Notes

P reface

1 . T i m o t h y C h e e k , Mao Zedong and China’s Revolutions (Boston: Bedford/St. Martin’s, 2002). 2 . The Swiss National Bank stepped into the markets in September 2011 when it pegged the franc at 1.20 to the euro. 3 . Which anyway cannot be used in the US jurisdiction because they are inad- missible under the Dodd-Frank Act. 4 . D. N. Chorafas, Risk Pricing (London: Harriman House, 2010). 5 . Simon Sebag Montefiore, Staline (Paris: Editions des Syrtes, 2005). 6 . By contrast, identification is made when opinions have been already quoted by the financial media.

P rologue

1 . First attested in English 1382, the word allegory comes from the Greek ἀλληγορία (allegoria ), “veiled language, figurative,” from ἄλλος (allos ), “another, different,”and ἀγορεύω ( agorevo ), “to speak in the assembly” and that from ἀγορά (agora ), “assembly.” 2 . The Fed’s Open Market Committee. 3 . Michael Woodford, “Methods of Policy Accommodation at the Interest- Rates Lower Bond,” lecture, Columbia University, August 2012. 4 . Duke University/CFO Magazine Global Business Outlook Survey, Fuqua School of Business, Duke University. 5 . D e u t s c h e B u n d e s b a n k , Financial Stability Review , 2012, Frankfurt, November 12, 2012. 6 . William R. White, “Ultra Easy Monetary Policy and the Law of Unintended Consequences,” Banks of Dallas, Globalization and Monetary Policy Institute, Working Paper No. 126, 2012. 7 . George Paloczi-Horvath, Mao Ts é -Toung (Paris: Gallimard, 1963). 8 . Like Mario Draghi, another Goldman Sachs investment banker, and now boss of the European Central Bank. 9 . Financial Times , December 19, 2012. 258 NOTES

10 . Relative to real assets the central bank has in its possession to back up and honor its legal tender. For instance, gold. Short of this, what it prints is good for wallpaper. 1 1 . D . N . C h o r a f a s , Breaking Up the Euro: The End of a Common Currency (New York: Palgrave Macmillan, New York, 2013). 1 2 . Financial Times , December 15–16, 2012. 1 3 . I b i d . 14 . On December 19, 2012, it was announced that New York-based Third Point hedge fund, headed by Daniel Loeb, a young billionaire, made a profit of $500 million on Greek debt. It scooped holdings for just 17 cents on the euro and sold them at 34 cents—doubling its risk capital. Paul Paulson’s hedge fund, on the other hand, which had made a kill in 2007 with the subprimes, lost 60 percent of its clients’ money. 1 5 . Financial Times , December 15–16, 2012. 16 . CNBC, December 12, 2012. 1 7 . Financial Times , January 11, 2013. 18 . See chapter 6. 19 . In a way this resembles QE in which the Fed prints money to buy Treasury bonds, but a single trillion dollars coin, which could be lost down the drain, is even more “sophisticated.” Thanks for thinking of it. 20 . The pros say that this is not so. The central bank will target both inflation and full employment, but if central bankers go after two incompatible goals they will reach neither. 2 1 . W i l l i a m G r e i d e r , Secrets of the Temple (New York: Touchstone/Simon & Schuster, 1989). 22 . Revision frequency depends on policies prevailing in different jurisdictions. 2 3 . Financial Times , January 2, 2013. 24 . Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds. Originally published in the nineteenth century, recent reprint by Amazon.com, Marson Gate, Great Britain.

1 Q ueen Elizabeth II and the Economists

1 . UBS Investor’s Guide , February 24, 2012. 2 . The joke in France is that its universities teach only two economic theories: Marxist and Keynesian. 3 . T i m o t h y C h e e k , Mao Zedong and China’s Revolutions (Boston: Bedford/ St. Martin’s, 2002). 4 . And a first-rate political leader. 5 . The Economist , May 5, 2012. 6 . Several of Albert Einstein’s theories, which were based on hypotheses for- mulated and exploited by a penetrating mind, have been proven postmortem by observations and experiments. But many renowned physicists objected to them when Einstein published his five revolutionary papers within half a year. NOTES 259

7 . Marx tried to do so but as an armchair theorist. He never rubbed shoul- ders with politicians and never worked in industry or finance (see chapter 9 on the importance of doing so). Lenin was a politician, but he abandoned Marxism with his New Economic Policy. 8 . UBS Investor’s Guide , February 24, 2012. 9 . According to a saying, common sense is the most widely distributed quality, that’s why each of us has so little of it. 10 . Which is also becoming common in China and India. 1 1 . D . N . C h o r a f a s , Household Finance: Adrift in a Sea of Red Ink (London: Palgrave Macmillan, 2013). 12 . By contrast, in Carthage, nobility was based above everything else on wealth. 1 3 . B . D . H o p k i n s , The Making of Modern Afghanistan (New York: Palgrave Macmillan, 2008). 14 . Corrigan also advised Greenspan that the growth and complexity of off– balance sheet activities, and the nature of credit, price, and settlement risk they entail, should give all of us cause for concern. D. N. Chorafas, Wealth Management: Private Banking, Investment Decisions and Structured Financial Products (London and Boston: Butterworth-Heinemann, 2005). 1 5 . C h o r a f a s , Household Finance. 16 . In fact, not only of the Soviet Union but also of regimes in Poland, Czechoslovakia, Hungary, Romania, Bulgaria, and East Germany. 17 . Jacques Attali, La Crise, et Aprè s? (Paris: Fayard, 2008). 18 . From a personal discussion. 1 9 . D . N . C h o r a f a s , Globalization’s Limits: Conflicting National Interests in Trade and Finance (London: Gower, 2009). The Chinese state, for example, is the biggest shareholder in the country’s largest companies, guides thousands more, directs money to favored industries, and shapes the overall market by micromanaging the currency. 20 . In an interview he gave to Bloomberg News on July 20, 2012. 2 1 . D . N . C h o r a f a s , Breaking Up the Euro: The End of a Common Currency (New York: Palgrave Macmillan, 2013). 22 . In France, no politician will ever think of pronouncing the word “austerity,” let alone practice it because he or she knows very well that this will be the end of his political career. 2 3 . Le Monde , August 11, 2011. 24 . Slate.fr, August 11, 2011. 25 . Democratic, of course, up to a point. 2 6 . C h o r a f a s , Household Finance. 2 7 . UBS Investor’s Guide , July 13, 2012. 2 8 . The Economist , June 2, 2012. 2 9 . D . N . C h o r a f a s , Financial Boom and Gloom: The Credit and Banking Crisis of 2007–2009 and Beyond (London: Palgrave Macmillan, 2009). 30 . As a brief reminder, in 1990 Iraq invaded Kuwait provoking strong inter- national reaction in solidarity with the emirate. The allies liberated Kuwait from Iraqi occupation, but also set a precedent for global intervention. 260 NOTES

31 . In 2012, for totally different reasons, this sequence of outlier events repeated itself in Greece. 32 . Though the funds for saving what could still be saved were provided by the private sector: banks and hedge funds, in a solution brokered by the New York Fed. 3 3 . D . N . C h o r a f a s , Managing Risk in the New Economy (New York: New York Institute of Finance, 2001). 34 . These have been mortgages pushed down the throat of financially weak peo- ple and households who could hardly afford them. 3 5 . Financial Times , May 18, 2012. 36 . This is indeed a missed opportunity particularly on behalf of a famous economics school well known for its Left leanings, and its critique of capitalism. 3 7 . Bloomberg News , May 2, 2012. 38 . Governor Brown could not convince voters to approve a round of new taxes. He has staked his term on the need for new revenues but is sticking to an election pledge to put any increase to California voters. 39 . As another example, on August 8, 2011, the S&P 500 dropped 80 points. Again, models indicated that this should only happen once every 10,000 years. Then, on September 23, 2011, gold dropped USD 100/oz in intraday trading, projected as being a once-in-60-years event. 40 . Statistically, theory says that 99.7 percent of measurements fall within three standard deviations. An event falling more than three standard deviations from the mean is expected to happen at a very low frequency. An eight stan- dard deviations event is only meant to happen once every three trillion years. But as we saw, a 14.5 standard deviations event happened in 1987 and a 25 standard deviations event two decades later in 2008. 41 . As a recent UCLA study demonstrated, crimes are more likely to occur in rapid succession and in close proximity to one another, which the UCLA researchers called a self-exciting process ( UCLA Magazine , April 2012). 42 . Reportedly, in its annual financial accounts, Lehman Brothers misrep- resented some $50 billion. According to Sarbanes-Oxley the bank’s CEO and CFO had to sign the financial statements and they were first in line of responsibility—but nobody has brought them to justice. 43 . Economists laboring to come up with predictions are also confronted by the query whether these predictions matter to the financial markets. 4 4 . D . N . C h o r a f a s , Quality Control Applications (London: Springer Verlag, 2013). 4 5 . J o s e p h W e c h s b e r g , The Merchant Bankers (New York: Pocket Books/Simon and Schuster, 1966). 46 . D. N. Chorafas, Risk Pricing (London: Harriman House, 2010). 4 7 . International Herald Tribune , April 14, 2012. 4 8 . B I S , 79th Annual Report , Basel, June 29, 2009. 49 . Mao Zedong, Problems of Strategy in China’s Revolutionary War, originally written in 1936, (Beijing: Foreign Languages Press, 1965). NOTES 261

2 M oney

1 . Nobody today is able to give a precise answer to the question “Who invented money?” It might have been the Chinese, Sumerians, Babylonians, Assyrians, Hittites, or Lydians. 2 . Stephen Zarlenga, The Lost Science of Money (Valatie, NY: American Monetary Institute, 2002). 3 . During his reign there was a phenomenal flowering of algebra, geometry, and astronomy. 4 . Respect of the law. 5 . F r i t z M o r i t z H e i c h e l h e i m , An Ancient Economic History (Leiden: A. W. Sijthoff, 1938). 6 . As symbol of riches, King Gyges (682–652 bc ) was succeeded by another Lydian king, Croesus (561–546 bc ), who was the host of Solon. 7 . The “barbarous metal,” as John Maynard Keynes called it. It was barbarous in the sense that it put brakes on the spending desires of profligates. 8 . For larger denomination bills, the production costs are practically the same and therefore the profit even greater. 9 . Alternatively the sovereign may order that a newly printed paper money is rejected by merchants and common citizens. De Gaulle did so shortly after the Anglo-Americans had printed “occupation forces francs.” No French touched them. 10 . UBS, Chief Investment Office, “Currency Markets,” May 9, 2012. 1 1 . D . N . C h o r a f a s , An Introduction to Derivative Financial Instruments (New York: McGraw-Hill, 2008). 1 2 . The Economist , September 24, 2011. 13 . Though there are exceptions. Different rules apply to the British pound, Australian dollar, New Zealand dollar, and the euro in professional foreign exchange trading (and in banknote trading). When the US dollar is left out of the equation and currencies are related directly to each other, the cross rate is used. 1 4 . A swap is a financial transaction in which two counterparties agree to exchange streams of payments over time, according to a predetermined rule applying to both of them. It is a legal agreement that specifies the notional principal amount, payments, termination (maturity), and terms of default. 15 . The spread is greater by a factor of 3 or more for banknotes than for foreign exchange, because with foreign currency banknotes the bank incurs extra costs. For instance, it must keep a number of foreign currencies available, which leads to a loss of interest. Also, security measures have to be taken, adding to costs. 16 . And not the “dismal science,” as Keynes said. 17 . John Maynard Keynes, The General Theory of Employment, Interest and Money (Amherst, NY: Prometheus Books, 1997). 18 . Friedrich List, National System of Political Economy (London: Longmans Green, 1885). 262 NOTES

1 9 . M a l t h u s , Definitions in Political Economy (London: John Murray, 1827). 20 . Since the best rocket scientists work for the banking industry. 2 1 . D . N . C h o r a f a s , Managing Risk in the New Economy (New York: New York Institute of Finance, 2001); Chorafas, An Introduction to Derivative Financial Instruments ; D. N. Chorafas, Risk Pricing (London: Harriman House, 2010). 22 . Emile Zola, L’Argent (Paris: Gallimard, 1972).

3 M onetary Policy

1 . As chapter 1 already brought to the reader’s attention, what makes money acceptable is the issuing authority standing behind it. 2 . F. Fluri and E. Spoerndli, “Simple Sun vs. Divisia Money in : Some Empirical Results.” Paper delivered at the Divisia Monetary Aggregates Conference, University of Mississippi, October 17–18, 1994. 3 . A British definition. 4 . Often with an agreed maturity of up to two years, and deposits redeemable at notice of up to three months. 5 . Often different by jurisdiction. 6 . A Swiss definition. 7 . There is as well M4 equal to M3 plus Treasury bills, commercial paper, bank- ers’ acceptances, and savings bonds. We will not be concerned with M4 in this text. 8 . Monetary financial institution, read: bank. 9 . European Central Bank, Monthly Bulletin , April 2012. 1 0 . I b i d . 11 . Coins vary between 7 percent and 8 percent of money in circulation. 12 . Today the theory of is out of favor among many economists because it was tested in the 1980s and the results were not impressive. But neither is the Keynesian theory bulletproof, let alone the Marxist. 13 . Even if in the long run we are all dead, as Keynes said, the heat will be felt by our successors. 14 . When in the early 1990s the Clinton administration decided to follow that policy, it created a whole network of “equal opportunity” legal offices that terrorized banks into granting mortgages to people with no credit stand- ing. The banks securitized these bogus mortgages and this led squarely into the crisis of the subprimes. D. N. Chorafas, Financial Boom and Gloom: The Credit and Banking Crisis of 2007–2009 and Beyond (London: Palgrave Macmillan, 2009). 15 . Liquidity that is in excess of the amount needed by the financial system to cover investment and transaction needs. 16 . Quantitative easing was invented in 1981 by the Bank of Japan. 1 7 . E m p h a s i s a d d e d . 1 8 . E m p h a s i s a d d e d . 1 9 . Financial Times , February 7, 2012. 2 0 . I b i d . NOTES 263

2 1 . I b i d . 2 2 . D . N . C h o r a f a s , Breaking Up the Euro: The End of a Common Currency (New York: Palgrave Macmillan, New York, 2013). 23 . Typically set by several central banks at 2 percent. 24 . Monetary power was in city hands also because it held the cults. While each city had a finite domain, the cults operated through the then-known world. 2 5 . W . G r e i d e r , Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Touchstone-Simon & Schuster, 1987). 26 . Including consumer credit, lending for house purchase, and so on. 27 . Known as α , Type I error, or producer’s risk in an operating characteris- tics curve. D. N. Chorafas, Quality Control Applications (London: Springer Verlag, 2013). 28 . Known as β , Type II error, or consumer’s risk. 29 . Minus the regulatory reserve, which usually is about 8 percent, though it can vary. 3 0 . Financial Times , May 18, 2012. 3 1 . I b i d . 32 . Deposit insurance was first instituted by Franklin D. Roosevelt, at the height of the as savers lost all their savings when American banks went bust. 3 3 . The Economist , May 26, 2012. 34 . And foreign ownership in these banks would not change the problem. 3 5 . Bloomberg News , April 5, 2013. 3 6 . P r o l o g u e , s e c t i o n 1 . 37 . CNBC.com, Thursday, April 4, 2013.

4 Currency Exchange in a Globalized World

1 . For instance, Panama has adopted the US dollar, while the 17 countries of Euroland share the euro. 2 . Though there are signs that in the near future they may start to get unstuck. 3 . For instance, over time, the ECB has accepted a lower quality collateral in refinancing Euroland banks. 4 . This presently stands between $8.5 and $9.0 trillion for convertible currencies. 5 . “Other things equal,” of course, are not necessarily equal. Imported tour- ism and exported tourism are factors in current account balances in interna- tional trade and the economy. 6 . No analytical procedure is free of methodological problems and therefore above criticism. 7 . Statistics by Deutsche Bundesbank, Monthly Report , October 2011. 8 . D . N . C h o r a f a s , Globalization’s Limits: Conflicting National Interests in Trade and Finance (London: Gower, 2009). 9 . Banking has been purposely left out of this list given the current mess. 10 . An average figure between 1999 and 2007, Deutsche Bundesbank, Monthly Report , March 2012. 264 NOTES

11 . As the careful reader will recall from previous discussion, a very strong currency can hurt the economy of the country to which it belongs, mak- ing it uncompetitive in terms of goods (manufactured or agricultural) and services. 12 . Though at the time these lines were written Germany may lose its AAA sta- tus because of the euro, Moody’s suggests. 13 . UBS Daily Forex Europe, July 9, 2012. 14 . In May 2012, the SNB’s foreign currency reserves increased by Swiss francs 66 billion, to 60 percent of the country’s gross domestic product (Financial Times , July 10, 2012). 1 5 . Bloomberg News , August 7, 2012. 1 6 . C r é d i t S u i s s e , Research Monthly , Foreign Exchange; Switzerland, June 26, 2012. 1 7 . C h o r a f a s , Globalization’s Limits. 18 . Analysts estimated that in July 2012 the actual intervention by the SNB to defend the 1.20 ceiling was 35 billion Swiss francs. 19 . UBS CIO Wealth Management, September 6, 2012. 2 0 . Financial Times , October 1, 2012. 21 . Taken on the basis of telephone conferences among finance ministers, as nobody bothered to go to Madrid and audit the books. 22 . Such loans are normally adjusted to align with the Swiss franc three-month Libor. 2 3 . UBS Investor’s Guide , Wealth Management Research, April 5, 2012. 2 4 . The Economist , July 7, 2012. 2 5 . Financial Times , January 16, 2012. 26 . Estonia, Latvia, and Lithuania. 2 7 . The Economist , January 7, 2012.

5 P reserving the Value of Money

1 . D . N . C h o r a f a s , Breaking Up the Euro: The End of a Common Currency (New York: Palgrave Macmillan, 2013). 2 . E m p h a s i s a d d e d . 3 . Which nowadays has taken a leave. 4 . P a u l A . S a m u e l s o n , Economics (New York: McGraw-Hill, 1951). 5 . A well-rounded versatile maid. 6 . B I S , 8 2nd Annual Report , Basel, June 24, 2012. 7 . I b i d . 8 . M i l t o n F r i e d m a n , Dollars and Deficits (Englewood, NJ: Prentice-Hall, 1968). 9 . John Maynard Keynes, The General Theory of Employment, Interest and Money (Amherst, NY: Prometheus Books, 1997). 10 . Keynes observes: “Unless is meant (by inflationary) that simply prices are rising.” On the other hand when prices continue rising it is inflation indeed. 11 . Paul Volcker and Toyoo Gyohten, Changing Fortunes (New York: Times Books, 1992). NOTES 265

1 2 . Financial Times , April 8, 2013. 1 3 . C h o r a f a s , Breaking Up the Euro . 1 4 . Financial Times , March 15, 2012 1 5 . M e r r i l l L y n c h , The RIC Report , March 8, 2005. 16 . Producer prices, commodity and real estate prices, as well as prices of assets such as stocks and bonds are not included in the basket. 17 . Like the Federal Reserve has been doing in recent years. 18 . UBS, Global Risk Watch, CIO WM Research, July 17, 2012. 19 . European equities in particular. 20 . Based on a couple of telephone conversations. 21 . Keynes was right to call them that way. 22 . What Trotsky said was: “You may not be interested in this war. But this war is interested in you.” 23 . CNN, July 26, 2012. 2 4 . C h o r a f a s , Breaking Up the Euro .

6 Central Banks Are Reserve Institutions, Not Firefighters

1 . And periodically controlling the quality of paper money in circulation. 2 . Not a universal mission. The argument on whether reserve banking and supervision should be under the same roof or separated, is long dated. 3 . The two are incompatible with one another. 4 . BIS, Basel, June 24, 2012. 5 . See also chapter 3 for specific examples. 6 . Including double books and cooked books. 7 . Stephen Zarlenga, The Lost Power of Money (Valatie, NY: American Monetary Institute, 2002). 8 . I b i d . E m p h a s i s a d d e d . 9 . Antonio J. Ferreira, “Family Myth and Homeostasis,” Archives of General Psychiatry 9 (1963). 1 0 . W i l l i a m G r e i d e r , Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Touchstone/Simon and Schuster, 1987). 11 . The way a feature article in The Economist put it: “A common theme among the most vocal critics is that QE is some sort of voodoo monetary policy” (November 27, 2010). The article also admitted that there are worries about its effects, ranging from the fact it does not work, to sending inflation spiralling. 1 2 . M i l t o n F r i e d m a n , Dollars and Deficits (Englewood Cliffs, NJ: Prentice-Hall, 1968). 1 3 . I b i d . 14 . R. Christopher Whalen, Inflated (New York: Wiley, 2011). 1 5 . I b i d . 16 . The book he wrote after the financial collapse of 2008. 1 7 . The Economist , December 31, 2011. 1 8 . Financial Times , May 18, 2012. 266 NOTES

1 9 . Financial Times , April 30, 2012. 2 0 . D . N . C h o r a f a s , Breaking Up the Euro: The End of a Common Currency (New York: Palgrave Macmillan, 2013). 21 . With Holland and Finland. 2 2 . Bloomberg News , March 7, 2012. 23 . Here lies a famous cardinal who did more bad than good. The good he did, he did it badly. The bad he did, he did it well. 2 4 . C h o r a f a s , Breaking Up the Euro. 2 5 . Bloomberg News , January 2, 2012. 26 . UBS, CIO Note, November 25, 2011. 2 7 . D . N . C h o r a f a s , Chaos Theory in the Financial Markets (Chicago: Probus, 1994). 28 . Largely motivated by the fact that with the shrinking dollars the gold moun- tain in Fort Knox was rapidly downsized. 2 9 . Financial Times , January 13, 2012.

7 The Challenge of Bank Regulation

1 . The subprimes is an example on these two counts. D. N. Chorafas, Financial Boom and Gloom: The Credit and Banking Crisis of 2007–2009 and Beyond (London: Palgrave Macmillan, 2009). 2 . The Basel Committee was set up to provide needed coordination and response to banking problems with an international impact: The venue is the Basel-based Bank for International Settlements (BIS). 3 . Financial Times , January 11, 2013. 4 . D . N . C h o r a f a s , The 1996 Market Risk Amendment: Understanding the Marking-to-Model and Value-at-Risk (Burr Ridge, IL: McGraw-Hill, 1998). 5 . Bank for International Settlements, “Basel Committee: International Convergence of Capital Measurement and Capital Standards; a Revised Framework;” D. N. Chorafas, Economic Capital Allocation with Basel II: Cost and Benefit Analysis (London and Boston: Butterworth-Heinemann, 2004). 6 . D . N . C h o r a f a s , Basel III, the Devil and Global Banking (London: Palgrave Macmillan, 2012). 7 . This, for instance, stands for European System Risk Board. 8 . In this system the EBA is specifically responsible for banking supervision. 9 . D . N . C h o r a f a s , Breaking Up the Euro: The End of a Common Currency (New York: Palgrave Macmillan, 2013). 1 0 . BusinessWeek , November 5, 1990. 1 1 . D . N . C h o r a f a s , Rocket Scientists in Banking (London and Dublin: Lafferty Publications, 1995). 1 2 . Bloomberg News , May 9, 2012. 1 3 . International Herald Tribune , March 15–17, 2013. 1 4 . I b i d . 15 . Which have first to be developed, backed by case studies, and translated into all of Euroland’s languages. NOTES 267

16 . Very often on a personalized basis for a single major client. 17 . Theoretically, CIO stands for chief investment officer. Practically, in a large number of cases, the CIO is the chief gambler in the bank. 1 8 . C h o r a f a s , Basel III, the Devil and Global Banking . 19 . This capital estimate includes the extra capital surcharge for global systemi- cally important financial institutions. 20 . In countries hardest hit by the crisis the numbers are more depressing. In Greece 20 percent of loans to the private sector are now nonperforming. 21 . The law that once forbade financial groups from engaging in both commer- cial and investment banking. 2 2 . Bloomberg Businessweek , August 13–26, 2012. 23 . The bank buys protection on the riskiest or mid-level tranche from a hedge fund, insurance, or private equity company. 2 4 . Financial Times , April 30, 2010. 25 . With some restrictions. 2 6 . The Economist , December 10, 2011. 27 . The bank that resulted from the merger of two defunct Japanese credit institutions. 28 . Mortgage-backed securities, asset-backed securities. That’s risky because, as it is well known, AAA rating has been given to securitizations with CCC creditworthiness. 29 . Statistics as of end 2011. Financial Times , October 25, 2012. The IMF has somewhat different numbers, estimating in mid-2012 that the US had $10.8 trillion in Treasuries outstanding while other countries rated AAA or AA, evidently including Japan and states in Europe, had about $24 trillion of debt. 30 . Prepared by Manmohan Singh, “Velocity of Pledged Collateral,” IMF Working Paper, IMF Research Department, November 2011. 31 . Run by firms such as the Chicago-based CME and London-based LCH. Clearnet. 3 2 . H . R . M c M a s t e r , Dereliction of Duty (New York: Harper Perennial, 1997). 3 3 . D . N . C h o r a f a s , Stress Testing: Risk Management Strategies for Extreme Events (London: Euromoney, 2003). 34 . Rightly or wrongly analysts universally focus on the ability of banks to return capital either through dividends or buybacks. 3 5 . The Economist , March 17, 2012. 36 . Mitsuo Fuchida and Masatake Okumiya, Midway: The Battle That Doomed Japan, the Japanese Navy’s Story (Annapolis: United States Naval Institute, 1955). 3 7 . International Herald Tribune , October 6, 2012. 38 . Since one piece of bad news never comes alone JPMorgan Chase has also other expensive problems to confront. Authorities in New York sued the bank for an alleged fraud by Bear Stearns, an investment bank it bought during the financial crisis. Investors lost more than $20 billion on mort- gage-backed securities issued by Bear Stearns (The Economist, October 6, 2012). 268 NOTES

39 . JPMorgan’s investment bank’s VAR nearly doubled in the first quarter, according to its filing. It rose to an average of $170 million from $88 million a year earlier—that of course is an alarm signal even if VAR is an obsolete risk model. 40 . CNBC, June 13, 2012.

8 L oose Ends of Bank Supervision and Regulation

1 . Financial Times , July 10, 2012. 2 . D . N . C h o r a f a s , Breaking Up the Euro: The End of a Common Currency (New York: Palgrave Macmillan, 2013). 3 . Business Week , October 5, 1992. 4 . This was one of the nightmares of the Great Depression, 1929–1933. 5 . The high-interest, high-risk loans addressed to lower-income borrowers with no good credit standing. 6 . Under “hustle,” Countrywide removed bonuses linked to the quality of loans and paid them solely on volume. 7 . Financial Times , October 25, 2012. 8 . The Economist , April 7, 2012. 9 . Financial Times , July 12, 2012. 1 0 . D . N . C h o r a f a s , Financial Boom and Gloom: The Credit and Banking Crisis of 2007–2009 and Beyond (London: Palgrave Macmillan, 2009). 11 . The marketplace in which the largest risks are taken is New York. For exam- ple, a study found that Australian banks have more exposure among them- selves in New York than in Sydney or Melbourne. 1 2 . Financial Times , November 8, 2012. 13 . Or, at least admitted that this is the case. 1 4 . D . N . C h o r a f a s , Globalization’s Limits: Conflicting National Interests in Trade and Finance (London: Gower, 2009). 15 . A better example has been that of Sweden in 1990. Confronted with a mas- sive failure of the nation’s banks, the government paid about 4 percent of GDP to bail out the financial system and got back only half of that from sell- ing off loans, different company holdings, and stakes in banks. 16 . An estimated 135 American financial institutions will have to submit their living wills to regulators. 17 . D. N. Chorafas, Risk Pricing (London: Harriman House, 2010). 1 8 . The Economist , February 25, 2012. 1 9 . Stars stands for “structured trust advantaged repackaged securities.” 20 . Six US banks participated in Stars deals with Barclays between 1999 and 2006, which the IRS claims generated $3.4 billion in foreign tax credits. 2 1 . Financial Times , October 25, 2012. 2 2 . W i l l i a m G r e i d e r , Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Touchstone/Simon & Schuster, 1987). 23 . These have led to court actions and the courts have generally been favorable to the municipalities’ viewpoint, condemning the banks. NOTES 269

24 . Assets & Liabilities Management 25 . A former US senator, state governor, and boss of Goldman Sachs. 2 6 . Financial Times , February 3, 2012. 2 7 . Financial Times , October 17, 2012. 28 . In October 2011 the European Union announced a plan to curb high- frequency trading following the flash crash in May 2011, during which the Dow Jones Industrial Average briefly lost almost 1,000 points. 29 . Panel discussion, January 28, 2012, World Economic Forum, Davos. 3 0 . I b i d . 3 1 . I b i d . 3 2 . I b i d . E m p h a s i s a d d e d . 3 3 . D . N . C h o r a f a s , Basel III, the Devil and Global Banking (London: Palgrave Macmillan, 2012). 3 4 . The Economist , December 8, 2012. 3 5 . Financial Times , March 28, 2013. 36 . The EBA looked specifically at RWA versus total assets in the banking books of 89 banks in 16 countries. Financial Times , February 27, 2013. 3 7 . I b i d . 38 . Dodd-Frank expressively forbids the use of such ratings agencies, whose poor judgments are held partly responsible for the subprimes crisis. 3 9 . Bloomberg News , May 1, 2012. For their part, US bankers expressed uncer- tainty and confusion with the Fed’s stress tests (Bloomberg News , June 31, 2012). 40 . To correct this, some banks are asking institutions to apply their models to several sample portfolios to see if they can identify the causes of the big dif- ferences across countries and banks. 41 . Largely derivatives instruments. 42 . Which we continue using as an approximation to real life through stress testing by varying the number of standard deviations. The rich tables of normal distribution and richness of statistical tests are unparalleled in mathematics. 4 3 . B u t o n l y might . 4 4 . Specific risk has to do with individual characteristics of an entity. Systematic risk tells you how exposure connected to a certain variable, such as equity prices, is geared to general market movements. 4 5 . J e a n M o n n e t , Memoires (Paris: Fayard, 1976).

9 Counterparty Risk, Data Points, and CDSs

1 . Financial Times , November 22, 2012. 2 . The Economist, November 17, 2012. The two-year investigation was sparked by complaints from consumer groups and involved a police raid on the rating companies’ offices in Milan. 3 . UBS Global Equity Strategy, November 19, 2012. 4 . Nice Matin, November 11, 2012. 270 NOTES

5 . It may also be higher scores, this being relatively rare. 6 . That were already once renewed by Obama. 7 . On the contrary, many economists were of the opinion it will not be more than 2 percent of US GDP. This major difference in estimates was largely due to what “is” and what “is not” included in calculating the likely contraction of the American economy. 8 . The estimates by the Fed and Budget Office are not equal, but the one and the other are just that: estimates. 9 . UBS CIO Wealth Management, November 22, 2012. 1 0 . Data points are rocket science that has turned on its head. There are limits with everything, also with models. 1 1 . Wall Street Journal , November 21, 2012. 1 2 . Financial Times , April 8, 2013. 13 . UBS, CIO WM, April 11, 2013. 1 4 . Bloomberg News , April 22, 2013. 1 5 . Sigma , no. 2/2013, Swiss Re Zurich. 1 6 . U B S , CIO Monthly Letter , May 2013. 1 7 . Bloomberg News , May 1, 2013. 18 . In Chinese “May you live in interesting times” is not a be-well wish; it’s a curse. 19 . Less than 10 percent over the “frightening” 5 percent of US GDP Bernanke estimated to be the cost of the American fiscal cliff. 20 . Included in the spending cuts under discussion has been half a trillion dollars from the defence department’s ten-year plans on top of previously mandated cuts of $490 billion during nearly the same period—that is simply smoke and mirrors since no one really expects that the US military will accept budget- ary cuts. 21 . With the possible exception (in alphabetical order) of Germany, Norway, Sweden, and Switzerland. 22 . CNBC, November 21, 2012. 2 3 . D . N . C h o r a f a s , Alternative Investments and the Mismanagement of Risk (London: Palgrave Macmillan, 2003). 2 4 . Financial Times , November 20, 2012. 25 . According to its trustees, Medicare is projected to be unable to pay full ben- efits in 2024, or earlier, as it is growing faster than any other part of the US government’s budget. 2 6 . The Wall Street Journal , November 7, 2012. 2 7 . I n a l p h a b e t i c a l o r d e r . 28. The worst case is France with 55.9 percent. 29 . Germany just misses membership in this second group as government spending is 45.6 percent of GDP. 30 . The silly business of refilling the treasury of self-wounded Spanish banks is like making good money run after bad money. The November 2014 mora- torium on the eviction of Spanish real estate owners—that is sound in ethi- cal terms—would further push Spanish banks to the abyss since what they counted as their “assets” are frozen by the law of the land. NOTES 271

3 1 . Financial Times , November 20, 2012. 32 . Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton: Princeton University Press, 1963). 3 3 . F e r g u s o n , The Ascent of Money . 3 4 . T o a then all-time low of 1 percent, in June 2003. 3 5 . F e r g u s o n , The Ascent of Money . 36 . UBS, CIO Wealth Management Research, October 12, 2012. 3 7 . Financial Times , October 25, 2012. 38 . This argument is funny because one of the three topmost independent rating agencies, Fitch, is controlled by French capital. 39 . This then has been 10 percent of the $600 trillion OTC derivatives market. 40 . This problem has been recently mitigated by the Dodd-Frank Act that requires swaps to be traded on a central clearinghouse. Banks and clearing- houses must keep track of how much collateral belongs to each customer, with collateral posted by customers held in separate accounts. In Europe, pertinent legislation is the European Market Infrastructure Regulation (EMIR), which was voted through the European Parliament on March 29, 2012.

E p ilogue

1 . As most likely it will. 2 . International Herald Tribune , September 21, 2012. 3 . Including the European Parliament and other services, the bureaucratic monarch of the EU employs 55,000 people (according to some estimates). 4 . Bloomberg News , July 25, 2012. 5 . Bloomberg BusinessWeek , August 13–20, 2012. 6 . I b i d . 7 . I b i d . 8 . Niall Ferguson, The Ascent of Money (New York: Penguin Books, 2008). 9 . Bloomberg News , November 27, 2012. 10 . The reader might ask why digital currencies, for instance, Bitcoin, have not been included in this text. That’s an issue that required meditation, and I came to the conclusion that talking of official counterfeited dollars, pounds, euros was enough of a shock. 1 1 . Financial Times , November 7, 2011. 12 . Which in America stands at 15 percent and is growing. 13 . Laurent Freysson, “Economy and Finance,” Eurostat, Statistics in Focus, 42/2011 . 14 . The highest spending on social protection is found in Denmark (25.4 per- cent), France (23.5 percent), and Sweden (23.0 percent). At the other end of the scale are Slovakia (12.2 percent) and Cyprus (10.9 percent). 15 . Which is close to or higher than 10 percent of GDP in 11 EU member states. 1 6 . D . N . C h o r a f a s , Household Finance: Adrift in a Sea of Red Ink (London: Palgrave Macmillan, 2013). 272 NOTES

1 7 . The Economist , May 5, 2012. 18 . During Xerxes’s time (500 BC) the Persian empire had a population of roughly 100 million, estimated at 20 percent of people then living on planet Earth. Comparatively speaking, in terms of proportion, its population was bigger than China’s today. 19 . Artabanus, son of Hystaspes, was full brother of Darius, Xerxes’s father. 20 . Herodotus says that Xerxes’s army had 1.7 million infantry and 80,000 cav- alry. According to more conservative estimates there were in Xerxes’s army between 200,000 and 250,000 men, and 75,000 horses and other animals (there were also camels)—still an unprecedented size for its time. 2 1 . T h o m a s R . M a r t i n , Herodotus and Sima Quin (Boston: Bedford/St. Martin’s, 2010). 2 2 . B a r r y S t r a u s s , The Battle of Salamis (New York: Simon & Schuster, 2005). 2 3 . M a r t i n , Herodotus and Sima Quin (emphasis added). 24 . Particularly US agencies, MBSs, and Treasuries 25 . It is too early yet to include the credit crisis in China, which worsened in late June 2013. 2 6 . E C B , Financial Stability Review , May 2013. 27 . Come to maturity. 28 . On June 21, 2013, yields on ten-year US Treasuries, which move inversely to prices, hit 2.47 percent at one point—up from a low of 1.61 percent about a month earlier. 2 9 . Financial Times , June 26, 2013. 30 . Under the most recent rules, unrealized losses in “available for sale” portfo- lios hit banks’ equity capital. 3 1 . Financial Times , June 28, 2013. 3 2 . N a t h a n M i l l e r , F.D.R.: An Intimate History (New York: Meridian, New American Library, 1983). 3 3 . E C B , Financial Integration in Europe , April 2013. 3 4 . D . N . C h o r a f a s , Breaking Up the Euro: The End of a Common Currency (New York: PalgraveMacmillan, 2013). 3 5 . E C B , Financial Stability Review , May 2013. 36 . Angus Burgin, The Great Persuasion: Reinventing Free Markets since the Depression (Cambridge, MA, and London: Harvard University Press, 2012).

Index

Accident risk, 236 Bank of Spain, 152 Accumulation of wealth, 50 Bank of Sweden, 130 Altschul, Frank, 135, 136 Bank regulation, xii American Economic Association, 103 Bank runs, 76–78 American International Group, 32 Banks of systemic importance, 170 Arbeitsagentur, 243 Banque de France, 132, 139, 142 Aristotle, 38 Barter agreements, 37, 39 Artabanus, 250, 251 Basel Committee, 151, 152, 162, 198 Asian tigers, 19, 49 Basel I, 154 Asset inflation, 182 Basel II, 154, 196, 198 Asset purchases, 2 Basel III, 154, 162, 163–65, 196–98, 230 Attali, Jacques, 21, 24 Bernanke, Ben, 5, 8, 80, 81, 125, 138, Attic standard, 38 143, 215, 218, 227, 242, 244, 247, 251 Austerity, 23, 147 Beta, 35 Black swans, 33 Bad bank, 181 Blinder, Alan, 102, 103 Balance of payments crisis, 87, 88 Bonds bubble, 6 Balance sheet bubble, 102 Bookkeeping credits, 63 Balance sheet expansion, 84 Boston Consulting Group, 249 Balance sheet surpluses, 84 Bove, Richard, 172 Ballooning balance sheets, 143 Brandt, Willi, 21 Bank examiners, 161 Breeden, Richard, 157 Bank for International Settlements Bretton Woods Agreement, xiii, 67, (BIS), 3, 35, 109, 110, 132, 154 83, 148 Bankia, 152 Brown, Gordon, 139 Banking union, 134 Brown, Jerry, 31 Bank of Amsterdam, 130 Budget Control Act, 221 Bank of Canada, 5 Buffett, Warren, 97, 158 Bank of England, xi, 2, 5, 11, 16, 17, Bureaucratic monarchy, 4, 224 84, 94, 100, 131, 134, 135, 144, 196, Burns, Arthur, 108, 138 197, 228, 247, 251 Bank of Greece, 77 Call options, 43 Bank of , 47 Cameron, David, 11 Bank of Japan, xi, 2, 245, 251 Capital flight, 23 Bank of Lending, 130 Capital inadequacy, xiv Bank of New York, 191 Capital market, 61 274 INDEX

Capital market funding, 239 Credit crisis, 32 Carli, Guido, 137 Credit default swaps (CDS), xiv, 174, Carney, Mark, 5, 8, 10, 251 175, 229–39 Casino society, 194 Credit derivatives, 230 CDS premium, 237 Credit event, 232–34 CDS spread, 234, 236, 237, 239 Credit risk RWA, 201 CDS volatility, 231 Creditworthiness, xv, 210, 230 Central bank activism, 132 Crony capitalism, 150 Central bank autonomy, 40 Crossborder regulation, 25 Central Bank of Cyprus, 72 Currency devaluation, 214 Centralized bank resolution, 162 Currency diversification, 43 Chaos theory, 146 Currency options, 43 Charon’s obol, 41 Currency stability, 52, 58, 78, 245 Chase, Salmon, 124 Current account, 86, 87 Chiang Kai-shek, 5 Current account imbalances, 40 Chicago School, 65 Cyprus haircut, 72 Clausen, Christian, 99, 100 Club Med Euroland countries, 99 Data points, xiv, 220 Coburn, Tom A., 30 Davis, Jonathan, 218 Collateralized loan obligations, 174 Debt-to-GDP ratio, 213, 218, 235 Collateral transformation, 168 Default risk, 209, 214 Commercial bank money, 41 Deferred tax assets, 165, 166 Committee of European Banking Definition of derivatives, 184, 185 Supervision, 155 Deflation, 120, 121 Commodity Futures Trading Deleveraging, 123, 133 Commission (CFTC), 187 Democratization of derivatives, xiv Competitive devaluations, 95 deMoivre, Abraham, 202 Concentration of wealth, 51 Demosthenes, 76 Conflict of interest, 53, 142 Dennis, Bengt, 100 Confucius, 17 Deposit insurance, 77 Congressional Budget Office, 215 Deregulation, 115 Constancio, Vitor, 150 Derivatives, 54 Consumer Financial Protection Derivatives trades, xiv Bureau, 164 Deutsche Bundesbank, 3, 76, 111, Consumer price index, 120 142, 226 Convertibility of bank deposits, 226 Dijsselbloem, Jeroen, 73 Core inflation, 114 Dimon, Jamie, 54, 156, 174, 177 Corralito risk, 77 Direct quotation, 46 Corrigan, Gerald, 20 Discount credits, 75, 76 Costa Concordia, 219, 220 Disinflation, 120 Counterparty risk, 209, 230 Distribution of wealth, 60 Country-specific CDS, 235 DJIA, 26, 28, 194 Countrywide, 183 Dodd-Frank Act, 164, 166, 176, Creation of wealth, 51, 52 186, 187 Creative , 34, 190 Doscière, René, 213 Credit bubble, 6 Dot-com bubble, 28 INDEX 275

Dracon, 39 European Securities and Markets Draghi, Mario, 7, 8, 116, 125, 145, 148, Authority, 194 227, 242, 247, 251 European Stability Mechanism Drucker, Peter, 124 (ESM), 106 Duke University, 3 European System of Financial Supervision, 155 East Asia Crisis, 27 European Union, 34 Eccles, Marriner, 11, 74, 75, 139, 192 Eurostat, 248 Ecofin, 73, 148 Event options, 236 Economic destabilization, 23 Excess deposits portfolio, 175 Economic firefighting, 140 Excess liquidity, 69, 70 Economic governance, 60 Exit strategy, 125, 126, 127 Economic insecurity, 246 Exotic financial instruments, 68 Economic policy, 58, 215 Expansion of credit, 57 Einstein, Albert, 33 Expansive monetary policy, 57 El-Erian, Mohamed, 81, 110 Expected losses, 206 Emergency liquidity assistance Expected risks, 206 mechanism, 77 English Bank Act of 1844, 131 Fair value, 185, 186 Entitlements, 17, 25, 118, 124, 221, Fannie Mae, 32, 81, 101, 182 236, 243, 248 Fat tails, 203 Eunomia, 38 Federal Bank of Philadelphia, 141 Eurobonds, 142 Federal Deposit Insurance Euro crisis, 214 Corporation, 197 Euro-exit risks, 126 Federal Housing Finance Agency, 183 Euroland, 94, 105, 106 Federal Reserve, xi, 6, 11, 17, 48, 58, Euroland meltdown, 78 59, 65, 71, 74, 100, 116, 123, 129, European Bank for Reconstruction 144, 192, 199, 218, 226, 245, 251 and Development, 29, 106 Federal Reserve Bank of Dallas, 1, European Banking Authority (EBA), 80, 84 154, 155, 197 Ferguson, Niall, 245 European Central Bank (ECB), xi, Ferreira, Antonio, 136 2, 6, 17, 65, 72, 77–79, 84, 100, , 38, 40, 53, 131 116, 118, 119, 125, 144, 160, 161, Fiduciary money, 53 247, 251 Financial Accounting Standards European Commission, 34 Board, 184 European Exchange Rate Mechanism Financial innovation, 4, 33, 39 (ERM), 95 Financial instability risks, 133 European Financial Stability Facility Financial mismanagement, 97 (EFSF), 106 Financial Services Authority, 134, 135, European Financial Stabilization 159, 197 Mechanism, 106, 107 Financial stability, xi, 242 European Investment Bank, 106 Financial Stability Board, 154 European Monetary System, 94 Financial Stability Report, 197 European Monetary Unit, 92 Fiscal austerity, 86 European Parliament, 34 Fiscal cliff, 85, 215, 221, 225 276 INDEX

Fiscal consolidation, 221 Great Depression, 95, 121, 147, 226 Fiscal crisis, 221 Greenspan, Alan, xi, 20, 30, 123, 138, Fiscal deficit, xi, 31 146, 147, 175, 190, 220, 227 Fiscal policy, xiii, 13, 58, 215, 222 Gross, Bill, 71, 220 Fiscal responsibilities, 222, 234 Gyges, 40 Fiscal stability, 234 Fiscal sustainability, 237 Hague, William, 11 Fiscal union, 134 Haldane, J.B.S., 99 Fisher, Richard W., xii, 1, 20, 80 Hamilton, Alexander, 42 Fitch, 177, 212 Hammurabi, 38, 40, 109, 205 Fixed exchange rates, 68 Harding, Robin, 8, 9 Flash crash, 194 Harvard Club of New York, 1, 20 Fluri, Robert, 62, 63 Harvard University, 241 Foreign currency exposure, 48 Haussmann, Jacques, 146 Foreign exchange markets, 48 Headline inflation, 114 Foreign exchange transactions, 45 Healthcare bubble, 31 Forex scams, 48 Helicopter money, 12 Forward outright transactions, 47 Hoenig, Tom, 197 Forward price, 46 Höfert, Andreas, 99, 219 Fractals, 204 Hollande administration, 126 Franc Germinal, 132 Hollande, François, 24 Frank, Barney, 164, 176, 187, 188 Household debt, 209 Freddie Mac, 32, 81, 101, 182 Household wealth, 18 Friedman, Milton, 65, 112, 138, Hurst, H.E., 202 226, 227 Hurst exponent, 203, 206 Fuchida, Mitsuo, 172, 173 , 4, 5, 115, 120, 122, Full employment, 137 127, 147

Gallo, Alberto, 77 Iksil, Bruno Michael, 174 Gay, Robert, 218 Indirect quotation, 46 Geopolitical factors, 89 Inflation volatility, 228 Giannini, Amadeo, 207 Insurability, 206 Gingrich, Newt, 7 Interactive computational Glass-Steagall Act, 164, 195 finance, 157 Global bank regulation, xiv Interest-bearing accounts, 63 Global competitiveness, 23 Interest rate hikes, 27 Global deflation, 121 Internal bank ratings, 238 Global economic dominance, 44 Internal economic stimulus, 106 Global inflation, 121 Internal Revenue Service (IRS), Globalized economy, xiv 159, 191 Global monetary base, 85 International Accounting Standards Global monetary policy, 85 Board, 185 Global shadow banking, 8 International Center for Financial Goldman Sachs, 5 Regulation, 164 , 62, 227, 247 International Financial Reporting Grant Street National Bank, 180 Standards, 185 INDEX 277

International Monetary Fund (IMF), M2, 64, 66, 74 72, 93, 164 M3, 65, 66, 74 International Securities Dealer Mackay, Charles, 13 Association (ISDA), 233 Malinvestments, 246 Inverse delegation, 153, 154 Malthus, Thomas, 51 Investment policies, 50 Mandelbrot, Benoit, 204 Mao Zedong, xi, 16, 36 Japan Premium, 210 Market confidence, 8 Joerres, Jeffrey A., 243 Market psychology, 57, 192 JPMorgan Chase, 54, 156 Market Risk Amendment, 154 Junk bond funds, 217 Market-risk RWA, 201 Junker, Jean-Claude, 148 Marking-to-model, 157 Marshall, Alfred, 50 Kaletsky, Anatole, 242 Marshall, George, 220 Keynes, John Maynard, xii, 50, 107, Marshall Plan, 220 113, 147, 150, 226 Marx, Karl, 21, 150 King, Mervyn, 16, 125, 228, 251 Massive inflation, 68 Krugman, Paul, 78, 116 Mazur, Albert, 33 Kyrtosis, 203, 204 McCabe, Thomas, 139 McChesney Martin, William, 139 Lacker, Jack, 70, 218 McCulley, Paul, 116 Lanebank, 130 Medicare, 223 Langone, Ken, 224 Mellon Bank, 180 Legal risk, 204, 205 MFGlobal, 193, 194 Lehman bankruptcy, 166 Midway syndrome, 173 Lehman Brothers, 15, 31, 32, 71, 101, Milligan, Andrew, 8 184, 218 Mirow, Thomas, 29 Lender of last resort, 133 Monetary accommodation, 1, 133 Liberal democracies, 23 Monetary base, xiii, 62, 63, 67, 71, 225 Libor, 191 Monetary capital, 65 Light crossborder supervision, 155 Monetary decisions, 57 Liquidity crisis, 29 Monetary policy, xiii, 1, 13, 40, 57–60, List, Friedrich, 50 105, 129, 222, 228, 229, 241, 242 Living wills, 189 Monetary policy transmission, 115 Locke, John, 50, 113 Monetary stability, 11, 52, 83, 129, 137, London School of Economics, xii, 15, 229, 245 19, 24, 26, 29, 30, 35, 228 Money is manure, 55 London Whale, 174, 175 Money market, 61 Long Term Capital Management, 28 Money supply, xiii, 66, 71, 121 Loose monetary policy, 132 Money supply metrics, 63 Loss absorption, 162 Monnet, Jean, 207 LTRO, 7, 116, 118, 119, 179 Montagu, Charles, 131 Lycurgus, 19, 39 Moody’s, 140, 177 Moreau, Emile, 139, 147 M0, 63 Mortgage-backed securities, 9, M1, 63, 66 182, 185 278 INDEX

Nanny state, 20 PricewaterhouseCoopers, 164 National asset resolution vehicle, 78 Primary deficit, 59 National inflation rates, 112 Principal write-down, 163 National Land Bank, 131 Private sector involvement (PSI), New Keynesian models, xii 72, 233 New York Fed, 20 Profumo, Alessandro, 194 Nixon, Richard, 67, 182 Protection buyer, 230, 233 Nominal GDP spending (NGDPS), Protection seller, 230, 232 10–14 Public confidence, 4 Nomisma, 38 Public debt, 12, 59, 211–13, 222, 244, Non-traditional legal risk, 205 245, 249 Notion of a reserve bank, 130 Public guarantee, 249 Noyer, Christian, 142 Purchasing power parity (PPP), 19 Put options, 44 Obama, Barack, 223 Pyramid of credit, 108 Obama administration, 126, 215 Occupy Wall Street, 24, 241 Quantitative counterfeiting, 241, 246 OECD, 199 Quantitative easing, 10, 22, 71, 79, Oil price shocks, 114 102, 126, 137, 215, 216, 242 Okumiya, Masatake, 172, 173 Quantitative Easing 3.5, xii, 5 OMT, 7, 116, 242, 247 Queen Elizabeth II, xiii, 15, 26, 30, 32 Open market operations, 70 Operation Twist, 2 Reagan, Ronald, 113 Origin of money, 37 Real-time risk control, 186 Ortiz, Guillermo, 196 Reference rates, 46 Osborn, George, 10, 11 Regulatory arbitrage, 160 Output volatility, 228 Regulatory capital, 164, 165 Ownership society, 182 Regulatory framework, 179 Regulatory laxity, 17 Pasqua, Charles, 14 Rehypothecation, 168, 231 Paterson, William, 131 Reichsbank, 147 Paul, Ron, 141, 144, 177 Resolution Trust Corporation, 189 Paulson, Paul, 29 Richmond Federal Reserve, 70 Peterson Institute, 44, 45 Ridpath, Barbara, 164 Pimco, 71, 81, 110, 220 Riksbank, 76, 100, 101, 103, 130 Plan Austral, 123 Risk-free returns, 48 Plan Cruzado, 123 Risk management, 201, 202 Plosser, Charles, 141 Risk-on, 6 Plutarch, 19 Risk pricing, xv Poincaré, Raymond, 139 Risk-weighted assets, 163, 196, Point of Non Viability, 162 197–201 Polish restructuring, 123 Risk-weight optimizers, 196 Political accountability, 59 Rocket scientists, 158, 191 Precious metal coinage, 40 Rogers, Will, 222 Pre-deal information, 47 Roosevelt administration, 192 Price stability, 114 Rose, Charlie, 28 INDEX 279

Roseman, Michael, 193 State capitalism, 150 Rosenberg, David, 243 Statement of Financial Accounting Roubini, Nouriel, 24, 195 Standards, 184 Rumsfeld, Donald, 33 State Supermarket, 124, 229 Russell, Bernard, xii Steinhardt, Michael, 71, 148 Russian Crisis, 27 Steinmann, Heinrich, 125 Strauss, Barry, 251 Saint-Exupéry, Antoine de, 22 Stress testing, 169–71, 173, 200 Samuelson, Paul A., 108, 109 Strong, Benjamin, 138, 147, 227 Sarbanes-Oxley Act, 32 Structural budget deficit, 217 Sarkozy, Nicolas, 24 Structural reforms, 24 Savings accounts, 63 Subpramanian, Arvind, 44 Schäuble, Richard, 145 Subprimes, 26, 29, 31, 182, 193 Schwartz, Anna, 226, 227 Sumner, Scott, 12 Second Versailles, 143 Supply of money, 62, 63 Securities and Exchange Swiss Federal Council, 200 Commission, 157 Swiss National Bank, xiii, 17, 42, 62, Seignorage, 39 84, 91, 94, 95, 200 Self-wounded banks, 249 Synthetic securitizations, 165 Sequester, 221 Systemic banking crisis, 78 Serna, Evelyne, 22 Systemic risk, 78 Shapiro, Mary, 158 Short-termism, 12 Tardieu, André, 111 Singh, Manmohon, 168 Technology bubble, 28 Smith, Adam, 22, 50, 150 Tequilla Crisis, 27 Smith, Peggy, 243 Term money, 65 Smithsonian Agreement, 148 Theseus, 38 Social benefits, 248 Tier 1 capital, 163, 165, 170, 171, 198 Social obligation of banks, 172 Time deposits, 65 Social protection, 248 Too Big to Fail, 200, 249 Solon, 38, 39, 40 Toxic waste, 180 Soros, George, 22, 30, 92, 148, 151 Toynbee, Arnold J., 18 Sound monetary policy, 227 Transaction accounts, 63 Sovereign bonds, xiv Transfer of risk, 3 Sovereign credit risk, xiv Treaty of Rome, 107 Sovereign debt, 179 Trichet, Jean-Claude, 195 Sovereign debt ratings, 210 Trotsky, Leon, 126 Sovereign wealth fund, 89 True inflation, 113 Special investment vehicles, 26 Truman, Harry S., 139 Specific credit risk, 209 Turner, Adair, 159, 195 Spiraling national debt, 92 Spoerndli, Erich, 62 Ugaki, Rear Admiral, 172, 173 Spot price, 46 Unconditional deals, 46 Spread, 47 Unconventional monetary policies, 117 Stagflation, 113 Unemployment, 9, 91, 241, 243 Standard & Poor’s, 85, 140, 177, 210 Unexpected losses, 206 280 INDEX

Unexpected risks, 206 Whalen, Christopher, 139 Unit labor costs, 248 White, William, R., 3, 4 Unknown unkowns, 33 Whitton, Andy, 194 US Department of Justice, 183 Wolf, Martin, 128 US Treasuries, 5 Woodford, Michael, 2 World Bank, 86 Velocity of circulation of money, 66, World Economic Forum, 195 67, 71, 76, 137 World Trade Organization, 95 Virtual assets, 192 Wriston, Walter, 61 Volcker, Paul, 113, 114, 190 Volcker Rule, 176 Xerxes, 250, 251

Walker, David, 191 Zarlenga, Stephen, 135 Wallich, Henry, 136, 225 Zimbabwe hyperinflation, 123 War games, 169 Zoellick, Robert, 86 Wechselbank, 130 Zola, Emile, 49, 55 Weidman, Jens, 111, 142, 226 Zombie companies, 249