Part 16 (1/2)

63 Financial innovation changed that: The account that follows draws heavily on Gillian Tett, Fool's Gold: How the Bold Dreaan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe (New York: Free Press, 2009), 51-56; Mark Zandi, Financial Shock: A 360 Look at the Subprie Implosion, and How to Avoid the Next Financial Crisis (Upper Saddle River, NJ: Financial Times Press, 2008), 111-19

63 the Governe association: Cameron L Cowan, American Securitization Foru and Community Opportunity and the Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, US House of Representatives, November 5, 2003

65 passed down the line like a hot potato: On the erosion of due diligence, see Ainate-to-Distribute Model and the Sub-Prie Crisis,” paper presented at the A, September 18, 2009, Atlanta, Ga

65 As securitization becaly commonplace: See, for example, Vinod Kothari, Securitization: The Financial Instrument of the Future (Hoboken, NJ: John Wiley and Sons, 2006)

66 new, exotic, and colas J Lucas, Laurie S Goodations and Credit Risk Transfer,” Journal of Financial Transforant solution: the CDO: Zandi, Financial Shock, 117-19 See also Janet Tavakoli, Collateralized Debt Obligations and Structured Finance: New Developments in Cash and Synthetic Securitization (Hoboken, NJ: John Wiley and Sons, 2003)

68 Moral hazard played a significant role: See, for example, Kevin Dowd, ”Moral Hazard and the Financial Crisis” Cato Journal 29 (2009): 141-66

68 the way these firms provided compensation: Much of the discussion in this section is drawn from Gian Luca Cleo Walter, ”Rethinking Compensation in Financial Firms,” and Viral V Acharya et al, ”Corporate Governance in the Modern Financial Sector,” both in Viral V Archaya and Matthew Richardson, eds, Restoring Financial Stability: How to Repair a Failed System (Hoboken, NJ: John Wiley and Sons, 2009)

68 a systehuram Rajan, ”Bankers' Pay Is Deeply Flawed,” Financial Times, January 8, 2008; Gian Luca Clementi and Thomas Cooley, ”Executive Compensation: Facts,” New York University, Stern School of Business, Working Paper, Novecle sue to 36 Billion,” Bloocom/apps/news?pid=20601087&refer=home&sid=atEk12XYMerk

72 as the career of Alan Greenspan ae of Turbulence: Adventures in a New World (New York: Penguin Press, 2007)

72 ”In a crisis environmentwe shouldn't”: Greenspan quoted in John M Berry, ”Black Monday for Greenspan: A Race to Forestall a Liquidity Crisis,” Washi+ngton Post, October 19, 1997

73 ”take away the punch bowl”: Martin quoted in Kenneth T Jackson, Karen Markoe, and Arnie Markoe, eds, The Scribner Encyclopedia of American Lives, vol 5 (New York: Charles Scribner's Sons, 2002), 73 ”irrational exuberance”: Alan Greenspan, ”The Challenge of Central Banking in a Democratic Society,” Francis Boyer Lecture of the American Enterprise Institute, Deceov/boarddocs/speeches/1996/19961205htm

73 it created a Greenspan put: Miller, Weller, and Zhang, ”Moral Hazard and the US Stock Market”

73 ”For us to go in and audit”: Greenspan quoted in Greg Ip, ”Did Greenspan Add to Subprime Woes?” Wall Street Journal, June 9, 2007; Eded as Subprime Crisis Spread,” New York Tirowth in subprime”: Alan Greenspan, remarks to the Federal Reserve System's Fourth Annual Coton, DC, April 8, 2005, online at federalreservegov/boarddocs/speeches/2005/20050408/defaulthtm

74 The h, Jr, and Jaall and the Advent of Broad Banking,” Journal of Econo 2000): 191-204; and Jill M Hendrickson ”The Long and buall Reforislation,” Ay 60 (2001): 849-79

75 ”We've said these are the big guys”: Quoted in Stephen Labaton, ”Agency's '04 Rule Let Banks Pile Up New Debt,” New York Times, October 2, 2008

75 Community Reinvestment Act of 1977: See, for example, Peter J Wallison, ”Cause and Effect: Government Policies and the Financial Crisis,” Critical Review 21 (2009): 365-76

76 legislation passed in the 1990s: Carol D Leonnig, ”How HUD Mortgage Policy Fed the Crisis,” Washi+ngton Post, June 10, 2008

77 ”shadow banking syste coined the term at the Fed conference at Jackson Hole in 2007, McCulley elaborated on it in a newsletter for PIMCO See Paul McCulley, ”The Shadow Banking System and Hyman Minsky's Economic Journey,” Global Central Bank Focus, PIMCO, May 2009 See also James Crotty, ”Structural Causes of the Global Financial Crisis: A Critical assesse Journal of Econo of this place”: It's a Wonderful Life, complete film script, online at imdbcom/scripts/It27s-a-Wonderful-Lifehtml

78 Federal Deposit Insurance Corporation: Federal Deposit Insurance Corporation, A Brief History of Deposit Insurance in the United States (Washi+ngton, DC: FDIC, 1998), 20-44

79 3-6-3 rule: John R Walter, ”The 3-6-3 Rule: An Urban Myth?” Federal Reserve Bank of Richmond Economic Quarterly 92 (2006): 51-78

79 Basel Co Supervision, ”History of the Basel Committee and Its Meust 2009, online at bisorg/bcbs/historypdf?nofra syste Supervision, ”Core Principles for Effective Banking Supervision,” Septe/publ/bcbs30apdf

80 ”whole alphabet soup”: Paul McCulley, ”Teton Reflections,” Global Central Bank Focus, PIMCO, August-September 2007

81 ”bond market conundru, Housing, and Urban Affairs, US Senate, February 16, 2005, online at federalreservegov/boarddocs/hh/2005/february/testilobal markets: See, for example, Tao Wu, ”Globalization's Effects on Interest Rates and the Yield Curve,” Economic Letter, Federal Reserve Bank of Dallas, Septe/research/eclett/2006/el0609pdf

82 Leverage has been on the increase: Minsky, Stabilizing an Unstable Economy, 265; Martin Wolf, ”Seeds of Its Own Destruction,” Financial Tie,” Conference Board Review, May-June 2009, 61-65

83 Leverage comes in many flavors: See, for example, Charles R Morris, The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash (New York: Public Affairs, 2008), 147-49; Katia D'Hulster, ”The Leverage Ratio,” World Bank Crisis Response Note no 11, Dece/docus Fall Apart

86 ”are iehot, Lombard Street, 249-50

87 ”We are in a minefield”: Quoted in Ralph Atkins, Michael Mackenzie, and Paul J Davies, ”ECB Chief Fails to Reassure Markets,” Financial Tiust 14, 2007

87 ”advance it ehot, Los”: Minsky, Stabilizing an Unstable Economy, 237

88 ”fashi+onable printouts”: Ibid

88 ”stock prices have reached”: Fisher quoted in ”Fisher Sees Stocks Perh,” New York Times, October 16, 1929; ”Realtors Group Says Home Sales Will Slip in 2006,” Wall Street Journal, December 13, 2005

89 cracks appeared in the facade: This chapter draws heavily fros, which are now available to subscribers at roubinico this story have been Zandi, Financial Shock, and Tett, Fool's Gold

90 Bernanke fell into this trap: Ben S Bernanke, testiress, March 28, 2007, online at federalreservegov/newsevents/testimony/bernanke20070328ahtm

90 ”visibility and transparency”: Quoted in Grace Wong, ”Behind Wall Street Subprialleries/2007/news/0711/galleryabx_index/indexhter, Manias, Panics, and Crashes,19-20; Justin Lahart, ”In Time of Tumult, Obscure Econoust 18, 2007

94 Frank H Knight's now faht, Risk, Uncertainty, and Profit (Boston: Houghton Mifflin, 1921); Nouriel Roubini, ”Current Market Turhtian 'Uncertainty' Rather Than Priceable Market 'Risk,' ” August 15, 2007, available to subscribers at roubinicom

95 ”twenty-five standard deviation events”: Peter Thal Larsen, ”Goldust 13, 2007

95 ”every day, as a panic grows”: Bagehot, Loust 9 the European Central Bank: Jeremy W Peters and Wayne Arnold, ”US Stocks Recover Soust 10, 2007

97 ”We are certainly not going to protect”: Quoted in Tett, Fool's Gold, 187