Financial Origami: How the Wall Street Model Broke
Format: PDF / Kindle (mobi) / ePub
An in-depth look at the failure of Wall Street's "proven" financial models
Origami is the Japanese art of folding paper into intricate and aesthetically attractive shapes. As such, it is the perfect metaphor for the Wall Street financial engineering model, which ultimately proved to be the underlying cause of the 2008 financial crisis.
In Financial Origami, Brendan Moynihan describes how the Wall Street business model evolved from a method to transfer risk into a method for manufacturing risk. Along the way, this timely book skillfully dissects financial engineering and addresses how it's often a mechanism to evade regulatory constraints, provide institutional investors with customized products, and, of course, generate revenue for financial engineers.
- Reveals how Wall Street's financial engineering business model morphed into something destructive
- Highlights how the origami model worked well in the comparatively stable years of the early 2000s, when there was less risk to transfer
- Discusses how Wall Street began manufacturing risk by creating products that multiplied risk exposures and encouraged subprime lending
With the collapse of Lehman Brother the Wall Street business model effectively broke. But there are many lessons to be learned from what has transpired, and Financial Origami will show you what they are.
replace T-bills as the benchmark short-term interest rates. 36 CH003.indd 36 2/1/11 1:42:19 PM Fold Sides to Center, Again It was a wonderful piece of Financial Origami. For the ﬁrst time, a futures contract settled only with cash, not with an underlying asset. This made it possible to bet on changes in the level or value of all sorts of indexes and events. Cash settlement opened avenues for index products of almost limitless variety. That same year, 1981, brought the ﬁrst commodity exchange
securities. Ratings on a company’s bonds impact its borrowing costs as well as the pool of potential investors permitted to buy its debt. The Securities and Exchange Commission allows ﬁnancial ﬁrms to use the ratings for regulatory purposes; this includes calculating regulatory capital, or dead capital. Most, if not all, insurance companies’ and pension funds’ investment policy constraints require them to hold only investment-grade issues. Money-market mutual funds have similar constraints. And
changes in price. The same phenomenon occurs in other derivatives markets, such as futures contracts listed on commodity exchanges, helping to ﬁll the function of price discovery. For example, the New York Mercantile Exchange’s daily volume in crude oil futures in 2009 averaged about 550 million barrels a day. That’s about six times the daily global consumption of oil. Companies with exposure to oil prices, as well as speculators with no such exposure, are trading in that market. The exchange has
Futures 1971 1981 Wall Street Relationship to Risk PARTNERSHIP/AGENT 1971 MER PUBLIC/PRINCIPAL 1981 1984 1986 BSC MS 1993 LEH MANUFACTURER 1999 GS 2002 Figure 8.1 The Inﬂection Dates for Rules, New Products, and Business Organization 112 CH008.indd 112 2/1/11 6:58:03 AM Pull Head to Suitable Angle instruments, the major changes in the regulatory environment, and the timeline of the bulge bracket ﬁrms going public. Market participants can do several things with these instruments:
didn’t (and still doesn’t) guarantee funds at a securities ﬁrm the way it had guaranteed them at banks and S&Ls since the 1930s. It wasn’t until 1970 that Congress created the Securities Issuer Ford NYSE Issuer GM Underwriter MORGAN STANLEY Sales MERRILL LYNCH Trading SALOMON BROTHERS Investors Figure 1.2 1960s Wall Street Secondary Market 13 CH001.indd 13 2/1/11 6:51:41 AM FINANCIAL ORIGAMI Investor Protection Corporation, which was designed to be the investors’ ﬁrst line of