Crisis of Crowding Quant Copycats, Ugly Models, and the New Crash Normal

ISBN-10: 1118250028
ISBN-13: 9781118250020
Edition: 2012
List price: $56.95 Buy it from $25.89
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Description: A rare analytical look at the financial crisis using simple analysisThe economic crisis that began in 2008 revealed the numerous problems in our financial system, from the way mortgage loans were produced to the way Wall Street banks leveraged  More...

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Book details

List price: $56.95
Copyright year: 2012
Publisher: John Wiley & Sons, Incorporated
Publication date: 7/13/2012
Binding: Hardcover
Pages: 478
Size: 6.50" wide x 9.50" long x 1.75" tall
Weight: 2.068
Language: English

A rare analytical look at the financial crisis using simple analysisThe economic crisis that began in 2008 revealed the numerous problems in our financial system, from the way mortgage loans were produced to the way Wall Street banks leveraged themselves. Curiously enough, however, most of the reasons for the banking collapse are very similar to the reasons that Long–Term Capital Management (LTCM), the largest hedge fund to date, collapsed in 1998. The Crisis of Crowding looks at LTCM in greater detail, with new information, for a more accurate perspective, examining how the subsequent hedge funds started by Meriwether and former partners were destroyed again by the lapse of judgement in allowing Lehman Brothers to fail.Covering the lessons that were ignored during LTCM′s collapse but eventually connected to the financial crisis of 2008, the book presents a series of lessons for hedge funds and financial markets, including touching upon the circle of greed from homeowners to real estate agents to politicians to Wall Street.Guides the reader through the real story of Long–Term Capital Management with accurate descriptions, previously unpublished data, and interviewsDescribes the lessons that hedge funds, as well as the market, should have learned from LTCM′s collapseExplores how the financial crisis and LTCM are a global phenomena rooted in failures to account for risk in crowded spaces with leverageExplains why quantitative finance is essential for every financial institution from risk management to valuation modeling to algorithmic tradingIs filled with simple quantitative analysis about the financial crisis, from the Quant Crisis of 2007 to the failure of Lehman Brothers to the Flash Crash of 2010A unique blend of storytelling and sound quantitative analysis, The Crisis of Crowding is one of the first books to offer an analytical look at the financial crisis rather than just an account of what happened. Also included are a layman′s guide to the Dodd–Frank rules and what it means for the future, as well as an evaluation of the Fed′s reaction to the crisis, QE1, QE2, and QE3.

Foreword
Preface
Cast of Characters
Introduction
The 1998 LTCM Crisis
Meriwether's Magic Money Tree
Meriwether's Magic Money Tree
The Birth of Bond Arbitrage
The Dream Team
Early Success
Risk Management
The General Idea
Leverage
Measuring Risk
The �
Economics
Copycats, Puppies, and Counterparties
LTCM's Actual Risk Management Practices
Diversification
Operations
The Raw Evidence
The Trades
The Short U.S. Swap Trade
The European Cross-Country Swap Trade (Short UK and Long Europe)
Long U.S. Mortgage Securities Hedged
The Box Spread in Japan
The Italian Swap Spread
Fixed-Income Volatility Trades
The On-the-Run and Off-the-Run Trade
Short Longer-Term Equity Index Volatility
Risk Arbitrage Trades
Equity Relative-Value Trades
Emerging Market Trades
Other Trades
The Portfolio of Trades
The Collapse
Early Summer 1998
The Salomon Shutdown
The Russian Default
The Phone Calls
The Meriwether Letter
Buffett's Hostile Alaskan Offer
The Consortium Bailout
Too Big to Fail
Why did it Happen?
The John Meriwether Letter
The Warren Buffett Letter
The Fate of LTCM Investors
General Lessons from the Collapse
Interconnected Crowds
VaR
Leverage
Clearinghouses
Compensation
What's Size Got to do with it?
Contingency Capital
The Fed is a Coordinator of Last Resort
Counterparty Due Diligence
Spread the Love
Quantitative Theory Did not Cause the LTCM Collapse
D�j� Vu
The Financial Crisis of 2008
The Quant Crisis
The Subprime Mortgage Market Collapse
What Was the Quant Crisis?
The Erratic Behavior of Quant Factors
Standard Factors
Quantitative Portfolio Factors
Causes of the Quant Crisis
The Shed Show
The Bear Stearns Collapse
A Brief History of the Bear
Shadow Banking
Window Dressing
Repo Power
The Unexpected Hibernation
The Polar Spring
Money for Nothing and Fannie and Freddie for Free
The Basic Business
Where's the Risk?
CDO and CDO<sup>2</sup>
The Gigantic Hedge Fund
Big-Time Profits
The U.S. Housing Bubble
The Circle of Greed
Real Estate Agents and Mortgage Lender Tricks
Home Owners
Profits and Politicians
The Media and Regulators
Grade Inflation
Commercial Banks
Freddie and Fannie's Foreclosure
Why Save Freddie and Fannie?
Did Anyone Know?
The Lehman Bankruptcy
The Wall Street Club
Why was Lehman Next?
Business Exposure
A Chronology of the Gorilla's Death
Double Down in Real Estate
Mildly Seeking Capital
The Final Days
A Classic Run on the Bank
Why Let Lehman Fail?
Who was at Fault?
Lehman Brothers
The Counterparties
The Government and Market Structure
The Legal Opinion on the Lehman Bankruptcy
Who Would have been Next?
The Spoils of having Friends in High Places
The Absurdity of Imbalance
The Long-Dated Swap Imbalance
The Repo Imbalance
The 228 Wasted Resources and the Global Run on Banks
Asleep in Basel
Basel I
The Concept
The Problems
Basel II
The Concept
The Problems
Basel and the Financial Crisis
The LTCM Spinoffs
JWM Partners LLC
Platinum Grove Asset Management
The Others
The Copycat Funds
The End of LTCM's Legacy
The Bear and the Gorilla Attack
November Rain
What Went Wrong?
Market Insanity
Bigger Shocks
Market Imbalance
Deleveraging
Coup de Grace
New and Old Lessons from the Financial Crisis
Interconnectedness and Crowds
Leverage
Systemic Risk and Too Big to Fail
Derivatives: The Good, the Bad, and the Ugly
Conflicts of Interest
Policy Lessons
Risk Management
Counterparty Interaction
Hedge Funds
The Importance of Arbitrage
The Aftermath
The Flash Crash
Background
Flash Crash Theories
Fat Finger Theory
High-Frequency Trader Theory
Jittery Markets
The Real Cause of the Flash Crash
The Waddell-Reed Trade
The Computer Glitch
Gone Fishing
The Aftermath
Getting Greeked
Members Only
The Conditions
The Benefits of Membership
The Drawbacks of Membership
The Club's Early Years
Getting Greeked
Greek Choices
Remain a Club Member and Order Finances
Ditch the Club and Keep the Debt
Ditch the Club and Ditch the Debt
The IMF and Euro Packages
The EU's Future
The Fairy-Tale Decade
I Hate Wall Street
The Real Costs of the Financial Crisis
An Avatar's Life Force
Economic System Choices
The Crisis of Crowds
The Wine Arbitrage
Appendixes
The Mathematics of LTCM's Risk-Management Framework
A General Framework
A Numerical Example
Measuring Risk
The Mechanics of the Swap Spread Trade
The Long Swap Spread Trade
The Short Swap Spread Trade
Derivation of Approximate Swap Spread Returns
Methodology to Compute Zero-Coupon Daily Returns
Methodology to Compute Swap Spread Returns from Zero-Coupon Returns
The Mechanics of the On-the-Run and Off-the-Run Trade
The Correlations between LTCM Strategies Before and During the Crisis
The Basics of Creative Mortgage Accounting
The Business of an Investment Bank
Investment Banking
Capital Markets
Equities
Equity Cash
Equity Derivatives
Equity Finance
Arbitrage (Proprietary Trading)
Fixed Income
Government and Agency Obligations
Corporate Debt Securities and Loans
High-Yield Securities and Leveraged Bank Loans
Money Market Products
Mortgage- and Asset-Backed Securities
Municipal and Tax-Exempt Securities
Financing
Fixed-Income Derivatives
Lehman Brothers Bank
Foreign Exchange
Global Distribution (Global Sales)
Research
Client Services
Private Client Services (Private Wealth Management)
Private Equity
Technology
Corporate and Risk Management
Summary
The Calculation of the BIS Capital Adequacy Ratio
The General Calculation
An Example
Notes
Glossary
Bibliography
About the Author
Index

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