13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (46 page)

13.
Financial sector data are from the
Federal Reserve Flow of Funds,
Tables L.1, L.109, L.126, and L.129, available at
http://www.federalreserve.gov/releases/z1/Current/
. Nominal GDP is from the Bureau of Economic Analysis,
supra
note 8, at Table 1.1.5. We used the end of 2007 rather than the end of 2008 because there was a major shift in assets from investment banks to commercial banks in 2008—because three major investment banks were bought by commercial banks (most of Lehman’s assets were bought by Barclays) and the other two major investment banks became bank holding companies.

14.
Federal Reserve Flow of Funds, supra
note 13, at Table L.1.

15.
Data are from Bank for International Settlements,
Semiannual OTC Derivatives Statistics,
available at
http://www.bis.org/statistics/derstats.htm
.

16.
Bureau of Economic Analysis,
supra
note 8, at Table 1.5.5.

17.
Ibid. at Table 6.16. We use corporate profits with inventory valuation adjustment, and exclude Federal Reserve banks from the financial sector. Profits are deflated using the GDP price index. Ibid. at Table 1.1.4.

18.
Quoted in Eric J. Weiner,
What Goes Up: The Uncensored History of Wall Street as Told by the Bankers, Brokers, CEOs, and Scoundrels Who Made It Happen
(New York: Little, Brown, 2005), 31.

19.
Bureau of Economic Analysis,
supra
note 8, at Tables 1.1.4, 6.3, 6.5; calculation by the authors. Banking includes financial sector less insurance, real estate, and holding companies. Annual compensation is total wage and salary accruals divided by full-time equivalent employees. See Figure 4-1 of this book.

20.
Michael Lewis,
Liar’s Poker: Rising Through the Wreckage on Wall Street
(New York: Penguin, 1990), 203.

21.
Frank Partnoy,
Infectious Greed: How Deceit and Risk Corrupted the Financial Markets
(New York: Henry Holt, 2004), 85.

22.
David Segal, “$100 Million Payday Poses Problem for Pay Czar,”
The New York Times,
August 1, 2009, available at
http://www.nytimes.com/2009/08/02/business/02bonus.html
.

23.
Poppy Trowbridge, “Paulson’s $3.7 Billion Pay Tops Hedge Fund Managers, Alpha Says,” Bloomberg, April 16, 2008, available at
http://www.bloomberg.com/apps/news?pid ewsarchive&sid=axHxRPBdtun8
. See also Gregory Zuckerman,
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
(New York: Broadway Business, 2009).

24.
Lewis,
Liar’s Poker, supra
note 20, at 119.

25.
Nicholas Brady (lecture, Institute of International Finance, Washington, D.C., April 25, 2009).

26.
Federal Reserve Flow of Funds, supra
note 13, at Table L.129.

27.
Thomas Philippon and Ariell Reshef, “Wages and Human Capital in the U.S. Financial Industry: 1909–2006” (working paper, December 2008), Figure 3, available at
http://pages.stern.nyu.edu/~tphilipp/research.htm
.

28.
On attempts to skirt regulation and government responses, see Richard Scott Carnell, Jonathan R. Macey, and Geoffrey P. Miller,
The Law of Banking and Financial Institutions,
fourth edition (Austin: Wolters Kluwer Law & Business, 2009), 20–23.

29.
Bureau of Economic Analysis,
supra
note 8, at Table 1.1.6.

30.
Quoted in Weiner,
What Goes Up, supra
note 18, at 162.

31.
Brett Duval Fromson, “Merrill Lynch: The Stumbling Herd,”
Fortune,
June 20, 1988, available at
http://money.cnn.com/magazines/
fortune/fortune_archive/1988/06/20/70693/index.htm
.

32.
Weiner,
What Goes Up, supra
note 18, at 166.

33.
Charles R. Geisst,
Wall Street: A History: From Its Beginnings to the Fall of Enron
(Oxford: Oxford University Press, 2004), 306.

34.
Ibid. at 315, 327.

35.
Jerry W. Markham,
A Financial History of the United States, Volume III: From the Age of Derivatives into the New Millennium (1970–2001)
(Armonk, NY: M. E. Sharpe, 2002), 6–7.

36.
Freddie Mac,
Primary Mortgage Market Survey Archives,
available at
http://www.freddiemac.com/pmms/pmms30.htm
.

37.
Gretchen Morgenson and Andrew Martin, “Citigroup Hires Mr. Inside,”
The New York Times,
October 10, 2009, available at
http://www.nytimes.com/2009/10/11/business/11hohlt.html
.

38.
Pub. L. 96-221. Interest ceilings on deposit accounts were phased out in Title II. State usury laws were preempted in Title V.

39.
Geisst,
Wall Street, supra
note 33, at 327.

40.
On academic finance, see Justin Fox,
The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
(New York: Harper Business, 2009); John Cassidy,
How Markets Fail: The Logic of Economic Calamities
(New York: Farrar, Straus & Giroux, 2009), chapter 7; Peter Bernstein,
Capital Ideas: The Improbable Origins of Modern Wall Street
(New York: Free Press, 1992); and Peter Bernstein,
Capital Ideas Evolving
(Hoboken, NJ: Wiley, 2007).

41.
Liabilities of the nonfinancial business sector in the United States grew from 68 percent of GDP in 1970 to 129 percent of GDP in 2007.
Federal Reserve Flow of Funds, supra
note 13, at Table L.101.

42.
Eugene F. Fama, “Efficient Capital Markets: A Review of Theory and Empirical Work,”
The Journal of Finance
25 (1970): 383–417. See also Bernstein,
Capital Ideas: Improbable Origins, supra
note 40, at 132–39.

43.
John Arlidge, “ ‘I’m Doing God’s Work.’ Meet Mr. Goldman Sachs,”
The Sunday Times
(London), November 8, 2009, available at
http://www.timesonline.co.uk/tol/
news/world/us_and_americas/article6907681.ece
.

44.
See Cassidy,
How Markets Fail, supra
note 40, at 93–94; Fox,
Myth of the Rational Market, supra
note 40, at 196–200.

45.
Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann, “Noise Trader Risk in Financial Markets,”
The Journal of Political Economy
98 (1990): 703–38. The concept of noise traders was first posited in Albert S. Kyle, “Continuous Auctions and Insider Trading,”
Econometrica
53 (1985): 1315–35.

46.
Fischer Black, “Noise,”
The Journal of Finance
41 (1986): 529–43. See also Fox,
Myth of the Rational Market, supra
note 40, at 201–2.

47.
Stanley Fischer, “Capital Account Liberalization and the Role of the IMF” (lecture, IMF Annual Meetings, September 19, 1997), available at
http://www.imf.org/external/np/speeches/1997/091997.htm
.

48.
Jagdish Bhagwati, “The Capital Myth: The Difference Between Trade in Widgets and Trade in Dollars,”
Foreign Affairs,
May–June 1998.

49.
On the strength of this belief and the lack of empirical support at the time, see Dani Rodrik and Arvind Subramanian, “Why Did Financial Globalization Disappoint?”
IMF Staff Papers
56 (2009), available at
http://www.piie.com/publications/papers/subramanian0308.pdf
.

50.
For a summary of Friedman’s views, see Cassidy,
How Markets Fail, supra
note 40, at chapter 6.

51.
Reagan, Inaugural Address,
supra
note 1.

52.
Edward Cowan, “How Regan Sees the Budget,”
The New York Times,
October 18, 1981.

53.
Ronald Reagan,
Remarks on Signing the Garn–St. Germain Depository Institutions Act of 1982,
October 15, 1982, available at
http://www.reagan.utexas.edu/archives/speeches/1982/101582b.htm
.

54.
The Garn–St. Germain Depository Institutions Act of 1982, Pub. L. 97-320.

55.
Ibid., at Title VIII.

56.
OCC regulation 46 F.R. 18932-01.

57.
OCC regulation 48 F.R. 40698-01, taking effect September 9, 1983.

58.
Markham,
Financial History,
Volume III,
supra
note 35, at 132.

59.
See Alyssa Katz,
Our Lot: How Real Estate Came to Own Us
(New York: Bloomsbury, 2009), 15–21.

60.
Pub. L. 98-440.

61.
Richard K. Green and Susan M. Wachter, “The American Mortgage in Historical and International Context,”
Journal of Economic Perspectives
19 (2005): 93–114, at 98–99.

62.
Charles R. Geisst,
Undue Influence: How the Wall Street Elite Put the Financial System at Risk
(Hoboken, NJ: Wiley, 2005), 222–23; William S. Haraf, “Bank and Thrift Regulation,”
Regulation: The Cato Review of Business and Government,
available at
http://www.cato.org/pubs/regulation/regv12n3/reg12n3-haraf.html
.

63.
Federal Deposit Insurance Corporation, “Bank Failures and Assistance Transactions,”
Historical Statistics on Banking,
at
http://www2.fdic.gov/hsob/Select Rpt.asp?EntryTyp=30
.

64.
Markham,
Financial History,
Volume III,
supra
note 35, at 171. The $54 billion estimate does not include the resolution costs for some institutions where those costs were not available. George A. Akerlof, Paul M. Romer, Robert E. Hall, and N. Gregory Mankiw, “Looting: The Economic Underworld of Bankruptcy for Profit,”
Brookings Papers on Economic Activity
24 (1993): 1–73.

65.
Markham,
Financial History,
Volume III,
supra
note 35, at 111.

66.
On the investigation of Milken and Drexel Burnham Lambert, see James B. Stewart,
Den of Thieves
(New York: Simon & Schuster, 1992).

67.
Securities Industry and Financial Markets Association Research and Statistics,
U.S. Corporate Bond Issuance—Investment Grade and High Yield,
available at
http://www.sifma.org/research/research.aspx?ID=10806
.

68.
Mortgage assets held by issuers of asset-backed securities.
Federal Reserve Flow of Funds, supra
note 13, at Table L.126.

69.
Center for International Securities and Derivatives Markets, “The Benefits of Hedge Funds: 2006 Update,” May 2006, available at
http://cisdm.som.umass.edu/research/hedge.shtml
.

70.
Alternative Investment Management Association, “AIMA’s Roadmap to Hedge Funds,” November 2008, available at
http://www.aima.org/en/knowledge_centre/education/aimas-roadmap-to-hedge-funds.cfm
.