JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

Index

ABX index, 127 Bank holding companies, 218, 227 Accenture and flash crash, 319, 320 Bank of America, 216 Accounting and risk management, 302 Bank of Italy and LTCM, 99 Adjustable-rate mortgage (ARM), 175, Bankruptcies and estimation of value of 180 losses, 303–304 Agency securities, 156 Bankruptcy Abuse Prevention and AIG (American International Group), Consumer Protection Act, 181 227–230, 295, 342 Banks. See also Investment banks; specific Allison, Herbert, xix, 78, 82 banks Alvarez, Scott, 220 bailouts of, 301, 341, 342 Amaranth Advisors LLC, 103 basic operations of, 143–144 Angelides, Philip, 219 fees charged by, 347 Antoncic, Madelyn, xix, 207 Greek debt exposure, 332–333, 334, Apgar, William C., Jr., 180 336 AQR Capital Management, 129, 131, 134, as funds, 112–113 139 housing bubble and, 185–186, 291–292 A.R. Baron brokerage, 142 leverage and, 107–108 , 306–308, 384–385 Maughan on, 268–269 Arbitrage trades of LTCM, 67 provision of emergency credit by, Arb spread, 61 113–114 Archstone real estate investment trust, 204, runs on, 217, 243–244 206, 211 trust between, 234 Argent Mortgage Company, 176 trust in, 214, 303 ARM (adjustable-rate mortgage), 175, 180 Barclays, 193, 216, 244 Asness, Cliff, xix, 134 Barclays Global Investors (BGI), 129, 135, Asset-backed securities, 386–387 138, 139 Auto companies,COPYRIGHTED bailout of, 342 Basel Committee: MATERIAL Azimuth Trust, 260, 261 Basel I document, 246–248 Basel II document, 248–250 Bagehot, Walter, 302, 349 financial crisis and, 250–252 Bailouts of banks, 301, 341, 342 guidelines of, 33 Banco Nazionale del Lavoro, 255 overview of, 246 Bankers Trust, consolidated balance sheet Bear Stearns: of, 31, 32–33 bank run on, 265–266 Bank for International Settlements (BIS), collapse of, 148–150, 151–154 245–246. See also Basel Committee failure of hedge funds of, 123, 125–127

467 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

468 Index

Bear Stearns (Continued ) CDSs (credit default swaps), 148, 228, history and reputation of, 141–143 295–296 J.P. Morgan and, 146, 150–151 CDX index, 127, 275, 277 leverage of, 193 Central Bank of Russia, 75–77 LTCM and, 80, 82–83, 143 Chow, Andrew, 11 near-collapse of, 3, 106, 110 Cioffi, Ralph, xix, 123, 125 repo system and, 145–147 Citadel , 286 window dressing by, 144 Citibank, 181, 193, 259 Begleiter, Steve, 126 CLA (collateralized lending agreement), Benn, Orson, 176 198 Berkshire Hathaway, 11. See also Buffett, Clearinghouses, 109–110 Warren Client services, 389–390 Bernanke, Ben, xix, 152, 168, 172, 175, Clinton, Bill, 178, 181 219, 221 CMBS securities, 280–282 Black, Fischer, 53 CMBX index, 127, 280–281 Black-Scholes formula, 53, 116 CMOs (collateralized mortgage Blankfein, Lloyd, xix, 216, 227 obligations), 160 Blasnik, Steve, xix, 275, 278–279, 292 Collateral-backed bonds, 46 Bond arbitrage, 7–11 Collateralized debt obligations (CDOs): Born, Brooksley, 181 AIG and, 228 Box trade, 266–267 Basel Committee and, 252 Brady Plan, 65–66 Bear Stearns and, 125 Brazilian C bonds, 65–67 overview of, 159–162 Brendsel, Leland, 167 ratings agencies and, 184–185 Broker-dealers, 312, 313 Collateralized lending agreement (CLA), Buffett, Warren, xix, 11, 78–79, 81–82, 93, 198 182, 209–210 Collateralized mortgage obligations Buoni del Tesoro Poliennali, 50 (CMOs), 160 Buoni Ordinari del Tesoro, 51, 52 Commercial paper, trust in, 233–234 Bush, George, 178 Commercial real estate, 195–196 Butler, Angus, 245 Commodity Futures Modernization Act, Butterfly yield curve trades, 67, 283–284 181 Compensation models, 110, 298 Callan, Erin, 197 Conflicts of interest: Capital, contingency, 113–114 CDOs and, 161–162 Capital adequacy ratio (CAR), 246–247 financial crisis of 2008 and, 297–298 Capital markets, 382 ratings agencies and, 183 Capital ratio and leverage, 163 Conforming loans, 157–158 Capital-to-asset ratio, 33–34 Consolidated tape, 313 Carhart, Mark, xix, 133, 135, 138 Convergence trades, 39 Cash business, 158 Copycat funds, 257, 262–263, 268–274 Cassano, Joseph, 228 Copycat investors: Caxton macro hedge fund, 134, 259 definition of, 1, 25 Cayne, James E. (Jimmy), xix, 80, 82–83, effects of, 26 88, 99, 126, 142, 143, 147, 148, Salomon Brothers, 2 149–150, 151, 153–154 Corporate debt securities and loans, CDOs. See Collateralized debt obligations 385–386 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

Index 469

Correlation: Dodd, Chris, xx copycats, puppies, and counterparties, Dodd-Frank rules, 346–347, 349 25–27 Dominion Bond Rating Service Limited, economics, 24–25 182, 184 between LTCM strategies before and Dornbusch, Rudi, xx, 84 during crisis, 377–378 Drexel, 235 overview of, 21–22 Druckenmiller, Stanley, xx, 78 pre- and during LTCM crisis, 87–88 Duration tool, 117 -term and long-term, 27–28 Dynamic portfolio , 2 Corzine, Jon, xix, 11 Dynamic risk hedging, 305–306 Counterparties: bankrupt firms and, 236 Economic system choices, 349–350 booking of profits by, 296 Einhorn, David, xx, 210–211 confidence and, 218 Eisinger, Jesse, 209 due diligence of, 115 Electronic communication network (ECN), interaction of, 302–304 312 Lehman Brothers and, 224–225 Emergency lines of credit, 113–114, 146 LTCM and, 108–110 Emerging market trades, 65–67 overview of, 26–27 Endeavor Fund, 262, 268, 272, 274 Cox, Cristopher, xix, 150, 215 Equity cash, 382–383 Cramer, Jim, xix, 77 Equity derivatives, 383–384 Crash of 1987, cause of, 2 Equity finance, 384 Credit default swaps (CDSs), 148, 228, Equity market, crash of, 309. See also Flash 295–296 crash Credit risk, 159, 164, 246 Equity relative-value trades, 63–65 Crockett, Andrew, xix, 220, 245, 268, 269 European Central Bank, 325, 326, 328, 335 Crowds/crowding: European cross-country swap trade, 44–46 crisis of, 350–351 European Monetary Union plan, 330 desirability of, 1 European Union (EU): effects of, 1–2 early years of, 330–332 interconnected, 101–102, 289–291 future of, 335–337 in 1998, 88 membership conditions of, 324–327 in quant crisis, 138–139, 140 members of, 323–324 Currency union, 324. See also European pros and cons of membership, 328–330 Union ten-year government interest rates, 331

Dark pool, 312, 313 Fabozzi, Frank, 17 Deacon, Tom, 261 Fairy-Tale Decade, 339–340, 344, 346 Dealer community and hedge funds, 235 Fannie Mae (FNMA): Default risk of mortgages, 158 bailout of, 341, 342 Dektar, Daniel, 262, 263, 270, 271 bonds issued by, 46–47, 155–157 Dendreon, 313 business of, 157–158 Derivatives, 294–297 CDOs and, 159–162 Dimon, Jamie, xx, 75, 151, 216, 218, 227, government rescue of, 187–188 234, 346 hedge funds and, 162–165 Directional bets, 39 leverage ratios, 192, 193 Diversification, 27–28, 118 lobbying by, 178–179 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

470 Index

Fannie Mae (FNMA) (Continued ) FINRA, 321, 322 losses of, 186–187, 190 Fisher, Peter, 81 political pressure on, 177 Fitch, Inc., 182, 184 profits of, 165, 167–168 Fixed-income derivatives, 388 risk and, 159 Fixed-income instruments, 385–388 stock price of, 168 Flash crash: subprime mortgages of, 180 aftermath of, 321–322 threats posed by, 188–190 causes of, 315–321 total residential mortgage securities computer glitch and, 317–319, outstanding, 166 321 Farber, Jeff, 143 in history, 313 Fat finger theory, 314 overview of, 3, 311–312 Fazio, Antonio, xx, 99 stub quotes and, 319–321 Federal Deposit Insurance Corporation theories of, 313–315 (FDIC), 217, 294 Waddell-Reed trade and, 316–317 Federal Home Loan Mortgage Association. Flexner, Tom, 146 See Freddie Mac Fly fishing, 314 Federal National Mortgage Association. See Fons, Jerome, 184 Fannie Mae Foreign exchange, 388–389 Federal Reserve (Fed). See also Bernanke, Forest, Roderick, 271 Ben; Greenspan, Alan Frank, Barney, xx, 168–169, 178 Bear Stearns and, 152–153 Fraud and housing bubble, 176 as coordinator of last resort, 114–115 Freddie Mac (FHLMC): Greece and, 335 bailout of, 341, 342 interest rates and, 170–171, 172, 299 bonds issued by, 46–47, 155–157 Lehman Brothers and, 219–221, 225 business of, 157–158 Felder, Eric, xx, 205 CDOs and, 159–162 Fidelity Investments, 146 civil fine paid by, 179 Financial crisis of 2008. See also Lessons government rescue of, 187–188 from financial crisis hedge funds and, 162–165 Basel Committee and, 250–252 leverage ratios, 192, 193 blaming Wall Street for, 340–344 lobbying by, 178 causes of, 3 losses of, 186–187, 190 deleveraging, 285–286 political pressure on, 177 housing bubble and, 306 profits of, 165, 167–168 ignored lessons and, 4 risk and, 159 market imbalance, 282–285 stock price of, 168 market insanity, 275–281 subprime mortgages of, 180 overview of, 121–122, 123 threats posed by, 188–190 real costs of, 344–346 total residential mortgage securities timeline of, 124 outstanding, 166 Financial sector, size and productivity of, Friedman, Paul, xx, 146 342–343 Froeba, Mark, 184 Financial Services Authority (FSA, U.K.), Fuld, Richard, xx, 76, 196, 197, 203, 204, 216 205, 209–210, 211, 212, 217, 220, Financial statements, clarity and 221–222, 298 transparency of, 302 Fully funded pension funds, 236 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

Index 471

Geithner, Timothy, xx, 152–153, 215, 216, entry into European Union, 323 220, 221 IMF and EU packages for, 335 Gelband, Michael, xx, 204–205 Greed and housing bubble: Gensler, Gary, 188 commercial banks, 185–186 Ginnie Mae (GNMA): home owners, 177 bonds issued by, 46, 156 media and regulators, 180–181 business of, 157 overview of, 170–173 mortgage market and, 187 politicians, 177–180 Giovannini, Alberto, xx, 113, 255 rating agencies, 182–185 Global distribution/sales, 389 real estate agents and mortgage lenders, GlobalOp Financial Services, 261 173–177 Gluckstern, Steven, 261 Greenberg, Alan (Ace), xx, 141–142, 143, Goldman Sachs. See also GSAM 148 AIG and, 230 Greenspan, Alan, xx, 82, 163–164, 170, Bear Stearns and, 149 171, 172, 177–178, 181, 188–189, CDOs of, 162 245, 299 concerns about survival of, 226–227 Gregory, Joseph, xx, 197, 204, 205, 212 Convergence Asset Management, 25 Griffin, Kenneth, 286–287 Global Equity Opportunities Fund, GSAM, 129, 133, 135–136, 137, 139, 140 129 GSE. See Government-sponsored enterprise hedge funds of, 138 Gutfruend, John, xx, 10 LTCM and, 80, 81 profits of, 192, 230–231 Haghani, Victor, xx, 8, 12, 13, 254 real estate exposure, 194–195 Haircuts, 26, 38, 115, 289 stock price of, 230 Hausman, Jerry, 8 Gourinchas, Pierre Olivier, 333 Hawkins, Gregory, xx, 8, 9, 12, 100, 259 Government. See also Federal Reserve Hedge fund gate, 305 control of market by, 349 Hedge funds: policy lessons from financial crisis of average returns of, 287 2008, 298–301 of Bear Stearns, 123, 125–127 sale of debt by, 54–55 function of, 235 Government and agency obligations, 385 of Goldman Sachs, 138 Government-sponsored enterprise (GSE). growth management by, 290 See also Fannie Mae; Freddie Mac GSEs and, 162–165 overview of, 159 housing market and, 286 as “too big to fail,” 293 lessons from financial crisis of 2008, Graduated payment mortgage (GPM), 174, 304–306 175 relative-value, 06, 292 Gramm-Leach-Bliley Act, 181 High-frequency trader theory, 314–315 Greece: High-yield securities, 386 choices facing, 333–335 Hilibrand, Larry, xx, 7, 9, 12, 13, 18–19, competitiveness in world trade, 329, 78–79, 100, 254, 272 333 Hindy, Ayman, 258, 272 debt crisis in, 3, 291, 331, 332–333 Home equity loans, 177 disadvantages of EU membership for, Home owners and housing bubble, 177, 328–330 291 economy of, 326, 327 Household net worth, 344–345 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

472 Index

Housing bubble. See also Greed and housing fixed income, 385–388 bubble foreign exchange, 388–389 blame for, 341 global distribution, 389 circle of greed causing, 170–173 leverage of, 193 Federal Reserve and, 299 Main Street and, 391 financial crisis of 2008 and, 306 mortgage market and, 191–193 overview of, 168–170 overview of, 381–382 Huang, Chi-Fu, xxi, 12, 19, 258, 268, 269, profits, 192 272, 306 research, 389 HUD (Housing and Urban Development), stock prices, 226 affordable-housing goal of, 179 structure, 225, 344 Hufschmid, Hans, xxi, 9, 12, 19, 84, technology, 390 85–86, 100, 253–254, 260–261 Investment Corporation of Dubai (ICD), Hunsader, Eric Scott, 321 210, 213 Hybrid ARM, 175 Investment grade (IG) index, 275, 277 Investors, interconnected, 289–291 ICD (Investment Corporation of Dubai), IRS (interest-rate swap), 236–238 210, 213 Isaacs, Jeremy M., 207 IG (investment grade) index, 275, 277 Italian swap and government zero curve, III Fund LP, 262, 263, 268, 269, 272, 274, 237 306 Italian swap spread, 50–52 Illiquid securities, 39 Italy, debt burden of, 335–336 Implied volatility, 53 Iwanowski, Ray, xxi, 135, 138 Income distribution, 346 Index art, 39 Japanese box trade, 266–267 Indices: Japanese swap spread, 48–49 ABX index, 127 Japanese warrant trade, 38–39 average returns of, 287 Jittery markets, 315 CDX index, 127, 275, 277 Johnson, James, 167 CMBX index, 127, 280–281 Jones, Bob, xxi, 135 IG index, 275, 277 J.P. Morgan: IndyMac, 185, 186 Bear Stearns and, 146, 150–151 Insurance, basics of, 229–230 Lehman Brothers and, 214–215, 225 Interest-rate risk, 159, 175 leverage of, 193 Interest rates, 299 LTCM and, 78, 80 Interest-rate swap (IRS), 236–238 Washington Mutual and, 185, 186 International Swaps and Derivatives JWM Partners, LLC: Association, 236, 250, 303 collapse of, 281 Internet stock bubble of 2000, 2, 169, 171 deleveraging of, 285–286 Investment banks. See also specific banks Hilibrand and, 272 capital markets, 382 losses at, 266, 268, 269, 270, 274 client services, 389–390 market insanity and, 274–275 conflicts of interest, 297 overview of, 253–257 corporate and risk management, 390 Rosenfeld and, 265 demise of, 218 equities, 382–385 Kabiller, David, 134 exposure to residential real estate, 194 Kapor,Mitch,xxi,8 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

Index 473

Keynes, John Maynard, xxi Russian default and, 76 Kirk, Alex, xxi, 197, 204, 207 size of, 112 Kohn, Donald, 212 stock price, 208, 211, 213, 214 Komansky, David, 82 storage business strategy, 203 Korean Development Bank (KDB), 207, swap imbalance and, 236–241 212–213, 215 Lehman Brothers Bank, 388 Krasker, William, xxi, 8, 9, 12, 261 Lenders: Kravis, Henry, 271 of last resort, 300 Krisnamacher, Arjun, xxi, 9, 12, 100, 254 marking to market by, 106 Kroner, Ken, xxi, 137–138, 304, 305–306 mortgage, and housing bubble, 173–177 Kuwait Investment Authority, 207 Lessons from financial crisis: arbitrage, 306–308 Larson, Jeff, 128 conflicts of interest, 297–298 Leach, Jim, xxi, 178 counterparty interaction, 302–304 Leahy, Dick, xxi, 7, 9, 12, 19, 88, 254 derivatives, 294–297 Lehman Brothers: hedge funds, 304–306 business exposure, 196–202 interconnectedness and crowds, capital markets division, 196, 197, 199 289–291 capital seeking by, 207–213, 224 leverage, 291–293 clearinghouses and, 110 overview of, 308 client services division, 198 policy lessons, 298–301 consequences of failure of, 233–236, 244 risk management, 301–302 consolidated balance sheet, 31, 32–33 systemic risk and “too big to fail,” counterparties and, 224–225, 303 293–294 distribution of investments of, 200 Lessons from LTCM failure: earnings announcement, 214 compensation, 110 failure of, 3, 82, 106–107, 191 contingency capital, 113–114 Fed and, 219–221, 225 counterparties and clearinghouses, final days of, 213–217 108–110 Global Real Estate Group, 205, 206, 208 counterparty due diligence, 115 guilt of, 222–224 Fed as coordinator of last resort, as intermediary, 238 114–115 J.P. Morgan and, 214–215, 225 interconnected crowds, 101–102 legal opinion on bankruptcy of, 225–226 leverage, 105–108 leverage, 292 overview of, 119 liquidity pool, 215 quantitative theory, 116–118 liquidity stress test results, 154 regulation, 118–120 losses of, 211, 214 size of firms and “too big to fail,” market imbalances and, 296 110–113 moving business strategy, 203 spread the love, 115–116 profits of, 192, 199 VaR, 102–105 real estate exposure, 193–196, 200–202, Leverage: 203–207, 222 capital ratio and, 163 Repo 105, 222–223 dangers of, 23, 105–108 repo imbalance and, 241–243 of investment banks, 192, 193 Reserve Primary Fund and, 233 lessons from financial crisis, 291–293 run on, 217–219, 243–244 at LTCM, 22, 30–31, 34–35 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

474 Index

Leveraged bank loans, 386 Low-documentation loans, 176, 180 Levitt, Arthur, 181 LTCM. See Long-term Capital Lewis, Joe, 151 Management Lewis, Ken, xxi, 216 LIBOR (London Interbank Offer Rate), 42, Mack, John, xxi 234 Madoff Securities, 294 Liebowitz, Martin, 17 Market prices, as endogenous, 290 Liew, John, 134 Market risk, 248–249 Lim, Steven, 215 Mark-to-market accounting, 106, 302 Liquidity, price of during crisis, 60 Marron, Donald, 99 Liquidity risk, 302 Matched-book funding, 387–388 Liquid securities, 39 Matthews, Paul, 261 London Interbank Offer Rate (LIBOR), 42 Mattone, Vinny, 80, 99 Long swap spread trade, 361–362 Maturity transformation, 144, 145 Long-Term Capital Management (LTCM). Maughan, Deryck, xxi, 9–10, 75, 268–269 See also Lessons from LTCM failure; Maxwell, David, 167 Tr ade s of LTCM Mayer, Jeff, 143 Buffett hostile offer, 81–82, 93 MBS (mortgage-backed securities), 46–48, causes of failure, 2, 85–88 125, 158, 386–387 consolidated balance sheet, 31, 32–33 McCarthy, Lawrence, 196, 204 consortium bailout, 82–83 McCulley, Paul, 189 copycat firms, 262–263, 268–274 McDade, Herbert (Bart), 210, 212, 223 core trading strategies, 13 McDonald, Lawrence, 183, 197, 202 correlation and, 24–27, 377–378 McDonough, William, xxi, 81, 83 daily profit and loss, 78 McEntee, James, xxi, 12, 259 early success of, 14–19 McGee, 205, 212 fate of investors, 95–100 McHale, Sharon, 180 founding partners, 12 Measuring risk, 23–24 J.P. Morgan and, 78, 80 Media and housing bubble, 180–181 JWMP compared to, 254, 256 Mellon Bank, 146 launch of, 11–12 Merger arbitrage trades, 60–63 leverage, 22 Meriwether, John: losses by trade category, 74 career of, xxi Meriwether letter, 79–81, 89–92 on crowding, 88 overview of, 5 on financial insurance, 150 partner meeting and decision to sell, as financial pioneer, 351 77–79 JWM Partners and, 253–257, 266, 268 PGAM compared to, 258 letter by, 79–81, 89–92 portfolio construction mistakes, 27–35, at LTCM, 11, 12, 13, 18, 19, 85 68–69 on post-Lehman period, 270 risk management system, 21–22 at Salomon Brothers, 7–8, 9, 10, 11 Russian default and, 76–77 on 2008, 288 spinoff and copycat returns, 257, 273 Merrill Lynch: spinoffs, 253–259, 265–274 Bank of America and, 216 start of 1998, 71, 72 Bear Stearns and, 126 summer of 1998, 71, 73 liquidity stress test results, 154 wind down of, 84–85 real estate exposure, 194–195 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

Index 475

Merton, Robert, xxi, 9, 12–13, 19, 115, Obama, Barack, 347 116, 117, 255, 259, 295, 299–300, Occupy Wall Street movement, 341 301, 307, 348 Office of Federal Housing Enterprise Metallgesellschaft, collapse of, 29 Oversight, 163, 167, 178–179 Meyer, William, 83 O’Meara, Chris, 207 MF Global, 294 On-the-run/off-the-run trades, 54–57, Min, Euoo Sung, xxii, 212, 215 375–376 Modest, David, xxii, 12, 259–260, 261 Option-adjusted spread (OAS), 46–48 Molinaro, Samuel, xxii, 143, 149 Option pricing theory, 117 products, 386 Option theory, 52–53 Moody’s Investors Service, Inc., 182, 184 OTC derivative market, 181, 296 Moral hazard, 111, 164, 220, 221, 301 Overnight repos, 145–146 Morano, Tom, 143 Over-the-counter (OTC) market, 103 Morgan Stanley: Oxley, Michael, 178 exposure to residential real estate, 194–195 Painting the tape, 314–315 leverage of, 193 Palyi, Malchior, 182–183 Modest at, 259–260 Pandit, Vikram, 227 PDT group, 134 Papandreou, George, 332 profits of, 231 Parkcentral Global: size of, 112 CMBS trades, 280–281 stock price of, 230 collapse of, 271–272 Mortgage-backed securities (MBS), 46–48, gating game, 305 125, 158, 386–387 losses at, 269 Mortgages. See also Fannie Mae; Freddie as LTCM copycat fund, 262 Mac market insanity and, 275–281 adjustable-rate, 175 returns of, 268, 273, 274 collateralized mortgage obligations, trade positions, 276–277 160 trades of, 278, 279 creating cash flows on mortgage loans, Paulson, Hank, xxii, 186, 207, 210, 211, 379–380 215, 220, 221 graduated payment, 174, 175 Pension funds, as receivers, 236 lenders and housing bubble, 173–177 Perry, Michael, 186 risk of, 158 Platinum Grove Asset Management subprime, 161, 165, 167, 176, 180 (PGAM): zero-down, 177, 178, 180 collapse of, 274–275, 281–282 Mozer, Paul, xxii, 10 leverage of, 270 Mozilo, Angelo, 173 losses at, 268, 269 Mudd, Daniel, 168 as LTCM spinoff, 258–259 Muller, Peter, xxii, 134 returns, 273 Mullins, David, xxii, 12, 66, 260, 261 success of, 272 Municipal and tax-exempt securities, 387 Politicians and housing bubble, 177–180, 291 Nagioff, Roger, xxii, 205, 207 Polleccia, Ray, 318 New York Stock Exchange, creation of, Preferred habitats, 236 312 Prepayment risk of mortgages, 158 Ng, Lawrence, 258, 272 Primary Dealer Credit Facility, 230 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

476 Index

Prince, Chuck, xxii, 143 Repo transactions: Private client services, 389–390 Bear Stearns and, 145–147 Private equity, 390 definition of, 31, 42 Puppies, 26 Lehman Brothers and, 198 repo swaps of LTCM, 38 Quant Crisis of 2007: term repos, 43 causes of, 134–137, 290 Reserve Primary Fund (RFP), 233 counterparty transactions and, 304 Reverse repo agreements, 198 overview of, 3, 129–130 Risk. See also Risk management shed show, 137–140 Basel I and, 247–248 Quant factors, erratic behavior of, credit risk, 159, 164, 246 130–133, 139, 140 failure of models of to account for Quantitative Financial Strategies, 260 crowding and interconnectedness, Quantitative portfolio factors, 133 101–102 Quantitative techniques, 17, 116–118 Freddie, Fannie, and, 159 Quarterly reports, reduction of risk prior to, liquidity risk, 302 144–145 market risk, 248–249 Quote stuffing, 314, 315, 321 measuring, 23–24 of mortgages, 158 Raines, Franklin, xxii, 158–159, 168, 179 reduction of prior to quarterly reports, Rating agencies: 144–145 conflicts of interest of, 297 systemic risk, 111–113, 294 dependence on, 291 tail risk, 205 housing bubble and, 182–185 trades, 60–63 Real estate agents and housing bubble, Risk management: 173–177 at Bear Stearns, 147 Real estate bubble. See Housing bubble at JWMP and PGAM, 281 Real estate investing, 3 at JWM Partners, 256 Receivers, 236 at Lehman Brothers, 223–224, 390 Recession of 2008, 345–346 lessons from financial crisis of 2008, Reeves, Eddie, 272 301–302 Refco, 235 Risk management at LTCM: Regulation. See also Basel Committee; broad outlines, 21–22 Federal Reserve as cause of failure, 85–86 challenge of, 346–347 diversification, 27–28 housing bubble and, 180–181 mathematics of framework for, interconnections and, 347–349 355–359 lessons from financial crisis of 2008, operations, 28–29 298–301 raw evidence, 29–35 lessons from LTCM crisis, 118–120 Robertson, Julian, xxii, 78 Relative-value hedge funds, 292, 306 Rosenblum, Ira, 261 Relative value trades, 39, 253–254, Rosenfeld, Eric, xxii, 8, 9, 12, 13, 19, 266–267, 281, 286 51, 73, 79, 84–85, 88, 100, 254, Renaissance Technologies, 129 265 Repo imbalance and Lehman bankruptcy, Rosengren, Eric, 342 241–243 Royal Dutch-Shell trade, 63–65 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

Index 477

Rubin, Robert, 181 Shed show, 137–140 Russian government, default on debt by, Short swap spread trade, 362–363 75–77 Shustak, Robert, xxii, 12, 260 Russian markets, 2 Simon, James, xxii Size of firms and “too big to fail,” Salomon Brothers: 110–113 arbitrage trading group, 7–11, 17–18, Slap hands, 314 25, 116 Sloan, Bob, 149 bond-trading group shutdown, 75 Smith Breeden Mortgage Partners, copycat positions, 2 262–263, 268, 269, 270–271, 272, Traveler’s Group purchase of, 73 274 Schapiro, Mary, 348 Snow, John, 188 Scholes, Myron: Solender, Michael, 143 Banco Nazionale del Lavoro project and, Solomon, David, 149 255 Soros, George, xxii, 78, 79 Black-Scholes formula, 53, 116 Sowood Capital, 128 career of, xxii, 9 Spector, Warren, xxii, 99, 126, 147 on diversification, 118 Spoofing, 314 on economic system choices, 349–350 Standard & Poor’s, 182, 184 on financial models, 351 Standard quant factors, erratic behavior of, on insurance, 297 130–133, 139, 140 on Lehman failure, 300–301 State Street, 129, 137, 139, 146 LTCM and, 11–13, 19, 79, 86 (stat arb) funds, 130 PGAM and, 258, 272, 292 Steel, Robert, 212 on spreads, 284–285 Stock price manipulation, 315 on VaR, 250 Stress tests, 154, 302 Schwartz, Alan, xxii, 143, 149, 152 Stub quotes, 319–321 SEC (Securities and Exchange Subprime mortgage market collapse, Commission), 322 127–129 Securities: Subprime mortgages, 161, 165, 167, 176, Agency, 156 180 asset-backed, 386–387 Sun, Tong-Sheng, 258, 272 CMBS, 280–282 Swap business, 157–158 corporate debt, 385–386 Swap spreads: high-yield, 386 behavior of longer-term, 282–283 illiquid, 39 computing returns from zero-coupon liquid, 39 returns, 373 mortgage-backed, 46–48, 125, 158, derivation of approximate returns, 386–387 365–368 municipal and tax-exempt, 387 historical average, 240 , 159–160, 202 Italian, 50–52 Security price volatility, 53 Japanese, 48–49 Self help status, 318 mechanics of, 361–363 Shadow banking system, 143–144 U.S., 239 Sharpe, William, xxii, 79 Syron, Richard, 167 Sharpe ratio, 14 Systemic risk, 111–113, 294 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

478 Index

Tail risk, 205 UBS and LTCM, 97–98 TARP (Troubled Asset Relief Program), Unemployment, 345 243, 342 Upton, Bob, xxiii, 144, 149 Term-financing, 28 Term repo transactions, 43 Value-at-risk (VaR) of portfolios, 23, Term Securities Lending Facility, 230 102–105, 250, 251–252 Thain, John, xxiii, 221 Vega, 58 Thatcher, Margaret, 332 Viner, Cliff, xxiii “Too big to fail,” 110–113, 293–294 Vineyards, 351–352 Tr ade s of LTCM : Volatility, return, at LTCM, 29–30 emerging market, 65–67 Volatility trades, 52–54, 57–60 equity relative-value, 63–65 Volker, Paul, xxiii European cross-country swaps, 44–46 Waddell-Reed trade, 316–317 fixed-income volatility, 52–54 Wall Street, as shadow banking system, Italian swap spread, 50–52 143–144 Japanese box spread, 48–49 Walsh, Mark, 205 long U.S. mortgage securities, Warrants, 38 46–48 Washington Mutual (WaMU), 185–186 on-the-run/off-the-run, 54–57 Webb, Jim, 261 other, 67–68 Weicher, John C., 179 overview, 37–40 Weill, Sandy, xxiii, 73, 75 portfolio of, 68–69 White, Lawrence, 188 risk arbitrage, 60–63 Williams, Wesley, 261 short longer-term equity index volatility, Window dressing, 144–145 57–60 short U.S. swaps, 41–44 Zero-coupon daily returns: Treasuries, spread of LIBOR over, 234 computing, 369–371 Trillium Brokerage Services, 315 computing swap spread returns from, Troubled Asset Relief Program (TARP), 373 243, 342 Zero-down mortgage, 177, 178, 180 Tykhe Capital LLC, 129 Zubrow, Barry, 218 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

479 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

480 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

481 JWBT801-IND JWBT801 Printer: Yet to Come July 27, 2012 22:19 Trim: 6in × 9in

482