Catalogue


The crisis of crowding [electronic resource] : quant copycats, ugly models, and the new crash normal /
Ludwig B. Chincarini.
edition
1
imprint
Hoboken, N.J. : Bloomberg Press, 2012.
description
xxvii, 478 p. : ill. ; 24 cm.
ISBN
9781118250020 (hardback)
format(s)
Book
More Details
series title
imprint
Hoboken, N.J. : Bloomberg Press, 2012.
isbn
9781118250020 (hardback)
restrictions
Licensed for access by U. of T. users.
abstract
"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 Guides the reader through the real story of Long-Term Capital Management with accurate descriptions, previously unpublished data, and interviews Describes the lessons that hedge funds, as well as the market, should have learned from LTCM's collapse Explores how the financial crisis and LTCM are a global phenomena rooted in failures to account for risk in crowded spaces with leverage Explains why quantitative finance is essential for every financial institution from risk management to valuation modeling to algorithmic trading Is 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 2010 A 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"--
catalogue key
11924939
 
Includes bibliographical references ( p. 451-464) and index.
A Look Inside
Excerpts
Flap Copy
The financial markets are dangerously over-crowded. Investors follow popular trends or latch onto profitable new strategies with herd-like single-mindedness, and an increasingly globalized and interconnected world has only exacerbated the problem. The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal explores how the dramatic overcrowding we've seen over the last quarter century has yielded terrifying results, including the 2008 financial crisis that continues to reverberate around the globe. The story of overcrowding as we know it now began in 1998, with the failure of the profoundly successful Long-Term Capital Management (LTCM) hedge fund. Exploring how this seemingly isolated event signaled a much larger problem within the financial industry, The Crisis of Crowding traces the story of LTCM and the subsequent hedge funds started by its founder, John Meriwether and his former partners, through the events of 2008, and up to the ongoing European debt crisis. Part narrative, part quantitative analysis, the book is filled with firsthand recollections from those on the front lines of the crowding crisis, including several LTCM partners. Featuring insights from key banking and hedge fund authorities, it brings the events that led to the current crisis vividly to life, showing how and why the market has evolved in new and dangerous ways, and what can be done about it. Much that should have been obvious after the fall of LTCM could have prevented the crises that followed. Instead, the problems of overcrowding went unchecked so that when the next economic disaster hit, increased leverage, policy mishaps, and an even more crowded trading space resulted in a far bigger collapse. We failed to learn our lesson the first time around, but that doesn't mean it's too late. Future economic crises are all but guaranteed, and The Crisis of Crowding reveals exactly what we need to know so we're prepared for next time.
Summaries
Long Description
"One of the lessons from the crisis, rarely discussed, are the problems caused by a crowded trading place. Chincarini takes the reader down a path not looked at by many analysts. An excellent read." --JIMMY CAYNE, former CEO and Chairman of the Board of Bear Stearns " The Crisis of Crowding is an excellent account of the financial crisis of 2008. This book has everything: an analysis of the trades, interviews with key players, and, most importantly, a simple, entertaining explanation of how we got into this mess. It stretches from the LTCM crisis in 1998 to the Greek crisis of 2012. Anyone who wants to know how our financial system works and how we can improve it should read this book." --FRANK FABOZZI, Professor at EDHEC Business School and former Professor at the Yale School of Management "Dr. Chincarini gives an engaging description of the various crises over the last decade and how they are connected. It's as if Chincarini were in the trading room taking notes as the crisis unfolded." --KEN KRONER, Chief Investment Officer and head of the firm's scientific active equity business, BlackRock "Do we need yet another book on the financial crisis? Yes, we do. Some books are fun to read, but leave you confused about what the actors actually did. Others give you a great deal of technical information, but can be a hard slog. This book by Ludwig Chincarini fills the middle. It is fun to read, and it tells you exactly who did what and how. Read, enjoy, and learn." --OLIVIER BLANCHARD, Chief Economist at the IMF "Chincarini's book, which combines a narrative style with an overview of economic fundamentals, should be on the reading list of anyone interested in the roots of our financial meltdown." --AUSTAN GOOLSBEE, former Chairman of the Council of Economic Advisors to the President, Professor of Economics, University of Chicago "Chincarini looks at the financial crises of the last fifteen years--starting with a comprehensive analysis of the LTCM crisis in 1998 and ending with the Euro-debt crisis of 2012--and argues convincingly that the central risk in these crises was accentuated from within the financial system rather than from external economic forces (it includes the best analysis I have read on the LTCM crisis). This bold new theory has important implications for both industry practices as well as for new regulations. This book should be required reading for anyone who wants to understand and help prevent future financial crises." --ERIC ROSENFELD, cofounder of Long-Term Capital Management and JWMP
Main Description
A rare analytical look at the financial crisis using simple analysis The 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 LTCMs 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 interviews Describes the lessons that hedge funds, as well as the market, should have learned from LTCMs collapse Explores how the financial crisis and LTCM are a global phenomena rooted in failures to account for risk in crowded spaces with leverage Explains why quantitative finance is essential for every financial institution from risk management to valuation modeling to algorithmic trading Is 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 2010 A 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 laymans guide to the Dodd-Frank rules and what it means for the future, as well as an evaluation of the Feds reaction to the crisis, QE1, QE2, and QE3.
Bowker Data Service Summary
This title provides a rare analytical look at the financial crisis using simple analysis. The book guides the reader through the real story of long-term capital management with accurate descriptions, previously unpublished data, and interviews.
Library of Congress Summary
"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 interviews Describes the lessons that hedge funds, as well as the market, should have learned from LTCM's collapse Explores how the financial crisis and LTCM are a global phenomena rooted in failures to account for risk in crowded spaces with leverage Explains why quantitative finance is essential for every financial institution from risk management to valuation modeling to algorithmic trading Is 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 2010 A 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"--
Back Cover Copy
"One of the lessons from the crisis, rarely discussed, are the problems caused by a crowded trading place. Chincarini takes the reader down a path not looked at by many analysts. An excellent read." -JIMMY CAYNE, former CEO and Chairman of the Board of Bear Stearns " The Crisis of Crowding is an excellent account of the financial crisis of 2008. This book has everything: an analysis of the trades, interviews with key players, and, most importantly, a simple, entertaining explanation of how we got into this mess. It stretches from the LTCM crisis in 1998 to the Greek crisis of 2012. Anyone who wants to know how our financial system works and how we can improve it should read this book." -FRANK FABOZZI, Professor at EDHEC Business School and former Professor at the Yale School of Management "Dr. Chincarini gives an engaging description of the various crises over the last decade and how they are connected. It's as if Chincarini were in the trading room taking notes as the crisis unfolded." -KEN KRONER, Chief Investment Officer and head of the firm's scientific active equity business, BlackRock "Do we need yet another book on the financial crisis? Yes, we do. Some books are fun to read, but leave you confused about what the actors actually did. Others give you a great deal of technical information, but can be a hard slog. This book by Ludwig Chincarini fills the middle. It is fun to read, and it tells you exactly who did what and how. Read, enjoy, and learn." -OLIVIER BLANCHARD, Chief Economist at the IMF "Chincarini's book, which combines a narrative style with an overview of economic fundamentals, should be on the reading list of anyone interested in the roots of our financial meltdown." -AUSTAN GOOLSBEE, former Chairman of the Council of Economic Advisors to the President, Professor of Economics, University of Chicago "Chincarini looks at the financial crises of the last fifteen years-starting with a comprehensive analysis of the LTCM crisis in 1998 and ending with the Euro-debt crisis of 2012-and argues convincingly that the central risk in these crises was accentuated from within the financial system rather than from external economic forces (it includes the best analysis I have read on the LTCM crisis). This bold new theory has important implications for both industry practices as well as for new regulations. This book should be required reading for anyone who wants to understand and help prevent future financial crises." -ERIC ROSENFELD, cofounder of Long-Term Capital Management and JWMP
Table of Contents
Forewordp. xv
Prefacep. xix
Cast of Charactersp. xxiii
Introductionp. 1
The 1998 LTCM Crisisp. 5
Meriwether's Magic Money Treep. 7
Meriwether's Magic Money Treep. 7
The Birth of Bond Arbitragep. 7
The Dream Teamp. 11
Early Successp. 14
Risk Managementp. 21
The General Ideap. 21
Leveragep. 22
Measuring Riskp. 23
The ¿p. 24
Economicsp. 24
Copycats, Puppies, and Counterpartiesp. 25
LTCM's Actual Risk Management Practicesp. 27
Diversificationp. 27
Operationsp. 28
The Raw Evidencep. 29
The Tradesp. 37
The Short U.S. Swap Tradep. 41
The European Cross-Country Swap Trade (Short UK and Long Europe)p. 44
Long U.S. Mortgage Securities Hedgedp. 46
The Box Spread in Japanp. 48
The Italian Swap Spreadp. 50
Fixed-Income Volatility Tradesp. 52
The On-the-Run and Off-the-Run Tradep. 54
Short Longer-Term Equity Index Volatilityp. 57
Risk Arbitrage Tradesp. 60
Equity Relative-Value Tradesp. 63
Emerging Market Tradesp. 65
Other Tradesp. 67
The Portfolio of Tradesp. 68
The Collapsep. 71
Early Summer 1998p. 71
The Salomon Shutdownp. 73
The Russian Defaultp. 75
The Phone Callsp. 77
The Meriwether Letterp. 79
Buffett's Hostile Alaskan Offerp. 81
The Consortium Bailoutp. 82
Too Big to Failp. 84
Why did it Happen?p. 85
The John Meriwether Letterp. 89
The Warren Buffett Letterp. 93
The Fate of LTCM Investorsp. 95
General Lessons from the Collapsep. 101
Interconnected Crowdsp. 101
VaRp. 102
Leveragep. 105
Clearinghousesp. 108
Compensationp. 110
What's Size Got to do with it?p. 110
Contingency Capitalp. 113
The Fed is a Coordinator of Last Resortp. 114
Counterparty Due Diligencep. 115
Spread the Lovep. 115
Quantitative Theory Did not Cause the LTCM Collapsep. 116
Déjà Vup. 118
The Financial Crisis of 2008p. 121
The Quant Crisisp. 123
The Subprime Mortgage Market Collapsep. 127
What Was the Quant Crisis?p. 129
The Erratic Behavior of Quant Factorsp. 130
Standard Factorsp. 130
Quantitative Portfolio Factorsp. 133
Causes of the Quant Crisisp. 134
The Shed Showp. 137
The Bear Stearns Collapsep. 141
A Brief History of the Bearp. 141
Shadow Bankingp. 143
Window Dressingp. 144
Repo Powerp. 145
The Unexpected Hibernationp. 148
The Polar Springp. 150
Money for Nothing and Fannie and Freddie for Freep. 155
The Basic Businessp. 157
Where's the Risk?p. 158
CDO and CDO2p. 159
The Gigantic Hedge Fundp. 162
Big-Time Profitsp. 165
The U.S. Housing Bubblep. 168
The Circle of Greedp. 170
Real Estate Agents and Mortgage Lender Tricksp. 173
Home Ownersp. 177
Profits and Politiciansp. 177
The Media and Regulatorsp. 180
Grade Inflationp. 182
Commercial Banksp. 185
Freddie and Fannie's Foreclosurep. 186
Why Save Freddie and Fannie?p. 187
Did Anyone Know?p. 188
The Lehman Bankruptcyp. 191
The Wall Street Clubp. 191
Why was Lehman Next?p. 193
Business Exposurep. 196
A Chronology of the Gorilla's Deathp. 202
Double Down in Real Estatep. 203
Mildly Seeking Capitalp. 207
The Final Daysp. 213
A Classic Run on the Bankp. 217
Why Let Lehman Fail?p. 219
Who was at Fault?p. 222
Lehman Brothersp. 222
The Counterpartiesp. 224
The Government and Market Structurep. 225
The Legal Opinion on the Lehman Bankruptcyp. 225
Who Would have been Next?p. 226
The Spoils of having Friends in High Placesp. 227
The Absurdity of Imbalancep. 233
The Long-Dated Swap Imbalancep. 236
The Repo Imbalancep. 241
The 228 Wasted Resources and the Global Run on Banksp. 243
Asleep in Baselp. 245
Basel Ip. 246
The Conceptp. 246
The Problemsp. 247
Basel IIp. 248
The Conceptp. 248
The Problemsp. 249
Basel and the Financial Crisisp. 250
The LTCM Spinoffsp. 253
JWM Partners LLCp. 253
Platinum Grove Asset Managementp. 258
The Othersp. 259
The Copycat Fundsp. 262
The End of LTCM's Legacyp. 265
The Bear and the Gorilla Attackp. 265
November Rainp. 271
What Went Wrong?p. 274
Market Insanityp. 275
Bigger Shocksp. 281
Market Imbalancep. 282
Deleveragingp. 285
Coup de Gracep. 286
New and Old Lessons from the Financial Crisisp. 289
Interconnectedness and Crowdsp. 289
Leveragep. 291
Systemic Risk and Too Big to Failp. 293
Derivatives: The Good, the Bad, and the Uglyp. 294
Conflicts of Interestp. 297
Policy Lessonsp. 298
Risk Managementp. 301
Counterparty Interactionp. 302
Hedge Fundsp. 304
The Importance of Arbitragep. 306
The Aftermathp. 309
The Flash Crashp. 311
Backgroundp. 312
Flash Crash Theoriesp. 313
Fat Finger Theoryp. 314
High-Frequency Trader Theoryp. 314
Jittery Marketsp. 315
The Real Cause of the Flash Crashp. 315
The Waddell-Reed Tradep. 316
The Computer Glitchp. 317
Gone Fishingp. 319
The Aftermathp. 321
Getting Greekedp. 323
Members Onlyp. 324
The Conditionsp. 324
The Benefits of Membershipp. 328
The Drawbacks of Membershipp. 328
The Club's Early Yearsp. 330
Getting Greekedp. 332
Greek Choicesp. 333
Remain a Club Member and Order Financesp. 333
Ditch the Club and Keep the Debtp. 334
Ditch the Club and Ditch the Debtp. 334
The IMF and Euro Packagesp. 335
The EU's Futurep. 335
The Fairy-Tale Decadep. 339
I Hate Wall Streetp. 340
The Real Costs of the Financial Crisisp. 344
An Avatar's Life Forcep. 346
Economic System Choicesp. 349
The Crisis of Crowdsp. 350
The Wine Arbitragep. 351
Appendixesp. 353
The Mathematics of LTCM's Risk-Management Frameworkp. 355
A General Frameworkp. 355
A Numerical Examplep. 357
Measuring Riskp. 357
The Mechanics of the Swap Spread Tradep. 361
The Long Swap Spread Tradep. 361
The Short Swap Spread Tradep. 362
Derivation of Approximate Swap Spread Returnsp. 365
Methodology to Compute Zero-Coupon Daily Returnsp. 369
Methodology to Compute Swap Spread Returns from Zero-Coupon Returnsp. 373
The Mechanics of the On-the-Run and Off-the-Run Tradep. 375
The Correlations between LTCM Strategies Before and During the Crisisp. 377
The Basics of Creative Mortgage Accountingp. 379
The Business of an Investment Bankp. 381
Investment Bankingp. 381
Capital Marketsp. 382
Equitiesp. 382
Equity Cashp. 382
Equity Derivativesp. 383
Equity Financep. 384
Arbitrage (Proprietary Trading)p. 384
Fixed Incomep. 385
Government and Agency Obligationsp. 385
Corporate Debt Securities and Loansp. 385
High-Yield Securities and Leveraged Bank Loansp. 386
Money Market Productsp. 386
Mortgage- and Asset-Backed Securitiesp. 386
Municipal and Tax-Exempt Securitiesp. 387
Financingp. 387
Fixed-Income Derivativesp. 388
Lehman Brothers Bankp. 388
Foreign Exchangep. 388
Global Distribution (Global Sales)p. 389
Researchp. 389
Client Servicesp. 389
Private Client Services (Private Wealth Management)p. 389
Private Equityp. 390
Technologyp. 390
Corporate and Risk Managementp. 390
Summaryp. 391
The Calculation of the BIS Capital Adequacy Ratiop. 393
The General Calculationp. 393
An Examplep. 395
Notesp. 397
Glossaryp. 443
Bibliographyp. 451
About the Authorp. 465
Indexp. 467
Table of Contents provided by Ingram. All Rights Reserved.

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