: 141659857X
Page Count: 304
Publisher: Free Press
Country: Add the country of publication.
Publication Date: 2009
ISBN: 141659857X
Page Count: 304
Classification edit
- Library of Congress: Add the Library of Congress Classification.
- Dewey: 332.660973
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