Oonagh McDonald
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Chapter 1: From Cotton Trader to Investment Banker: 1844–2008

1 History of Lehman Brothers – Lehman Brothers Collection – Baker Library, Maryland Business School, Contemporary Business Archives.
2 Peter Chapman, Lehman Brothers, 1844–2008, The Last of the Imperious Rich, pp. 198–9 (Portfolio, Penguin Group Ltd, 2012).
3 Ibid., p. 199.
4 Ken Auletta, Greed and Glory on Wall Street (Warner Books in conjunction with Random House, 1987), p. 17. Auletta provides a full and detailed account of the clashes between Peterson and Glucksman.
5 Scott Paltrow, ‘American Express to Spin Off Lehman Brothers: The Investment Bank will Become an Independent Company’, Los Angeles Times, 25 January 1994.
6 Chapman, n. 2, p. 222.
7 Ibid., p. 229.
8 ‘Lehman's New Street Smarts’, Business Week, 18 January 2004.
9 ‘The Improbable Power Broker’, Fortune, 23 April 2006.
10 Ibid.
11 New York Times, 23 July 2003.
12 ‘Lehman's New Street Smarts’, n. 8.
13 Quoted in The Director, ‘The King of Subprime’, excerpts from J Oliver, How They Blew It (Kogan Page, 2010).

Chapter 2: From Hubris to Nemesis: January to September 2008

1 Annual report: Form 10-K submitted to the Securities and Exchange Commission for the fiscal year ending 30 November 2007.
2 Lehman Brothers 2007 Annual Report, p. 4.
3 Board of Governors of the Federal Reserve System, Bear Stearns, JP Morgan Chase, and Maiden Lane LLC, 17 March 2008.
4 ‘Lehman Weathers the Storm’, CNN Money, 8 March 2008.
5 Partners Letter, 20 January 2009.
6 Pre-announcement of second quarter earnings Conference Call, LBHI_SEC07940_592160, p. 5: ‘Lehman Brothers announce expected second quarter results. Expected to report a net loss of $2.8bn’, 9 June 2008.
7 Lehman Brothers Holdings Inc., Q2 2008. Guidance Conference Call, 8 June 2008. LBHI_SEC0790_592160.
8 Citi's Corporate Bond Research Report (28/5/08) stated that Lehman followed a prudent funding practice and unlike Bear Stearns did not rely on customer balances in its prime brokerage operation to fund its balance sheet, and that it had reduced its leverage to 16X and that its exposure to subprime mortgages was $4bn, an amount that Lehman considered to be manageable, and planned to reduce its commercial mortgage exposure/CMBS to $5bn. Views amongst its analysts differed, however, with Ryan O'Connell commenting that ‘another Bear-Stearns type funding squeeze is overblown for Lehman’.
9 Quoted by Zachery Kouwe, New York Post, 18 March 2008.
10 Examiner's Report, p. 1396. See also memorandum from Margaret Sear, Lehman et al. to Files, 11 April 2008 at p. 1 (accounting policy memorandum).
11 In reply to questions from Mr Bachus during the Committee on Financial Services, US House of Representatives, Washington DC, 17 March 2010.
12 Jan Voigt's email to Timothy Geithner, 9 April 2008. Reference: Meeting with Lehman's senior management team, 20 March 2008. Jan Voigt, Examining Officer Operational Risk Governance, Federal Reserve Bank, New York.
13 Email sent 15 April 2008. FCIC documents.
14 Willem Buiter, ‘Three Hits and Three Misses for the Fed’. Maverecon, Financial Times, 17 March 2008.
15 Regulatory Reform. Primary Dealer Credit Facility, Board of Governors of the Federal Reserve System, 2 August 2013.
16 Under the provisions of the Dodd-Frank Wall Street Reform & Consumer Protection Act 2010, the Federal Reserve Bank is obliged to provide transaction data and detailed information about its loans to depository institutions and others. This information was published on 1 December 2010.
17 Quoted in ‘Morgan Stanley used Credit Program 212 times’ , Wall Street Journal, 1 December 2010.
18 Ibid.
19 Final Transcript LEH-Q3, Preliminary Lehman Brothers Holdings Inc. Earnings Conference Call, 10 September 2008, Thomson Street Events, pp. 4ff.
20 Memorandum for the record, which is a paraphrase of the interview dialogue. Interview with Annette Nazareth, SEC Commissioner from August 2005 until January 2008, 1 April 2010.
21 Testimony Concerning Turmoil in the Credit Markets by Erik Sirri, Director of Trading and Markets, before the House Committee on Financial Services, 7 May 2008.
22 ‘Turmoil in the U.S. Credit Markets: Examining Recent Action Federal Financial Regulators before the U.S. Senate Committee on Banking, Housing and Urban Affairs’. Testimony of Christopher Cox, Chairman of the SEC, 3 April 2008, p. 13.
23 Robert Colby, Testimony Concerning the Consolidated Supervision at US Securities Firms and Affiliated Industrial Corporations, Before the House of Representatives Financial Services Committee, 25 April 2007, p. 1 (my italics).
24 Testimony Concerning the Turmoil in the Credit Markets; Examining the Regulation of Investment Banks by the SEC before the Senate Sub-Committee on Securities, Insurance and Investment, 7 May 2008.
25 Ibid.
26 Management's Comments, Appendix VII, pp. 83–5.
27 Office of Inspector General Response to Chairman Cox and Management Comments, Appendix VIII, pp. 116 and 117–18.
28 Memorandum for the record (not a transcript). Meeting with Members of the SEC Regarding the CSE Programme, 18 March 2010. Mike Maccahiaroli, Director of Trading and Markets; Sam Fortstein, Assistant General Council; Sarah Hancur, Office of the General Counsel.
29 Ibid., memorandum of the interview with Annette Nazareth.
30 OIG Report, above n. 6, pp. 29 and 30–1.
31 Ibid., pp. 40–1.
32 SEC Memoranda from April 2006 to March 2007.
33 Basel II International Convergence of Capital Measurement & Capital Standards, June 2004, Part 3, The Second Pillar-Supervisory Review Process.
34 Testimony Concerning the Lehman Brothers Examiner's Report, Chairman Mary L Shapiro, before the House Committee on Financial Services, 20 April 2010, pp. 1–2.
35 Footnote: Full details can be found in ‘The SEC – Revitalised, Reformed and Protecting Investors’, SEC government news, press release, 2012.
36 ‘Chairman Cox announces End of Consolidated Supervised Entities Programme’, press release, 26 September 2008.
37 Christopher Cox, ‘Sound Practices for Managing Liquidity in Banking Organisations’, Letter to Dr Nout Wellick, Chairman of the Basel Committee on Banking Supervision, 20 March 2008.
38 Statement of Alan Schwartz, President and CEO of the Bear Stearns Companies Inc. before the US Senate Banking Committee, 3 April 2008.
39 SEC's Oversight of Bear Stearns and Related Entities: The CSE Programme, pp. 14–16.
40 Chairman Christopher Cox's Testimony concerning Recent Events in the Credit Markets, before the Senate Banking Committee, 3 April 2008.
41 Joint Economic Committee, Financial Meltdown and Policy Response, September 2008.
42 Chairman Ben Bernanke, Speech at the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition, The Subprime Mortgage Market, 17 May 2007.
43 Speech by Chairman Ben Bernanke at the Kansas City's Economic Symposium, Housing, Housing Finance and Monetary Policy, 31 August 2007.
44 Joint Economic Committee of Congress, Financial Meltdown and Policy Response, September 2008.
45 Ibid., Testimony on 17 March 2010.

Chapter 3: The Fateful Weekend

1 Lehman Brothers Press Release, 10 September 2008.
2 Q3 2008 Preliminary Lehman Brothers Holdings Inc. Earnings Conference Call, 10 September 2008. LBHI_SEC07940_612771.
3 ‘Rating Action: Moody's places Lehman's A2 rating on review with direction uncertain’, Moody's Investors Service, 10 September 2008.
4 James B Stewart, ‘Eight Days. The Battle to Save the American Financial System’, The New Yorker, 21 September 2009, p. 5; Henry M Paulson Jr, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System (Business Plus, Hachette Book Group, 2011), pp. 123 and 155.
5 Timothy F. Geithner, ‘Stress Test: Reflections on Financial Crises’, Deckle Edge, May 2014, p. 177.
6 On the Brink, p. 92.
7 Ibid., p. 184. LTCM, Long Term Capital Management, had collapsed in 1998: ‘Back then, a group of 14 Wall Street firms had banded together to craft a $3.6bn package, receiving 90% of the imperilled hedge fund, which they liquidated over time.’ Ibid., p. 178. Paulson hoped that a similar consortium of banks would come to the rescue of Lehman Brothers.
8 Work had been carried out by staff of the New York Federal Bank on a liquidation consortium consisting of major bank and investment bank counterparties of Lehman – most notable in tri-party repo, credit default swaps and other OTC derivatives to discuss possibilities of joint funding mechanism that avert Lehman's insolvency. The Memorandum added:

‘FRBNY financial commitment (this section to be overhauled by Dudley, Schetzel)

— we should have in mind a maximum number of how much we are willing to finance before the meeting starts, but not divulge our willingness to do so to the consortium.

Term of any liquidity support should be long enough to guard against a fire sale but on a short enough fuse to encourage buyers of Lehman assets to come forward.

— referable to style FRBNY commitment as much as possible as a backstop rather than lending.’

Referenced in the Examiner's Report, FRBNY to Exam 003516, 10 Sept 2008.
9 The diary of events relies on Henry Paulson's record of events in his book, On the Brink, and also on Appendix 15, Narrative of 4 September to 15 September in Lehman Brothers Holdings Inc. Chapter 11 Proceedings, Examiner's Report. Both of these seemed to me to present the most careful accounts of the way in which the events of the weekend unfolded. My interpretation of events differs from the views expressed by some of those involved, however.
10 On the Brink, p. 187.
11 ‘Eight Days’, p. 10.
12 On the Brink, p. xvii.
13 Those present included Wall Street's most prominent CEOs: Jamie Dimon from JP Morgan, John Mack from Morgan Stanley, Lloyd Blankfein from Goldman Sachs, Vikram Pandit from Citigroup, Brady Dougan from Credit Suisse and Robert Kelly from Bank of New York Mellon.
14 Examiner's Report, p. 45.
15 Appendix 15, p. 42.
16 On the Brink, p. 197.
17 Examiner's Report; Appendix 15, p. 49.
18 Geithner, ‘Stress Test’, p. 185.
19 Ibid., p. 178.
20 Statement of the Financial Services Authority (UK). In September 2009, the FSA received a request from the Examiner appointed by the US bankruptcy court to provide information about their involvement in the attempt by Barclays Bank plc to buy Lehman Brothers Holdings Inc during the period 12–15 September 2008. These sections draw on that report.
21 Alistair Darling, Back from the Brink, 1,000 Days at Number 11, p. 121.
22 Ibid., p. 123.
23 On the Brink, p. 220.
24 See Appendix 15, pp. 56–8.
25 Private information.
26 Opinion on Motions seeking modification of the Sale Order pursuant to Rule 60(b), the Trustee's motion for relief under the SIFA sale order, Barclays cross-motion to enforce sale orders and the adjudication of related adversarial proceedings, p. 11.
27 Statement by Thomas C Baxter Jr, Executive Vice President and General Counsel, Federal Reserve Bank of New York, to the Financial Crisis Inquiry Commission, 1 September 2010, pp. 3–5.
28 FOMC, 10 March 2008, p. 17.
29 Mr Angulo's report to the FOMC, 24–25 June, p. 144.
30 Email from Kirsten Harlow to Tim Geithner et al., 16 June 2008.
31 Federal Reserve Bank of New York, Primary Dealer Monitoring: Liquidity Stress Analysis, 25 June 2008.
32 Draft email to Shafran re Contingency planning re OTC Derivatives, 9 May 2008.
33 Email exchange between Chairman Bernanke, Donald Kohn, Tim Geithner and others, 17 June 2008.
34 Email exchanges and the proposal from Geithner, 11 July 2008.
35 William Brodows to Patrick Parkinson, 19 August 2008.
36 Financial Crisis Inquiry Commission Report, p. 329.
37 Geithner, ‘Stress Test’, p. 187.
38 Financial Crisis Inquiry Commission Report, January 2011, p. 340.
39 James Rickards, quoted in Robert Stowe England, pp. 201ff.
40 Senate Sub-Committee on Banking, Housing and Urban Affairs, Testimony on US Financial Markets, 23 September 2008.
41 Ibid.
42 Statement of Christopher Cox, Chairman, Securities and Exchange Commission, before the Senate Banking Committee, 3 April 2008.
43 Paulson, On the Brink, p. 178.
44 Quoted in the FCIC Report, p. 351.
45 ‘Revisiting the Lehman Brothers Bailout That Never Was’, New York Times, 29 September 2014.
46 Paulson, On the Brink, p. 225.
47 Quoted in Bloomberg, ‘Lehman Recovery Seen as Justifying $2bn Bankruptcy’, 11 September 2013.
48 Quoted in ‘Bear to Lehman: Documents reveal an Alternate History’, 1 May 2012.
49 ‘Fed Fretted over the Demise of Lehman’, New York Times, 21 February 2014.
50 New York Times, 23 October 2008.
51 Thomas Russo, Keynote speech, Hughes Howard Bankruptcy Roundtable, ‘Too Big to Fail: Perspectives on Systemic Risk & The Evolving Regulatory Landscape’, p. 1.
52 Ibid., p. 3.
53 Ibid., p. 3.
54 Ibid., p. 7.
55 Email from Rita Proctor to Chairman Bernanke, 11 September 2008 10.45 am.
56 Transcript of Federal Open Market Committee, 18 March 2008, p. 80.
57 Ibid., p. 3.
58 Ibid., p. 108.
59 Ibid., p. 10.
60 FOMC, 24–25 June, pp. 4–5.
61 Ibid., p. 50.
62 FOMC, 5 August 2008, p. 8.
63 FOMC, 16 September 2008, p. 48.
64 Ibid., p. 35.
65 Ibid., p. 51.
66 Ibid., p. 62.
67 Chairman B Bernanke, US Financial Markets, before the House Committee on Financial Services, 24 September 2008.
68 New York Times, 15 September 2008 and Financial Times, 16 September 2008.
69 M Kacperczyk and P Scnabl, When Safe Proved Risky: Commercial Paper During the Financial Crisis of 2007–2009, NYU Stern Business School, November 2009, pp. 18–19.
70 Figures released by the US Department of Commerce, Bureau of Economic Analysis, 28 July 2011.

Chapter 4: Regulating the ‘Big Five’

1 Lawrence White, ‘The Gramm-Leach-Bliley Act of 1999: A Bridge Too Far? Or Not Far Enough?’, Suffolk Law Review (2010). White also points out that by February 2010, there were 543 FHCs in the USA, including 40 foreign banks.
2 The Glass-Steagall Act was passed in 1933, in the aftermath of the stock market crash of 1929, the collapse of thousands of commercial banks between 1929 and 1933, and the Great Depression. The securities activities of commercial banks were thought to have been the reason for bank failures. The Act separated commercial banks from investment banks, and the latter were not allowed to take deposits.
3 Section 16 as incorporated in 12 U.S.C. 24 (Seventh).
4 See 12 U.S.C. 377 and 378, repeal of Public Law 106–102 and Repeal of Public Law 106–012 Title I para. 101(a).
5 J Barth, D Brumbaugh and J Wilcox, The Repeal of Glass-Steagall and the Advent of Broad Banking, OCC Economics Working Paper 2000–5, April 2000, p. 2.
6 Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), also known as Government-Sponsored Enterprises, are unusual organizations in that they are shareholder-owned, profit-seeking corporations, but subject to government housing policy requirements as laid down by the Department of Housing and Urban Development. Fannie Mae was established in 1938 after the Great Depression in order to get the housing market moving by purchasing mortgages from banks, thus freeing up capital for the banks to lend. Freddie Mac was established in 1970 to compete with Fannie Mae. Neither corporation provides mortgages, but purchases mortgages from lenders, pooling loans to create mortgage-backed securities, which are then sold with guarantees against defaults on the underlying mortgages, to investors. Their purpose is to provide a stable source of funding for residential mortgages, including loans for housing to low-to-moderate income families. Their mortgage-backed securities (MBSs) were not guaranteed by the US government.
7 Barth, Brumbaugh and Wilcox, The Repeal of Glass-Steagall and the Advent of Broad Banking, pp. 4–5.
8 Ibid.
9 Report to the Congress on Financial Holding Companies under the Gramm-Leach-Bliley Act, November 2003.
10 Framework for Financial Holding Company Supervision, 15 August 2000.
11 The Federal Reserve's Framework for Financial Holding Company Supervision, 15 August 2000, SR 00-13 (SUP), pp. 2–3.
12 Ibid.
13 Bloomberg, 20 April 2012.
14 Remarks made by Vincent Cable on the BBC's Radio 4 ‘Today’ programme, as reported in the Guardian newspaper, 8 September 2010.
15 Opening Statement by Governor Daniel Tarullo, 10 Dec 2013.
16 Under the Office of the Comptroller of the Currency's regulations before and after the GLBA, banks could not underwrite or deal in MBSs or any other non-governmental securities, but they could do this before and after the GLBA. After GLBA, banks could be affiliated with a securities firm which undertook such activities. Reference is made to the OCC regulations. These apply to almost all the large banks, such as Bank of America and Citibank, which as national banks are regulated and supervised by the OCC.
17 For the full story, see Oonagh McDonald, Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare (Bloomsbury Academic, 2012).
18 Annette Nazareth, Testimony Regarding Certain Pending Proposals by the EU Commission, Before the House Committee on Financial Services, 22 May 2002.
19 Federal Register, Vol. 69, No. 118, 21 June 2004, Rules and Regulations.
20 Ibid., p. 34428.
21 Basel refers to the Basel Committee on Banking Supervision, promoting an international regulatory framework for banks. It does not have the power to impose regulatory or supervisory powers but in fact the regulatory framework results from discussions between central banks and banking supervisors; its proposals are subject to detailed consultation and most countries seek to incorporate Basel's regulatory framework into their regulatory framework. The framework known as Basel II has been superseded by Basel III, which, following the financial crisis, is a comprehensive set of reform measures designed to strengthen the regulation/supervision and risk management of the banking sector and improve its ability to absorb shocks.
22 Testimony Concerning Certain Pending Proposals by the European Commission by Annette Nazareth, Director, Division of Market Regulation, SEC, before the Committee on Financial Services, 22 May 2002.
23 Testimony Concerning the Consolidated Supervision of US Securities Firms and Affiliated Industrial Loan Corporations by Robert Colby, Deputy Director, Division of Market Regulation, US Securities and Exchange Commission, 25 April 2007.

Chapter 5: The Largest Bankruptcy in American History

1 Harvey R Miller, ‘Examining the Causes of the Current Financial and Economic Crisis of the United States and of the Collapse of Lehman Brothers’, before the Financial Crisis Inquiry Commission, 1 September 2010, p. 12.
2 This chapter inevitably draws on the Report of Anton R. Valukas, Examiner on the Lehman Brothers Holdings Inc for the Bankruptcy Court, Southern District of New York, Chapter 11. It was published on 11 March 2010. The Report is over 2,000 pages long. The Examiner and his staff reviewed five million documents and conducted 250 interviews. The documents are readily available, but, although the Examiner quotes from the interviews, the full text is not available.
3 Examiner's Report Vol. I, Executive Summary, pp. 16–17. The Repo (repurchase) is a way for investment banks to borrow money from a large company and in return, the bank sells the company an asset, usually a bond, to protect the company, so that if the bank goes bankrupt, the company can sell the bond and retrieve the cash. The bank also agrees to buy back the bond at the end of the loan (usually after a very short term), less an agreed level of interest, which is paid to the company. Lehman took rather less cash than the bond was worth, so that the transaction was properly recorded in the accounts as a sale rather than a loan.
4 Examiner's Report, Introduction, p. 4.
5 Examiner's Report, p. 734.
6 Ibid., pp. 738–9.
7 Ibid., p. 748.
8 Ibid., Linklaters Letter, Appendix 17, Repo 105, 1 D, pp. 21 and 31.
9 Debt instruments whose face value is paid out only on the maturity date. They are issued by governments and municipalities and may be long-term or short-term.
10 Ibid., p. 790.
11 Lehman was able to argue, ultimately successfully, that since it over-collateralized the borrowings, the counterparties would not complain about a default by Lehman on the repurchase leg, since the counterparty/transferee would incur a gain of 5 per cent or 8 per cent if that occurred. In effect, Lehman netted liabilities and assets that had disparate counterparties, contrary to basic GAAP rules. Unless the counterparties are identical, a risk remains for the transferor, which means that it did not sell the assets, i.e. if the issuers of the bonds announced that they were defaulting, that would not excuse the Transferor's obligation to ‘buy back’ the now worthless bonds. The accounting procedures could have been greatly streamlined by reinforcing the rules: ‘no offsetting of assets and liabilities already in place: unless both legs have the same counterparties, with a formal agreement in place to settle net, the transaction must be reported “broad”, which means in the context of Lehman's accounting, as a secured borrowing. Accountancy rules have not been improved in this way.’ Source: private comment from Dr Barry Epstein, lead author of Wiley GAAP, 1985–2010.
12 Examiner's Report, p. 742.
13 Ibid., p. 745.
14 Mary Shapiro, Evidence to the House Committee on Financial Services on 20 April 2010.
15 B J Epstein, ‘When Window-Dressing Becomes Fraud: Repo 105 was Much More than Window Dressing’, Russell, Novak & Co LLP.
16 FASB, Accounting Standards up-date 2014–11. Transfers, Servicing, Effective Controls for Forward Agreements to Repurchase Assets and Accounting for Repurchasing Finances.
17 Transcript of Lehman Brothers Holdings Inc for Second Quarter 2008 Earnings Call, 16 June 2008.
18 Quoted by the Examiner, op. cit., p. 205, from transcript of a speech by David Einhorn, Presentation to Grant's Spring Investment Conference, Private Profits and Socialised Risk, 8 April 2008, p. 9. At that same conference, Einhorn, manager of Greenlight Capital, announced that he was shorting Lehman stocks – an unusual announcement for a hedge fund manager, but also a way of ensuring that others would short the stocks as well, thereby increasing his profits. He had also been a board member of New Century Capital, a subprime mortgage company which had been forced to file for bankruptcy in 2007.
19 ‘The Confidence Man’, New York Magazine, 15 June 2008.
20 Examiner's Report, p. 210.
21 Examiner's interview with Mark Walsh, 21 October 2009, p. 244.
22 ‘Mark Walsh, Lehman's Unluckiest Gambler’, New York Observer, 10 January 2008.
23 ‘How Lehman Brothers got Its Real Estate Fix’, New York Times, 5 March 2009.
24 Examiner's interview with Mark Walsh, 21 October 2009, pp. 225–6.
25 Mezzanine is debt capital that gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time or in full. Mezannine debt capital is subordinated to debt provided by senior lenders such as banks and venture capital companies.
26 Lehman Global Real Estate Product Control, Global Real Estate Markdowns Presentation, January 2008, pp. 1–2, quoted by the Examiner, p. 229.
27 Remarks to the Economic Club, 9 June 2008.
28 Examiner's Report, p. 277.
29 Ibid., p. 285.
30 Ibid., pp. 291–2.
31 Ibid., p. 333 (emphasis added).
32 Ibid., p. 335.
33 Ibid., p. 354.
34 Comptroller's Handbook on Leveraged Lending, February 2008, p. 5.
35 At the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition, 17 May 2007.
36 Board of Governors of the Federal Reserve System, Joint Press Release and Text, 6 December 2006.
37 ‘Mark Walsh, Lehman's Unluckiest Gambler’ , New York Observer, 10 January 2008.
38 Email from William Hughes to Alex Kirk, Lehman, 27 July 2007.
39 Examiner's Report, p. 373.
40 Ibid., p. 379.
41 Ibid., p. 386.

Chapter 6: The Destruction of Value

1 Wall Street Journal, 29 December 2008.
2 NOLHGA Journal, October 2013, interview entitled, ‘Everyone was Caught Off-guard’.
3 Drawn from J Hughes, ‘Winding up Lehman Brothers’, Financial Times, 7 November 2008.
4 Ibid.
5 Quoted in The New Yorker: ‘Eight Days. The Battle to Save the American Financial System’, 21 September 2009.
6 As reported in The New York Times, 13 December 2008.
7 H Miller, Bloomberg, 28 April 2010. It should also be noted that no exact figure for the number of outstanding derivative contracts is available. Various estimates of the number and the amounts outstanding are provided by experts, including regulators. It is not possible to find an exact figure from any reputable source, which explains why the numbers vary throughout this chapter.
8 Financial Crisis Inquiry Commission: Examining the Causes of the Current Financial and Economic Crisis of the United States and of the Collapse of Lehman, Testimony of Harvey Miller, 1 September 2010.
9 H Miller, ‘Too Big to Fail: The Role for Bankruptcy and Antitrust Law in Financial Regulation Reform’, before the Subcommittee on Commercial and Administrative Law of the House of Representatives Committee on the Judiciary, 22 October 2009, p. 8.
10 Ibid., p. 9.
11 Ibid., p. 10.
12 Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’, 2011 and 2014; Basel Committee, ‘Report and Recommendations of the Cross-Border Bank Resolution Group’, 2010. For ‘living wills' for large banks in the USA Title I Dodd-Frank, New insolvency regime, Title II Orderly Liquidation Authority.’
13 Bank for International Settlements, Monetary and Economic Department, ‘OTC Derivatives Market Activity’, May 2009, pp. 1–2.
14 BIS Quarterly Review, December 2008, p. 4.
15 A derivatives contract is an ISDA Master Agreement, supplemented with a schedule. These together set out the fundamental contractual terms of all derivatives transactions which are executed between the parties. Each individual transaction is documented with a confirmation. There may be several confirmations, corresponding to individual derivatives transactions under a single Master Agreement and Schedule. There are typically multiple trades associated with each derivative contract.
16 Kimberly Summe, ‘An Examination of Lehman Brothers Derivatives Portfolio Post-Bankruptcy and whether Dodd-Frank would have made any differences’, Harvard Business Law Online, April 2011.
17 The exact size of Lehman Brothers Special Financing Inc (LBSF)'s derivatives portfolio pre-bankruptcy has not been published, but it was estimated to be $33 trillion in notional value. When the US estate filed for bankruptcy, it reported that it was counterparty to 930,000 derivative transactions documented under 6,100 ISDA Master Agreements. A figure of 1.3 million contracts is sometimes given, and at other times a lower figure of 960,000 is given.
18 K Ayotte and D A Skeel Jr, ‘Bankruptcy or Bailouts?’ Journal of Corporate Law, March 2009, Vol. 33, no. 3, p. 494.
19 Ibid., p. 494.
20 Ibid., p. 496.
21 Kimberly Summe, Systemic Risk in Theory and Practice (Board of Trustees of the Leland Junior University, 2010), p. 77.
22 Michael Fleming and Asani Sarkar, ‘The Failure Resolution of Lehman Brothers’, Economic Policy Review, Federal Reserve Bank of New York.
23 US Government Accountability Office, 2013.
24 ‘Policy Perspectives on OTC Derivatives and Market Infrastructure’, Staff Report 424, Federal Reserve Bank, March 2010, p. 11.
25 Miller, ‘Too Big to Fail’, p. 10.
26 Summe, Systemic Risk in Theory and Practice, p. 2.
27 Ibid., p. 27.
28 Ibid., p. 28.
29 The Act in question is the Commodities Futures Modernization Act, signed into law by President Clinton in December 2000. The Act excluded a wide range of derivatives from the Commodities Exchange Act 1974.
30 Alan Greenspan before the Committee on Agriculture, Nutrition and Forestry and the Committee on Banking, Housing and Urban Affairs, US Senate, 21 June 2000.
31 Remarks by the Deputy Comptroller for Capital and Regulatory Policy, Charles Taylor, OCC, 3 March 2014, Institute of International Bankers, Washington DC.
32 Ibid., p. 6.
33 L Laeven, Lev Ratnovski and Hui Tong, ‘Bank Size and Systemic Risk’, May 2014, IMF.
34 Ibid., p. 18.
35 Taylor, OCC, p. 7.

Chapter 7: Lehman's Valuation of Its Assets

1 Conference call, 16 June 2008, p. 9.
2 Lehman Brothers-Quantitative Risk Management, p. 4. Internal document included in the Examiner's Report, it can be found as LBEX-DOCID 384020.
3 Examiner's Report, p. 288.
4 Ibid.
5 My emphasis.
6 Ibid., pp. 288–90.
7 Ibid., pp. 306 and 312.
8 The four agencies are: the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS).
9 Interagency Appraisal and Evaluation Guidelines, 27 October 1994, p. 2.
10 Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, 12 December 2006, Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation.
11 Ibid., p. 1.
12 K Friend, H Glenos and J Nichols, ‘An Analysis of the Impact of Commercial Real Estate Concentration Guidance’, April 2013.
13 Cap*105 calculated the current capitalization of the underlying property (i.e. the outstanding debt plus equity invested to date) and then multiplied this number by 105 per cent to estimate the value of the collateral as of a specific valuation date. The additional 5 per cent represented the presumed appreciation of the collateral. It was designed to limit valuations in the midst of rising real estate prices in order to keep the presumed appreciation of the property within limits. Its use was obvious if real estate prices were rising rapidly. The method did not seem to make use of inputs from the market. But as prices began to fall, the method led to an over-valuation of the property used as collateral.
14 However, the internal rate of return method (IRR) was supposed to be based on at least some inputs from the market. Under the discounted cash flow method, an IRR model assessed the value of the collateral by calculating the net present value (NPV) of all monthly discounted net cash flows (NCF). This was done by calculating the NCF produced by the asset by taking the monthly expected revenue and subtracting the monthly expected expenses. Then the IRR model applied a discount rate in order to reach the NPV of the NCF. To arrive at the fair value, the discount rate should reflect the yield an investor would require to purchase the property. But Lehman applied a discount rate based on their expected rate of return or an interest rate associated with the underlying loans at origination, not the yield the investor would want to buy the property.
15 Examiner's Report, Section IIIA(i), Lehman's issues with TriMont's Data, pp. 312 and 332.
16 Examiner's Report, Lehman's Syndication Efforts, p. 317.
17 SEC press release, 5 October 2007.
18 Examiner's Report, Examiner's Findings and Conclusions as to the Reasonableness of Lehman's Valuation of the PTG portfolio, Section 5 (i), p. 373.
19 FASB, Summary of Statement No. 157.
20 Christopher Cox, Chairman of the US Securities and Exchange Commission, Keynote Address to Investment Company Institute 4th Annual Mutual Leadership Dinner, 30 April 2008.
21 Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-to-Market Accounting, December 2008.
22 At an SEC panel on mark-to-market accounting, ‘Fair Value Caused the Crisis’, CFO.com. See also William M Isaac, Senseless Panic: How Washington Failed America (John Wiley & Sons, 2012).
23 Report and Recommendations Pursuant to Sec 133 of the Emergency Economic Stabilization Act 2008: Study on Mark-to-Market Accounting, Dec 2008, pp. 94–5.
24 Christian Laux and Christian Leuz, ‘Did Fair-Value Accounting Contribute to the Financial Crisis?’, Journal of Economic Perspectives, Vol. 24, Winter 2010, pp. 93–118.
25 FASB, ‘Final Staff Positions to Improve Guidance and Disclosures on Fair Value Measurements and Impairments’, News Release, 4 September 2009.
26 Examiner's Report, Vol. I, Section III, Examiner's Conclusions, Business and Risk Management, (a) Executive Summary, pp. 48–9.
27 She is now Treasurer and Vice President of the World Bank.
28 17 August 2007.
29 SEC Division of Market Regulation, Lehman Brothers, Consolidated Supervised Entity Market and Credit Risk Review (2005). Quoted in Examiner's Bankruptcy Report, Appendix 8, p. 7.
30 SEC's Division of Market Regulation: Consolidated Supervised Entities Market and Credit Risk Review (2005) quoted in the Examiner's Report, Appendix 8, p. 7.
31 Examiner's Report, Vol I, Examiner's Conclusions, Executive Summary, Business and Risk Management, p. 72.
32 Ibid., p. 77.
33 Basel Committee on Banking Supervision, Consultative Document: ‘Fundamental Review of the Trading Book: A Revised Market Risk Framework’, October 2013, p. 4. As part of its rapid response to the financial crisis, Basel initiated a requirement to hold capital against credit risk, which had not been considered previously. The VaR model is also likely to be abandoned in favour of ‘expected shortfall’.
34 Office of Thrift Supervision, Report of Examination of Lehman Brothers Holdings Inc., New York, NY, Docket S2511, pp. 1–2. Examination Start Date, 8 July 2008. No completion date is given. The Report itself was probably designed to prove that OTS had taken appropriate action in relation to Lehman and the emerging problems in the markets.
35 Examiner's Report, Examiner's Conclusions, Business and Risk Management, Executive Summary, p. 50.
36 Examiner's Report, Section III, A. 1, Risk Section, (d) Lehman Increases Risk Appetite to Accommodate Additional Risk Attributable to Archstone Transaction, pp. 133, 141 and 153.
37 Ibid., Section III, A. 1, 52.
38 Ibid., pp. 55–6.

Chapter 8: Measuring Value

1 Press Release: ‘International Valuation Standards Council and The Appraisal Foundation Agree to Bring Greater Consistency to Appraisal Standards’, 24 October 2014. The Appraisal Foundation is authorized by Congress to set out appraisal standards and qualifications, applying USPAP. The Appraisal Standards Board sets the rules for developing an appraisal and reporting the results. It provides the recognized standards for real estate, personal property and business appraisal. Since 1992, the Office of Management and Budget has required federal land acquisition and direct lending agencies to conform to USPAP.
2 The sources used to inform the brief descriptions of the methodology for commercial real estate properties and development land include the following: RICS Guidance Note, Discounted Cash Flow for Commercial Property Investment; RICS Valuation Information Paper, Valuation of Development Land no. 12; RICS Commercial Property Valuation Methods 1997; and RICS Valuation Professional Standards 2014. The methodologies used in the USA between 2005 and 2008 were similar. The Interagency FAQs on Residential Tract Development Lending in 2005 is the main source of guidance for valuation. In both countries, the methodology used and the standards set have been subject both to criticism and revision.
3 These sources are given in B J Curry, ‘The Trouble with Rates in the Subdivision Development Method to Land Valuation’, The Appraisal Journal, Spring 2013. The first is a resource for gross margins, net profit, financial ratios and profit margins. The second two are sources for residential development property yield rates.
4 Examiner's Report, p. 288.
5 Examiner's Report, Section III, A.2, Valuation, pp. 293–4.
6 Brian Curry, ‘The Trouble with Rates in the Subdivision Development Method to Land Valuation’, The Appraisal Journal, Spring 2013, p. 151.
7 Examiner's Report, p. 342.
8 Examiner's Report, p. 236.
9 Available at LBEX-WGM 000574-95.
10 See Chapter 7.
11 Examiner's Report, Vol. 2, p. 543.
12 Ibid., p. 550.
13 Ibid., p. 548.
14 The model was developed by David X Li in two papers: ‘The Valuation of Basket Credit Derivatives’, CreditMetrics Monitor, April 1999, pp. 34–50, and ‘On Default Correlation: A Copula Function Approach’, Journal of Fixed Income, 2000, 9/4 pp. 43–54.
15 Jon Gregory, ‘Quant Congress: Gaussian Copula “Failing Dramatically” in Pricing CDOs’, Risk Magazine, 8 July 2008.
16 D MacKenzie and Taylor Spears, ‘The Formula that Killed Wall Street? The Gaussian Copula and the Material Cultures of Modelling’, School of Social Science and Politics, University of Edinburgh, June 2012.
17 D Beltram, L Cordell and C Thomas, ‘Asymmetric Information and the Death of ABS CDOs’, Federal Reserve, International Finance Discussion Papers, March 2013, p. 5.
18 S Bergman, ‘CDO Evaluator applies Correlation and Monte Carlo Simulation to the Art of Determining Portfolio Quality’, Standard & Poor, Structured Finance, 12 November 2001. Full details of the model S&P used for CDOs composed of mortgage-backed securities are given in this article.
19 From a technical point of view, this meant that S&P added Monte Carlo statistical methodology to the Gaussian Copula.
20 ‘Quant Congress’, Risk Magazine, pp. 4–5.
21 At least 44 SEC rules and forms incorporated agency ratings, as of June 2008. See JP Hunt, ‘Credit Rating Agencies and the “Worldwide Credit Crisis”. The Limits of Reputation, the Insufficiency of Reform and a Proposal for Improvement’, Columbia Business Law Review, 2009, I, pp. 109–209 for a detailed review of the role of rating agencies in financial regulation in the USA.
22 Quoted in Beltram, Cordell and Thomas, ‘Asymmetric Information and the Death of ABS CDOs’, pp. 6–7.
23 Quoted by Cordell, Huang and Williams, Working Paper No 11, May 2012, Working Papers Research Department, Federal Reserve Bank of Philadelphia.
24 N Vause, ‘Counterparty Risk and Contract Volumes in the Credit Default Swap Market’, BIS Quarterly Review, December 2010.
25 Otis Casey, ‘The CDS Big Bang’, Markit Magazine, Spring 2009.
26 Ingo Fender and Martin Schneider, ‘The ABX: How do the Markets Price Subprime Mortgage Risk’, BIS Quarterly Review, September 2008.
27 Ibid., p. 80.
28 Richard Stanton and Nancy Wallace, ‘The Bear's Lair: Index Credit Default Swaps and the Subprime Mortgage Crisis’, University of California, Berkeley, Stanton Papers, 2011, pp. 3275–6.
29 Ibid., p. 3276.
30 Testimony before the Financial Inquiry Commission, 30 June 2010.
31 ISDA, ‘The AIG and Credit Default Swaps’, November 2009.
32 Quoted in ‘On How AIG Got Deeply Involved with Credit Derivatives’, Washington Post, 31 December 2008.

Chapter 9: Monitoring Value

1 A Emmerich, W Savitt, S Niles and S Ongun, The Corporate Governance Review, 3rd edn (ed W J L Calkoen) (Law Business Research Ltd, 2013), p. 401.
2 At the time of the collapse there were four federal banking regulatory authorities: the Federal Reserve Bank, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision. The Dodd-Frank Act abolished the Office of Thrift Supervision and its role was transferred to the Office of the Comptroller of the Currency. The Act also established the Consumer Finance Protection Bureau.
3 NYSE CG Rules 303A.06-07 (2004).
4 NYSE CG Rules 303A.07(a) and 303A.03.
5 NYSE CG Rules 303A.04–07.
6 The full story may be found in her testimony to the Oversight and Investigations Sub-committee of the House Energy and Commerce Committee on the Financial Collapse of the Enron Corporation, 14 February 2002.
7 Testimony Concerning the Impact of the Sarbanes-Oxley Act, 21 April 2005, W.H. Donaldson before the House Committee on Financial Services.
8 Ibid., p. 1.
9 Delaware General Corporation Law, section 141(a).
10 Caremark International A 2nd 959 (Del. Ch. 1996).
11 See R Strahota, ‘The Effects of the Sarbanes-Oxley Act on Directors' Responsibilities and Liabilities’, 21–22 November 2002, slides 18 and 19.
12 A Valukas, Appendix 1, p. 22 (Unocal Corp. v Mesa Petroleum Co., 493 A 2d 946, 954, quoting Aronson v Lewis 473 A 2d 805, 812, Del. 1984).
13 Ibid., p. 23.
14 Ibid., p. 24.
15 Ibid., p. 26.
16 He depends on the Delaware Supreme Court's judgement concerning Gantler 965 A 2nd at 708–09.
17 A Valukas, Appendix 1, p. 30.
18 A Valukas, responding to questions after his testimony before the House Committee on Financial Services, 10 April 2010.
19 Statement by Anton Valukas before the Senate Committee on Banking, Housing and Urban Affairs, Sub-committee on Securities, Insurance and Investment, on The Role of the Accounting Profession in Preventing Another Financial Crisis, 6 April 2011, p. 3.
20 Ibid., pp. 30–1.
21 Quoted by Valukas, ibid., p. 32. Interestingly enough this was attached to Lehman's Quarterly Report, 10-Q filed 10 October 2006, which is when Fuld decided to move into the commercial and residential real estate market in a more aggressive fashion.
22 Ibid., p. 33.
23 Ibid., p. 38.
24 Ibid., p. 40.
25 A Valukas, Appendix 1, p. 22 (Unocal Corp v Mesa Petroleum Co 493 A 2d, 946, 954, quoting Aronson v Lewis A 2D 805, 812, Del 1984).
26 Here Cruikshank refers to F Balotti and A Finkelstein, Delaware Law and Corporations and Business Organisation (2009), a textbook on Delaware's General Corporation Law.
27 ‘Cinderalla Moment: Risk Management to the Fore’, The Economist, 11 February 2010.
28 A Valukas, Appendix 1, p. 49.
29 Ibid., p. 50.
30 Ibid., p. 54.
31 Ibid., p. 77.
32 Ibid., pp. 55–6.
33 The Examiner's Report gives access to the minutes of some board meetings and the presentations made to the board. The minutes typically cover reports from the various sub-committees, which do not contain the views of the sub-committee, nor do they record any issues the board may have raised in response to those reports or to the management presentations. There were private sessions from which the CEO was excluded, but the minutes do not give any indication at all of the contents of those discussions.
34 NYSE Listed Company Manual, para. 303A(7)(c)(iii)(D) & Cmt (2010).
35 Final Report of the IIF Committee on Market Best Practices: Principles of Conduct and Best Practice Recommendations, p. 15.
36 F Guerrera and P Thai-Larsen, ‘Gone by the Board? Why Bank Directors did Not Spot Credit Risks’, Financial Times, 25 June 2008. The observation concerning the last two may not be entirely fair. It depends on the way in which they were able to reapply their skills and experience.
37 Proxy Disclosure Enhancements, SEC Release NOS 33-9089; 34-61175; IC-29092; File No S7-13-09.
38 Ibid., p. 43.
39 Ibid., p. 44.
40 Ira Millstein, ‘The Great Divide, Board Leadership’, Directors and Boards First Quarter, 2010, p. 21.
41 Remarks by Thomas Curry before the ABA Risk Management Forum, 10 April 2014.
42 Remarks before RMA's Conference, 8 May 2014.
43 12 CFR 225.72 2012.
44 First known as the Combined Code on Corporate Governance, it was first devised in 1992 and has been revised several times since then in the light of changing circumstances and requirements.
45 Quoted in ‘King of the Subprime’, The Director, 10 November 2010.
46 Sir David Walker, ‘A Review of Corporate Governance in UK Banks and Other Financial Industry Entities – Final Recommendations’, pp. 9–10.

Chapter 10: Chasing a Chimera?

1 The Financial Services Authority, ‘The Turner Review: A Regulatory Response to the Global Banking Crisis’, March 2009, p. 39.
2 Alan Greenspan, The Age of Turbulence (2007; with an epilogue, 2008), p. 465.
3 Alan Greenspan's Testimony before the House Oversight and Reform Committee, 23 Oct 2008.
4 Ibid.
5 Alan Greenspan, ‘We will Never have a Perfect Model of Risk’, Financial Times, 16 March 2008.
6 ‘A Conversation with Alan Greenspan’, Council on Foreign Relations, 19 November 2002.
7 Ibid., p. 7.
8 Quoted in John Lippert's article, ‘Friedman would be Roiled as Chicago Disciples Rue Repudiation’, Bloomsberg, 23 December 2008.
9 George Soros, ‘The Crash of 2008 and What it Means’, in The New Paradigm for Financial Markets (Public Affairs, 2009), p. 165.
10 E Fama, ‘The Behaviour of Stock Market Prices’, Journal of Business, 38 (1965a) and E Fama, Financial Analysts Journal, 21 (1965b); E Fama, ‘Efficient Capital Markets II’, Journal of Finance, Vol. 46, Issue 5, December 1991 (a defence against a vast array of criticisms).
11 E Fama, ‘Efficient Capital Markets: A Review of Theory and Empirical Work’, Journal of Finance, Vol. 25, Issue 2, May 1970.
12 John H Cochrane, ‘Eugene F. Fama, Efficient Markets and the Nobel Prize’, Magazine, 25 November 2013. Not only is Professor Cochrane a long-standing colleague of Fama's, but also his son-in-law.
13 ‘Eugene Fama, King of Predictable Markets’, Interview with Jeff Sommer, New York Times, 23 October 2013.
14 M Sewell, ‘The Efficient Market Hypothesis: Empirical Evidence’, International Journal of Statistics and Probability, Vol. 1, No. 2, 2012, p. 165.
15 A Lo and C MacKinlay, A Non-Random Walk Down Wall Street (Princeton University Press, 1999), pp. 6–7.
16 A Lo, The New Palgrave: A Dictionary of Economics, 2nd edn (New York, Palgrave Macmillan, 2008): ‘Efficient Market Hypothesis’.
17 R Posner, ‘A Failure of Capitalism’, January 2010, cited by J Cassidy in ‘After the Blowup’, New Yorker, 11 January 2010.
18 Quoted in the Wall Street Journal and Markets, 28 April 2009.
19 Posner, quoted in the New Yorker, 11 January 2010.
20 Fortune, 3 April 1995.
21 Quoted in The New York Times, 26 October 2013: EF Fama and KR French, ‘Dividend Yields and Expected Stock Returns’, Journal of Financial Economics, Vol. 22, 1988.
22 Ibid.
23 R Shiller, ‘Do Stock Prices Move too Much to be Justified by Subsequent Changes to Dividends?’, American Economic Review, June 1981, p. 424.
24 R Shiller, ‘From Efficient Markets to Behavioural Finance’, Journal of Economic Perspectives, Vol. 17, 1, Winter 2003, p. 89.
25 This ‘dictum’ is from a private letter from Paul Samuelson to John Campbell and Robert Shiller and is quoted with approval by Shiller both in articles and in his book, Irrational Exuberance. The letter no doubt followed from Professor Samuelson's Opening Address to the Federal Reserve Bank of Boston's conference on ‘Summing Up on Business Cycles’, in which he stated that, ‘We have come a long way, by moving, in two hundred years towards the micro efficiency of markets: Black-Scholes option pricing, indexing of portfolio diversification, and so forth … But there is no persuasive evidence … that macro-market inefficiency is trending towards extinction.’
26 Ibid., p. 90.
27 Authors JY Campbell, A Lo and A MacAuley, The Econometrics of Financial Markets (Princeton University Press, 1997).
28 Shiller, Irrational Exuberance, 2nd edn, p. 81.
29 ‘Speculative Asset Prices’, Prize Lecture, 8 December 2013, p. 461.
30 The first is Bayes' Law, developed by the Reverend Thomas Bayes, published posthumously in 1763. It was the first expression of ‘inverse possibility’, or ‘conditional probability’ whose value depends on the value of another probability. These also come into play when we wish to decide how much confidence we wish to assign to a given belief. Like most of the early probability theories, Bayes' Law is derived from gambling, and the Reverend Bayes was a gambler. It is not known whether or not he was successful. The theory was rejected until it was used by Alan Turing in decoding the Nazi Enigma machine. Later, the development of the Markov chain Monte Carlo algorithm was crucial in the revival of the Bayesian inference. The second refers to the Subjective Expected Utility model (SEU) developed by L.T. Savage's Foundations of Statistics. This described the way in which people should decide, not the way in which they actually make decisions: to maximize their ‘selective expected utility’ – a subjective judgement of probability and value. A person has well-defined preferences and will select the option that is likely to provide the maximum satisfaction. The subjectivity lies in the estimation of the probability of the anticipated events or conditions. It has since been argued extensively that the empirical evidence contradicts his theory.
31 N Barberis and R Thaler, ‘A Survey of Behavioural Finance’, Social Science Research Network, September 2002, ch. 18, p. 1053.
32 A Kumar and CM Lee, ‘Retail Investor Sentiment and Return Comovements’, Journal of Finance, Vol. 61, Issue 5, October 2006, p. 2485.
33 Brad B Barber and Terrance Odean, ‘All That Glitters: The Effect of Attention and News of the Buying Behaviour of Individual and Institutional Investors’, The Review of Financial Studies, Vol. 211, No. 2, 2008, pp. 812–14.
34 Kumar and Lee, p. 4.
35 D Vayanos and Paul Woolley, ‘Capital Theory after the Efficient Market Hypothesis’, 5 October 2009, Vox EPR's Policy Portal.
36 Ibid., p. 2.
37 P Woolley and Dimitri Vayanos, ‘Taming the Finance Monster’, Central Banking Journal, December 2012. (My emphasis.)
38 Remarks by Secretary Henry Paulson Jr at the Ronald Reagan Presidential Library, HP-1285 Press Room of the US Department of the Treasury.
39 E Thomas and M Hirsh, ‘Paulson's Complaint’, Newsweek, 25 May 2008.
40 W Bagehot, Lombard Street: A Description of the Money Markets (Reprint Project Gutenberg), p. 104.
41 R Swedberg, ‘The Structure of Confidence and the Collapse of Lehman Brothers’, Markets on Trial: The Economic Sociology of the U.S. Financial Crisis, Research into the Sociology of Organizations, 2010, Vol. 30 A, pp. 76–7.
42 Ibid., pp. 71–114.
43 Gary Gorton, The Panic of 2007, Prepared for the Federal Reserve Bank of Kansas City, Jackson Hole Conference, August 2008, Abstract.
44 The ABX.HE indices were based on credit default swaps, tracking the price of credit default insurance on a basket of such deals. The Index referenced 20 subprime mortgage MBSs. Doubts have been raised about the validity of currently available models for the pricing of credit risk, especially for portfolio instruments, such as MBSs.
45 Gorton, The Panic of 2007, pp. 3, 11. In addition, Gorton points out the reasons for believing that house prices will always go up. The USA had not experienced a large, nationwide decline in house prices since the Great Depression. Between 2001 and 2005, homeowners experienced an increase of 54.4 per cent in the value of their homes. The S&P/Shiller quarterly home price index declined by 4.5 per cent in Q3 2007 versus Q3 2006, the largest drop since the index started recording data in 1988.
46 D Einhorn, ‘Private Pofits and Socialised Risks’, Grant's Spring Investment Conference, 8 April 2008.
47 Ibid., p. 91.
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Lehman Brothers

A Crisis of Value


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