financial engineering

How I Became a Quant: Insights From 25 of Wall Street's Elite
by Richard R. Lindsey and Barry Schachter
Published 30 Jun 2007

JWPR007-Lindsey April 30, 2007 16:14 328 JWPR007-Lindsey April 30, 2007 16:23 Chapter 24 John F. ( Jack) Marshall Senior Principal of Marshall, Tucker & Associates, LLC, and Vice Chairman of the International Securities Exchange W ithin the financial engineering community, I am perhaps best known to many as the person who gave definition to the field. My effort to define financial engineering began when I undertook the challenge of writing a book, with Vipul Bansal, titled Financial Engineering. (The publisher, a division of Simon & Schuster, later added the rather arrogant subtitle A Complete Guide to Financial Innovation.) We began this book in 1988 in response to our realization that finance, as we knew it and as we had been teaching it, was undergoing profound and fundamental change.

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The first step in the writing process was to interview people we considered financial engineers. I recall so many interviews that began 329 JWPR007-Lindsey 330 April 30, 2007 16:23 h ow i b e cam e a quant with the interviewee asking, “Financial what?” That book effort gradually led us to recognize that there was a need for a professional society to “foster the emerging profession of financial engineering.” This, in turn, led me, in 1991, along with Vipul and Robert J. Schwartz, to organize the International Association of Financial Engineers, Inc. (IAFE). We officially launched the organization on January 1, 1992, with 40 founding members, many of whom were the people we interviewed in the writing process.

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They later agreed to volunteer their time to serve as the editor and coeditor of the IAFE’s journal, the Journal of Financial Engineering. This journal served as the flagship publication of the IAFE until it was merged with the Journal of Derivatives. In the early 1990s, the IAFE undertook to develop a model curriculum for degree programs in financial engineering. I tried for two years to persuade the finance faculty at my university that this really was a new discipline and there was a need for degree programs in it. With the encouragement of a sympathetic dean, I spent the next year fleshing out a detailed curriculum and course syllabi for an MS degree program in financial engineering. Unfortunately, I could never win over a sufficient number of the faculty to get the program approved.

The Quants
by Scott Patterson
Published 2 Feb 2010

Rothman had described the quant meltdown as something models predicted would happen once in ten thousand years—but it had taken place every day for several days in a row. To Taleb, that meant something was wrong with the models. “These so-called financial engineers experience events that can only happen once, in the history of mankind, according to the laws of probability, every few years,” he told the room (full, of course, of financial engineers). “Something is wrong with this picture. Do you see my point?” Another slide showed a giant man sitting on the right side of a scale, tipping it heavily, while a group of tiny people scatter and fall on the left side.

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Worse, they believed their models were perfect reflections of how the market works. To them, their models were the Truth. Such blind faith, he warned, was extremely dangerous. In 2003, after leaving Oxford, he launched the CQF program, which trained financial engineers in cities from London to New York to Beijing. He’d grown almost panicky about the dangers he saw percolating inside the banking system as head-in-the-clouds financial engineers unleashed trillions of complex derivatives into the system like a time-release poison. With the new CQF program, he hoped to challenge the old guard and train a new cadre of quants who actually understood the way financial markets worked—or, at the very least, understood what was and wasn’t possible when trying to predict the real market using mathematical formulas.

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The world had little idea how close the financial system had come to a catastrophic seizure. The critical factor behind the crash of Black Monday on October 19, 1987, can be traced to a restless finance professor’s sleepless night more than a decade earlier. The result of that night would be a feat of financial engineering called portfolio insurance. Based on the Black-Scholes formula, portfolio insurance would scramble the inner workings of the stock market and set the stage for the single largest one-day market collapse in history. On the evening of September 11, 1976, Hayne Leland, a thirty-five-year-old professor at the University of California at Berkeley, was having trouble sleeping.

My Life as a Quant: Reflections on Physics and Finance
by Emanuel Derman
Published 1 Jan 2004

Quants and their cohorts practice "financial engineering"-an awkward neologism coined to describe the jumble of activities that would better be termed quantitative finance. The subject is an interdisciplinary mix of physics-inspired models, mathematical techniques, and computer science, all aimed at the valuation of financial securities. The best quantitative finance brings real insight into the relation between value and uncertainty, and it approaches the quality of real science; the worst is a pseudoscientific hodgepodge of complex mathematics used with obscure justification. Until recently, financial engineering wasn't really a subject at allwhen I entered the field in 1985, it didn't have a name and was something one learned on the job at an investment bank.

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"Stories can be wrong, but I'm uncomfortable trading without one... Looking only or primarily at their profit and loss statements is a recipe for disaster " He wanted to reward intelligence and long-term thinking rather than the short-term vagaries of markets. In his speech on being named the Financial Engineer of the Year by the International Association of Financial Engineers (IAFE) in 1994, Fischer said that he had always preferred applied research to academic. University professors, he claimed, should be paid and hired for their teaching, not their research; he believed that their desire to teach well would then lead them to do good research.

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Soon Risk was organizing expensive courses on exotic options, a clever arbitrage by which they charged quants from one set of investment banks to listen to the lectures of quants from another set, while Risk pocketed the fee. Other journals sprang up, too. The International Association of Financial Engineers, a new professional organization of quants, began to specify an educational syllabus suitable for the training of a quant. New textbooks and Master's of Financial Engineering programs sprouted and flourished at the increasing numbers of universities that, sensing a need, began to cater to those willing to pay to learn quantitative finance. In 1985 when I entered Will Street it was amateur heaven, a fluidly makeshift field filled with retreads from other disciplines who could learn quickly, solve equations, and write their own programs.

Capital Ideas Evolving
by Peter L. Bernstein
Published 3 May 2007

Retirement Economics is nothing new for Sharpe. In 1998, he was cofounder of Financial Engines, a successful Silicon Valley business venture to help individuals make the kinds of choices they confront as potential retirees—especially asset allocation and strategies to manage the risks they face. Financial Engines uses a computerized program, based on Sharpe’s contributions to portfolio theory and asset pricing. The output provides individuals with the same kind of sophisticated advice long available to institutional investors, high-ranking corporate officers, and wealthy people. Financial Engines is available, for example, at E*Trade, and for Vanguard investors with Admiral accounts, but many corporations and financial advisers also provide it for the benefit of their employees.

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Deeply rooted in Capital Ideas, outcome-investing is just plain English for what institutional investors describe as mean/variance analysis—a mathematical system for finding the highest expected return for any given level of risk exposure. Unlike widely advertised programs of financial advisers and brokerage houses, Financial Engines does not provide a definitive answer as to whether the individual will have enough money to provide for the needs of retirement. Rather, bern_c07.qxd 98 3/23/07 9:05 AM Page 98 THE THEORETICIANS Financial Engines furnishes the individual with the probable consequences of individual decisions based on a range of outcomes with which a person would be comfortable. The program is sophisticated, exciting, and crystal clear in the information it provides, and it is constantly being revised and improved by a skilled staff.

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As a financial adviser, the company has none of the usual conf licts of interest because it is beholden to no one—indeed, it is a popular tool among professional financial planners as well as among individuals who have access to it.* Employers originally retained Financial Engines to make available the expertise of more sophisticated investors to employees struggling with the complexities of a 401(k) plan and the myriad of investment products offered to them. Under these arrangements, and in addition to an online service, employees receive a complete personalized projection once a year showing how their plan is doing, not just in terms of the year’s investment results, but also in achieving their ultimate retirement goals. Even with the kinds of help the Financial Engines model can provide, most people today find these kinds of problems too complicated and lose interest.

A Primer for the Mathematics of Financial Engineering
by Dan Stefanica
Published 4 Apr 2008

Financial Engineering Advanced Background Series Published or forthcoming 1. A Primer for the Mathematics of Financial Engineering, by Dan Stefanica 2. Numerical Linear Algebra Methods for Financial Engineering Applications, by Dan Stefanica 3. A Probability Primer for Mathematical Finance, by.Elena Kosygina 4. Differential Equations with Numerical Methods for Financial Engineering, by Dan Stefanica A PRIMER for the MATHEMATICS of FINANCIAL ENGINEERING DAN STEFANICA Baruch College City University of New York FE PRESS New York FE PRESS New York www.fepress.org Information on this title: www.fepress.org/mathematicaLprimer ©Dan Stefanica 2008 All rights reserved.

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The connection built during their studies has continued over the years, and as alumni of the program their contribution to the continued success of our students has been tremendous. This is the first in a series of books containing mathematical background needed for financial engineering applications, to be followed by books in N umerical Linear Algebra, Probability, and Differential Equations. Dan Stefanica New York, 2008 Acknow ledgments I have spent several wonderful years at Baruch College, as Director of the Financial Engineering Masters Program. Working with so many talented students was a privilege, as well as a learning experience in itself, and seeing a strong community develop around the MFE program was incredibly rewarding.

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Dan Stefanic a IBaruch MFE Program web page: http://www.baruch.cuny.edu/math/masters.html QuantNetwork student forum web page: http://www.quantnet.org/forum/index.php New York, 2008 xv How to Use This Book While we expect a large audience to find this book useful, the approach to reading the book will be different depending on the background and goals of the reader. Prospective students for financial engineering or mathematical finance programs should find the study of this book very rewarding, as it will give them a head start in their studies, and will provide a reference book throughout their course of study. Building a solid base for further study is of tremendous importance. This book teaches core concepts important for a successful learning experience in financial engineering graduate programs. Instructors of quantitative finance courses will find the mathematical topics and their treatment to be of greatest value, and could use the book as a reference text for a more advanced treatment of the mathematical content of the course they are teaching.

Tailspin: The People and Forces Behind America's Fifty-Year Fall--And Those Fighting to Reverse It
by Steven Brill
Published 28 May 2018

INSURING AGAINST RECKLESS GAMBLES Two toxic ingredients that would be key factors in America’s tailspin had come together: A preoccupation with financial engineering aimed at enabling ever more aggressive betting on paper instruments had combined with still more engineering that allowed for those facilitating the bets to avoid accountability for the risks they were creating—risks whose consequences would ultimately be suffered far beyond the financial community. In fact, there would soon be a way for wary buyers of mortgage-backed securities to pass off their own risk completely. The financial engineering hero this time was Blythe Masters, a twenty-five-year-old, Cambridge-educated banker in JPMorgan’s London office.

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Then, in a way unprecedented in history, they were able to consolidate their winnings, outsmart and co-opt the government that might have reined them in, and pull up the ladder so more could not share in their success or challenge their primacy. By continuing to get better at what they do, by knocking away the guardrails limiting their winnings, by aggressively engineering changes in the political landscape, and by dint of the often unanticipated consequences of the breakthroughs they pulled off in legal rights, financial engineering, digital technology, political strategy, and so many other areas, they created a nation of moats that protected them from accountability and from the damage their triumphs caused in the larger community. Most of the time, our elected and appointed representatives were no match for these overachievers.

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Although the chapters that follow each focus on one element of the breakdown, the elements were interrelated. For example, the rise of meritocracy that created a newly entrenched aristocracy of knowledge workers powered the transformation of America into a finance-dominated economy. That in turn created still more demand for financial engineers and lawyers, which further entrenched the meritocracy and widened income inequality. Similarly, the emergence of the First Amendment as a tool enabling unlimited money to finance campaign contributions and to pay for lobbyists to dominate Washington allowed business interests to prevail in multiple battles against the middle class, including fights over unionization.

The Volatility Smile
by Emanuel Derman,Michael B.Miller
Published 6 Sep 2016

A secondary motivation for writing this book originates in the great financial crisis of 2007–2008, which began with the collapse of the mortgage collateralized debt obligation (CDO) market, whose structured credit products were valued using financial engineering techniques. When the crisis began, some pundits blamed the practice of financial engineering for the mortgage market’s meltdown. Paul Volcker, whose grandson was a financial engineer, wrote the following paragraph as part of an otherwise sensible speech he gave in 2009: A year or so ago, my daughter had seen . . . some disparaging remarks I had made about financial engineering. She sent it to my grandson, 1 2 THE VOLATILITY SMILE who normally didn’t communicate with me very much.

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Engineering is about using those principles, constructively, to create functional devices. What about financial engineering? In a logically consistent world, financial engineering, layered above a solid base of financial science, would be the study of how to create useful financial devices (convertible bonds, warrants, volatility swaps, etc.) that perform in desired ways. This brings us to financial science, the putative study of the fundamental laws of financial objects, be they stocks, interest rates, or whatever else your theory uses as constituents. Here, unfortunately, be dragons. Financial engineering rests upon the mathematical fields of calculus, probability theory, stochastic processes, simulation, and Brownian motion.

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These products include equity options granted to executives, embedded derivatives in convertible bonds, and many other customized fixed income and equity derivatives. Prior to this, he studied financial engineering at Columbia University, and physics at the University of Toronto. xv CHAPTER 1 Overview      Financial models in light of the great financial crisis. The difficulties of option valuation. An introduction to the volatility smile. Financial science and financial engineering. The purpose and use of models. INTRODUCTION Our primary aim in this book is to provide the reader with an accessible, not-too-sophisticated introduction to models of the volatility smile.

Mathematics for Finance: An Introduction to Financial Engineering
by Marek Capinski and Tomasz Zastawniak
Published 6 Jul 2003

Howie Sets, Logic and Categories P. Cameron Special Relativity N.M.J. Woodhouse Symmetries D.L. Johnson Topics in Group Theory G. Smith and O. Tabachnikova Topologies and Uniformities I.M. James Vector Calculus P.C. Matthews Marek Capiński and Tomasz Zastawniak Mathematics for Finance An Introduction to Financial Engineering With 75 Figures 1 Springer Marek Capiński Nowy Sa
cz School of Business–National Louis University, 33-300 Nowy Sa
cz, ul. Zielona 27, Poland Tomasz Zastawniak Department of Mathematics, University of Hull, Cottingham Road, Kingston upon Hull, HU6 7RX, UK Cover illustration elements reproduced by kind permission of: Aptech Systems, Inc., Publishers of the GAUSS Mathematical and Statistical System, 23804 S.E.

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Option Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 8.1 European Options in the Binomial Tree Model . . . . . . . . . . . . . . . 174 8.1.1 One Step . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 8.1.2 Two Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 8.1.3 General N -Step Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 8.1.4 Cox–Ross–Rubinstein Formula . . . . . . . . . . . . . . . . . . . . . . . 180 8.2 American Options in the Binomial Tree Model . . . . . . . . . . . . . . . 181 8.3 Black–Scholes Formula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 9. Financial Engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 9.1 Hedging Option Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 9.1.1 Delta Hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 9.1.2 Greek Parameters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 9.1.3 Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 9.2 Hedging Business Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 9.2.1 Value at Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 9.2.2 Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 9.3 Speculating with Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 9.3.1 Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 9.3.2 Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 10.

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The option price is computed in two ways, as a function of the time T remaining before the option is exercised: a) (solid line) from the Black–Scholes formula for T between 0 and 1; b) (dots) using the Cox–Ross–Rubinstein formula with T increasing from 0 to 1 in N = 10 steps of duration τ = 0.1 each; the discrete growth rates for each step are computed using formulae (3.7). Even with as few as 10 steps there is remarkably good agreement between the discrete and continuous time formulae. 9 Financial Engineering This chapter shows some applications of derivative securities to managing the risk exposure in various situations. The presentation will be by means of examples and mini case studies. Even though these are concerned with very particular circumstances, the methods are applicable to a wide range of tasks handled by financial managers.

Makers and Takers: The Rise of Finance and the Fall of American Business
by Rana Foroohar
Published 16 May 2016

Eleven percent of the undergraduate class at MIT, for example, now goes to Wall Street, and despite the 2008 crisis, financial engineering is the fastest-growing field at many of the country’s best engineering schools.58 “Not only are these people not making scientific progress,” says Greg Smith, the former Goldman Sachs quantitative trader who famously published his resignation letter in the New York Times, “but the complex derivatives products they create are being sold to unsuspecting public pension funds and investors [who don’t know any better]. So there is actually an argument to be made that diverting our smartest PhDs to finance is a waste, at best, and detrimental to [overall economic growth] at worst.”59 It’s an argument that even some of the financial engineers themselves would agree with. Derman, who runs the financial engineering program at Columbia, says that despite the blowback against risky Wall Street trading in the wake of the financial crisis, demand for his classes is as strong as ever. The only thing that’s changed, says Derman, “is that students today aren’t content to be just traders at a bank; they want to be principals [meaning, heads of their own hedge funds].”

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Part of the reason is that Apple hasn’t introduced any truly game-changing technology since Jobs’s death in 2011. That has at times depressed the company’s stock price and led to concerns about its long-term future, despite the fact that it still sells a heck of a lot of devices. It’s a chicken-and-egg cycle, of course. The more a company focuses on financial engineering rather than the real kind, the more it ensures it will need to continue to do so. But right now, what Apple does have is cash. Which gets us to that $17 billion. Apple didn’t need that money to build a new plant or to develop a new product line. It needed the funds to buy off investors by repurchasing stock and fattening dividends, which would goose the company’s lagging share price.

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David Einhorn, the hedge fund manager who’d long been complaining that the company wasn’t sharing enough of its cash hoard, inadvertently put it very well when he said that Apple should apply “the same level of creativity” on its balance sheet as it does to producing revolutionary products.1 To him, and to many others in corporate America today, one kind of creativity is just as good as another. I’ll argue differently in this book. The fact that Apple, probably the best-known company in the world and surely one of the most admired, now spends a large amount of its time and effort thinking about how to make more money via financial engineering rather than by the old-fashioned kind, tells us how upside down our biggest corporation’s priorities have become, not to mention the politics behind a tax system that encourages it all. This little vignette also demonstrates how detached many of America’s biggest businesses have become from the needs and desires of their consumers—and from the hearts and minds of the country at large.

Solutions Manual - a Primer for the Mathematics of Financial Engineering, Second Edition
by Dan Stefanica
Published 24 Mar 2011

The Solutions Ivlanual will be an important resource for prospective financial engineering graduate students. Studying the material from the Math Primer in tandem with the Solutions Manual would provide the solid mathematical background required for successful graduate studies. The author has been the Director of the Baruch College MFE Program 1 since its inception in 2002. Over 90 percent of the graduates of the Baruch IvIFE Program are currently employed i口 the financial industry. "A Primer for the Ivlathematics of Financial Engineering" and this Solutions Manual are the first books to appear in the Financial Engineering Advanced Backgrou日d Series.

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Books on Numerical Linear Algebra , on Probability, and on Differential Equations for financial engineering applications are forthcommg. Dan Stefanica New York , 2008 lBaruch MFE Program web page: http://www.baruch.cuny.edu/math/master 山tml QuantNetwork student forum web page: httr旷/ www.quantnet.org/forum/index 抖lp IX Acknowledgments "A Primer for the Mathematics of Financial Engineering" published in April 2008 , is based on material covered in a mathematics refresher course I taught to students entering the Financial Engineering Masters Program at Baruch College. Using the book as the primary text in the July 2008 refresher course was a challenging but exceptionally rewarding experience.

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Bibliography by substitu161 . . . . . . . . . 161 . . . . . . . . . 171 . . . . . . . . . 173 Implied volatil179 . . . . . . . . . . . 179 . . . . . . . . . . . 197 . . . . . . . . . . . 198 203 Preface The addition of this Solutions Ivlanual to "A Primer for the Mathematics of Financial Engineering" offers the reader the opportunity to undertake rigorous self-study of the mathematical topics presented in the Ivlath Primer , with the goal of achieving a deeper understanding of the financial applications therein. Every exercise from the Math Primer is solved in detail in the Solutions Manual. Over 50 new exercises are included , and complete solutions to these supplemental exercises are provided. 如1any of these exercises are quite challenging and offer insight that promises to be most useful in further financial engineering studies as well as job interviews.

King Icahn: The Biography of a Renegade Capitalist
by Mark Stevens
Published 31 May 1993

That was really going to take us to the top.” From Ashwood’s perspective, those who trusted Carl to rebuild TWA were naïve from the outset. “A leopard doesn’t change his spots. Icahn was, and is, a financial engineer. He can’t run a business. He can’t run a corner deli. If he ran the deli and the freezer broke, he wouldn’t fix it. He’d try to sell the spoiled milk rather than have the freezer fixed.” Through his financial engineering, Icahn had created a Frankenstein monster of ill will within his own organization. Soon after the privatization, viscous slurs were scrawled on the walls of TWA hangars and an oven in a jumbo jet’s lower galley read, “Hey, Carl, this one’s for you.”

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With this idea Icahn launched his first major move to control corporate destinies, and in turn, to earn the kind of windfall profits he believed were awaiting those gifted strategists who saw the opportunities in the system and had the gumption to exploit them. Standing at the vanguard of a new form of financial engineering that would have a cataclysmic impact on American capitalism, Icahn would fire his opening salvos at Baird & Warner, a slumping real estate investment trust (REIT), and a sleepy, Mansfield, Ohio-based range and oven maker, the Tappan Company. When Icahn launched his offensive against Baird & Warner Mortgage & Realty Investors, the Chicago-based REIT was run by John Baird, a prominent figure in the local business community.

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In the past, the best and brightest in America had built their wealth and their reputations by creating powerful, innovative companies that became world leaders in commerce and industry. But because intense foreign competition and corporate inefficiencies were taking a heavy toll on the traditional means of creating wealth, financial engineering emerged as an appealing alternative. Rather than financing companies forced to compete with the increasingly potent Japanese, Germans and Koreans, growing ranks of U.S. bankers switched allegiance to the financial alchemists who were promising and delivering bigger, faster gains with minimum risk.

Extreme Money: Masters of the Universe and the Cult of Risk
by Satyajit Das
Published 14 Oct 2011

In 2001, when the Internet bubble burst, Merrill was there front and center. The pattern would repeat with CDO investments in 2008 under Stan O’Neal. In 1987 a trade journal warned: “For Wall Street in general, Merrill’s loss is a reminder of the dangers of financial engineering.... The pace of innovation has been breathtaking. Unfortunately, the growth in understanding has been less impressive.”7 No one understood what economic commentator James Grant stated: “Financial engineering is the science of structuring cash flows...credit analysis is the art of getting paid.”8 Risk would return over and over via new structures, each time bigger and more toxic than the last.

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See also money FIBS (France, Italy, Britain, and the States), 354 FiDi (Financial District), 80 Fiennes, Ralph, 153 finance careers, 307-313 bonuses, 317-318 compensation, 313-320 finance certifications, 309-310 Financial Accounting Standard Board (FASB), 286 financial alchemy, 131-132 financial centers, 82-88 financial crises, preparation for, 264-278 Financial Crisis Inquiry Commission (FCIC), 291, 302, 325 financial districts, London, 53 financial engineering, 55-57 financial engineers, 308 financial frontiers, 52 financial gravity, 347 financial groupthink, 296-297 financial institutions, networks, 270 financial markets, deregulation of, 279 financial news, 89 newspapers, 89-91 video, 91-99 financial pornography, 92 Financial Products (FP), 230 Financial Services Authority (FSA), 81, 236 financial sponsors, 154 financial statements bad loans (2008), 343-344 falsifying, 289-291 financial supermarkets, 67, 75 financial system, deregulation of, 66 Financial Times (FT), 38, 89, 206, 280, 298, 310, 329-330, 351 Joel Stern, 124 ShokcGen, 226 financialization, 20, 38, 41, 54-57 General Electric (GE), 59-62 Japan, 38-39 management, 63 financiers celebrity, 324-326 end of bubble, 332 Fink, Lawrence, 170 firewalls, 66 First Boston, 134, 170 First Executive Insurance, 145 First Investors Fund for Income, 145 First World War, 34, 74, 103 first-to-default (FtD) swaps, 220-221 Fisher, Irving, 35, 98, 268 Fitch, 141, 282 Fitzgerald, F.

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—James Pressley, Bloomberg “Long before the 2008-09 credit crisis and collapse, one of the strongest warnings about the dangers of derivatives came from Satyajit Das.... it reads more like a crime novel than a financial book.” —Barry Ritholtz “...a scalpel of a book that pulls back the skin on the derivatives and risk management industry to expose the blood, guts and circulatory system underneath.” —Nina Mehta, Financial Engineering News “Traders, Guns & Money is one the most entertaining investment books I’ve read in a long time...this is possibly the best insider account of a career in investments since Michael Lewis’s book Liar’s Poker.” —www.dna.bloggingstocks.com “...this revealing insider’s account ...the book is peppered with cautionary tales ...Das wittily exposes the mechanisms behind the arcane language....”

The Price of Time: The Real Story of Interest
by Edward Chancellor
Published 15 Aug 2022

The numbers in the FinEng case study are hard to follow for anyone unfamiliar with corporate finance, but the important point is that the use of low-cost debt to repurchase shares artificially boosts profitability and stock valuations. Given that executive compensation is generally linked to measures that are enhanced by financial engineering – such as returns on equity, EPS growth and stock performance – senior management has a strong incentive to play the game. Short-term investors, bankers and senior corporate executives benefit from this financial engineering, but no one else is better off. The impulse for buybacks also came from outside the firm. Companies that underperformed in the stock market became takeover targets for competitors or private equity firms.

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The nation’s money supply and credit expanded rapidly while interest rates were held well below the economy’s GDP growth rate.5 Business investment soared. Japanese corporations, which issued foreign currency warrant bonds, enjoyed a negative cost of borrowing after swapping the proceeds back into yen. Financial engineering, known as zaitech, became commonplace: companies borrowed to speculate in stocks through their brokerage trust or tokkin accounts. Easy money fuelled a bubble in equities and property. The real estate value of the imperial palace in Tokyo was famously estimated to have surpassed that of the entire state of California.

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Too much debt accumulates. After the crisis, central bankers tried out new monetary measures – quantitative easing, paying banks interest on their reserves, zero and negative interest rates, and various other innovations. They stamped on the gas pedal whenever the economy lost momentum, or when the financial engine threatened to stall. The interest rate was floored but still the economic juggernaut continued to slow. All the signs pointed in the direction of ever lower rates. How to get back on track, Borio was asked. ‘If I were you,’ he replied, ‘I would not start from here.’22 It’s an old joke. He feared that monetary policy was losing efficacy.

Money Changes Everything: How Finance Made Civilization Possible
by William N. Goetzmann
Published 11 Apr 2016

He and the other directors were liable for the debts of the company. His anti-British sentiments may have been passed on to his son. In some places, however, American financial engineers got around the prohibition. In 1766, Maryland replaced its notes with a new security that could be redeemed for sterling—when presented in Britain! FOUNDING FATHERS The Bubble Act was extended to the colonies in 1741 to restrict financial engineering, but despite this regulatory restriction, American entrepreneurs pushed the financial envelope, particularly in land investments. America was one of the few exceptions to the global retreat from using stocks to finance business.

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However, the fundamental theme of economic expropriation by the state, legitimized by his clever use of Chinese history and ancient precedent—from invocations of the Guanzi to adaptations of the Zhouli—became part of the new lexicon of Chinese government rule. He may not have been the first to introduce the use of financial engineering in the service of the central state, but few politicians refined it as well as he did, using timeless and familiar populist rhetoric. CHINESE INNOVATION THROUGH WESTERN EYES Although it may be difficult for us today to imagine a world without paper money, we have a rare opportunity to see how wondrous this financial innovation appeared to a contemporary foreign observer.

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The only thing worse than selling life annuities at the wrong price is selling them to clever people who know precisely how best to exploit the mistake to their advantage. By 1770, European financiers had all read the new research on probability and life annuity valuations, even if government officials had not. With each new French government issue of life annuities, financial engineers in Holland and Switzerland bought them up and then issued bonds collateralized by the annuity cash flow. The securities issued by syndicates of Geneva-based bankers were among the most common. A Geneva investment syndicate would purchase French life annuities on the lives of thirty young girls at a time—trente demoiselles.

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better
by Andrew Palmer
Published 13 Apr 2015

As policy makers try to find a way to avoid bailing out banks in a future financial crisis, one answer is a new security issued by banks called “contingent convertible” bonds, or CoCos for short. The idea behind CoCos is that bondholders are forcibly converted into shareholders when a bank’s level of capital falls below a certain threshold, so that when a financial institution gets into trouble, its equity cushion is automatically plumped up. Financial engineering is one answer to a crisis partly caused by financial engineering. 21. Saumitra Jha, “Sharing the Future: Financial Innovation and Innovators in Solving the Political Economy Challenges of Development” (Stanford Graduate School of Business Research Paper 2093, 2011). 22. Alan Morrison and William Wilhelm Jr., Investment Banking: Institutions, Politics and Law (Oxford: Oxford University Press, 2007). 23.

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Some think this model—in which philanthropists, or perhaps government itself, guarantee that a portion of investors’ money is returned—is the way to bring in more capital. Another option is to blend the returns from SIBs with other assets. Allia, a British charity devoted to social investment, made a SIB available to retail investors for the first time in 2013. It made the risk acceptable with a simple bit of financial engineering. Of every £1,000 invested in the Allia bond, £780 goes to a fixed-rate loan to a social-housing provider, which when repaid with interest will give investors their £1,000 back. Another £200 goes into the SIB providing multisystemic therapy to troubled children in Essex, which offers investors the potential for an additional return.

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This “translational” period, which moves a promising piece of academic research into the early stages of testing for use in humans, is known to the industry as “the valley of death.” It is this part of the drug-discovery process, when risks are highest and capital is scarcest, that Andrew Lo wants to address. His goal is to unlock billions of dollars of funding for early-stage drugs. And to drum up interest, he and others have formulated a provocative question: “Can financial engineering cure cancer?”2 Lo is not an ivory-tower zealot. Well before the financial crisis, he was struck by the failure of the “efficient-market hypothesis” to grapple with the basics of human behavior. The essence of the efficient-markets hypothesis, which was formulated in 1970 by a University of Chicago economist named Eugene Fama, who shared the 2013 Nobel Prize for Economics, is that markets are rational.

Sabotage: The Financial System's Nasty Business
by Anastasia Nesvetailova and Ronen Palan
Published 28 Jan 2020

Banks’ less serious misdeeds include, but are not confined to, the following: misleading statements to investors involving capital-raising rights issues; abusive lending practices to small businesses; manipulation of gold prices; misreporting related to Barclays emergency capital raising; a banker stealing confidential regulatory information; collusion with Greek authorities to mislead EU policymakers on meeting euro criteria; financial engineering with the aim of moving Italian debt off balance sheet; manipulation of risk models with the aim of minimizing reported risk-weighted assets/capital requirements; filing false statements with the SEC and keeping false books and records, or what has become known as the ‘London Whale’ story.10 The list is likely to be incomplete by the time this book is published.

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Some free-market economists conclude, therefore, that one can make profit in a competitive market only through innovation, a process to be nurtured and encouraged. There is no shortage of advice on how to do just that on bookshop shelves and online. There are, for instance, quantitative suggestions. Here, the competitive edge and high profits can be delivered by a sophisticated command of financial engineering and scientific precision in management. In the world of business studies the profitability conundrum can be resolved by strategic moves. Here, Keith Ward’s highly popular manual, now into its fourth edition, offers a typical solution: In order to create this value, the company has to develop and then exploit one or more sustainable competitive advantages, which will allow it to earn super profits on a continuing basis.

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Even if they know the client may be putting themselves into great hardship by entering into a mortgage agreement, or even if they know the borrower is likely to be unable to pay, mortgage advisers have an incentive to try and persuade the clients to take a mortgage, and help them present their affairs in such a way that mortgage companies would issue the mortgages. Aware of such conflicts of interest, mortgage companies, in turn, devised schemes for passing the mortgages on to others. Enabled by the policies of deregulation and centred on the use of sophisticated financial engineering, these techniques transformed the financial system from the kind that Veblen analysed at the dawn of finance capitalism to its modern incarnation. Despite the great transformation, however, sabotage remains a central principle of business making in finance in the twenty-first century. Veblen wrote about industrial sabotage focusing on the business processes of the late nineteenth and early twentieth centuries.

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives
by Satyajit Das
Published 15 Nov 2006

Managers could have been forgiven for thinking that the market only rewarded financial engineering not basic, if boring, business initiatives. Like Skinner’s rats, they pressed the button that gave them food. The fact that their compensation was increasingly linked to the share price through share options meant that in the future companies concentrated on financial rather than real engineering. Equity analysts increasingly couldn’t differentiate between ‘real’ earning and all the financial jiggery pokery that went on. Enron, Worldcom and Paramalat lay at the end of that road. Financial engineering quickly replaced actual engineering in most businesses.

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In return the dealer would pay OCM an amount calculated according to a complicated formula: DAS_C01.QXD 5/3/07 11:45 PM Page 11 P ro l o g u e 11 Maximum of [0; NP × {7 × [(LIBOR2 × 1/ LIBOR) – (LIBOR4 × LIBOR–3)]} × days in the month/360] Where NP LIBOR = $600 million = 6 month dollar LIBOR rates The financial engineering was dazzling but there was just one problem. The complex equation, if you did the algebra, always equalled zero. The dealer would never pay OCM anything but OCM would be paying the dealer $4 million each month for three years. This was the intended effect. That was the deal, almost. There was an ‘extension’ option.

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Perversely it was the conservative Japanese who took trading within corporations to a new level. They were slavish lovers of American management theory. They had used the work of Frederick Taylor and Edward Deming to revolutionize manufacturing; now, they would do the same with financial management. This was ‘zaitech’ or ‘zaiteku’ – financial engineering. The treasury, the financial function within companies, was to be a profit centre. Proponents had carefully studied the Disney profit statement from 1984 where the accounting department had been a major contributor to its profits. Zaiteku meant trading in financial instruments to earn revenues for the company.

Nerds on Wall Street: Math, Machines and Wired Markets
by David J. Leinweber
Published 31 Dec 2008

Richard Rosenblatt CEO, Rosenblatt Securities “Nerds on Wall Street is a wild, funny ride though the technological changes that underpin modern financial markets. You will find yourself laughing out loud at what could otherwise be a dry subject. And, if you’re not careful, you might even learn something!” Richard R. Lindsey Chairman, International Association of Financial Engineers; Principal, Callcott Group LLC “If you’re interested in what computers are doing with your money, then this book is for you.” Richard Peterson MD Managing Director, MarketPsy Capital LLC; Author, Inside the Investor’s Brain “In David’s words, the stock market is a “victim not a cause” of the great mess of 2008.

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; Genetic Algorithms; Evolving Financial Models; An Early Lesson; Arbitrage and Predictive Strategies; Maximizing Predictability; Chromosomes for Forecasting Models; Fitness Functions for Forecasting Models; Use of the GA for Coping with a Combinatoric Explosion of Models; Genetically Optimized Forecasting Models in Hindsight; Genetic Algorithm Warning Label Chapter 9: The Text Frontier: AI, IA, and the New Research 203 Ten Pounds of News in a Five-Pound Bag; Pre-News and Disintermediation; More Pre-News on the Internet Contents ix Chapter 10: Collective Intelligence, Social Media, and Web Market Monitors 227 Investing with Crowds; Never Met a Data Vendor I Didn’t Like; Santa Claus Is Coming to Town; Counting Messages; Whisper Numbers—Ruined by Success; Monitoring Web Activity; More Web, More Warnings Chapter 11: Three Hundred Years of Stock Market Manipulations: From the Coffeehouse to the World Wide Web 253 The Power of Manipulation; A Classic Market Manipulation; The Very Model of a Modern Market Manipulator; Bluffing; How Communication Changes Market Manipulation; Anatomy of a Successful Manipulation; The Internet Era; Cyber-Manipulations; It’s Not Just Micro-Caps; Where Are We Headed? Part Four Nerds Gone Wild: Wired Markets in Distress 273 Chapter 12: Shooting the Moon: Stupid Financial Technology Tricks 279 To Protect and to Serve; Stupid Engineering Tricks; Stupid Financial Engineering Tricks; Take Them Out and Shoot Them; Tech Hall of Shame; Quants Who Saw It Coming Chapter 13: Structural Ideas for the Economic Rescue: Fractional Homes and New Banks 305 Fractional Home Ownership; New American Bank Initiative; Still Mad, but Ever Hopeful Chapter 14: Nerds Gone Green: Nerds on Wall Street, off Wall Street 327 Accelerating Innovation; From the Vault; Billions of Dollars and Millions of Tons of Carbon; Epilogue; Web Site Index 343 About the Web Site NerdsonWallStreet.com 353 Foreword Q uantitative finance is not a topic usually associated with laughter.

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If the level of regulation, reporting, and transparency we have in the equity markets were in effect for the toxic garbage that is being laid off on the U.S. taxpayers, we wouldn’t be in the bind we are in. We should not blame anyone using a computer on Wall Street for the trouble. But we should blame the financial engineers who designed these Frankenstein derivatives and then failed to point out loudly and emphatically enough that their pricing models for these were so far out of the range of applicability based on previous experience that a horrendously dangerous situation had been created. Imagine if the designers of the first skyscrapers had said, “We can build a pretty good two-story house out of wood.

Unconventional Success: A Fundamental Approach to Personal Investment
by David F. Swensen
Published 8 Aug 2005

Market depth implies a substantial volume of offerings for individual positions. Market investability assures access by investors to investment opportunities. The basic building blocks for investor portfolios come from well-established, enduring marketplaces, not from trendy concoctions promoted by Wall Street financial engineers. Core asset classes encompass stocks, bonds, and real estate. Asset classes that investors employ to drive portfolio returns include domestic equities, foreign developed market equities, and emerging market equities. Asset classes that investors use to create diversification include U.S. Treasury bonds, which promise protection from financial catastrophe, and U.S.

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Holders of fallen angels find their interests at odds with the interests of corporate management. In the case of new-issue junk bonds, particularly those employed to finance leveraged-buyout deals or leveraged-recapitalization transactions, bondholders confront even more highly motivated, adversarial management groups. Sophisticated, equity-oriented financial engineers bring numerous tools to bear on the problem of increasing equity values substantially and rapidly. As the financial operators work to minimize the cost of debt, the bondholders realize the mirror image of cost minimization in the form of return diminution. Market Characteristics At December 31, 2003, the market value of high-yield corporate bonds totaled $550 billion.

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Whether the premium constitutes fair compensation for the complex options embedded in mortgage securities poses an extremely difficult question. Wall Street’s version of rocket scientists employ complicated computer models in a quest to determine the fair value of mortgage-backed securities. Sometimes the models work, sometimes not. If financial engineers face challenges in getting the option pricing right, what chance do individual investors have? Optionality proves even more difficult to assess than credit risk. In the case of fixed-income instruments with credit risk, sensible investors look at bond yields with skepticism, knowing that part of the return may be lost to corporate downgrades or defaults.

Taming the Sun: Innovations to Harness Solar Energy and Power the Planet
by Varun Sivaram
Published 2 Mar 2018

Can the broader solar industry avoid the perils of too much leverage while still using financial engineering to expand the available pool of capital? Securitization Blanket At first blush, it might be unsettling that the financial trick that some solar companies are using to attract cheaper debt capital is the same maneuver that helped cause the Great Recession. Investment banks used that trick, securitization, to bundle, slice, and dice subprime mortgage loans from around the country. They managed to hoodwink the ratings agencies into certifying that the resulting high-risk derivatives were low-risk, but no amount of financial engineering could take garbage in and spit anything but garbage out.

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Christopher Martin, “SunEdison Emerging as Solar ‘Supermajor’ with $2.2 Billion Deal,” Bloomberg, July 20, 2015, https://www.bloomberg.com/news/articles/2015-07-20/sunedison-agrees-to-acquire-vivint-solar-for-2-2-billion. 3.  Antoine Gara, “SunEdison’s Big Slide: When Financial Engineering Goes Wrong,” Forbes, November 13, 2015, http://www.forbes.com/sites/antoinegara/2015/11/13/sunedisons-big-slide-when-financial-engineering-goes-wrong/. 4.  Stephen Foley and Ed Crooks, “SunEdison: Death of a Solar Star,” Financial Times, April 21, 2016, https://www.ft.com/content/04fca062-07a3-11e6-a70d-4e39ac32c284. 5.  Angus McCrone and Michael Liebreich, “Yieldcos—Two Big Questions,” Bloomberg New Energy Finance, July 30, 2015, https://about.bnef.com/blog/mccrone-liebreich-yieldcos-two-big-questions/. 6.  

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Achieving the latter will require three types of innovation. As part II explains, firms can apply financial and business model innovation to do more with existing solar PV technology. Today, solar PV still struggles to woo the colossal investors who regularly finance fossil-fuel projects. With some financial engineering, the solar industry could gain access to massive pools of low-cost investment to deploy solar on an unprecedented scale. Similarly, even though villagers in Africa or India are willing to pay for solar power, off-grid solar has been slow to take off. Now, a new crop of entrepreneurs are deftly combining mobile phones, big data, and conventional PV panels to reach these customers and make a profit doing so.

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
by Alan S. Blinder
Published 24 Jan 2013

But thinly traded or poorly understood securities are another matter entirely. Case in point: Theoretical valuation models based on EMH-type reasoning were used by Wall Street financial engineers to devise and price all sorts of exotic derivatives. History records that some of these calculations proved wide of the mark. Something New Under the Sun: CDS In the year 2000, a creative new type of derivative called a credit default swap (CDS) began to emerge. Its origins can be traced back a few years earlier, to a team of bright young financial engineers at JP Morgan in the 1990s. When I was vice chairman of the Federal Reserve in the mid-1990s, the Fed staff was just educating us about this unfamiliar new instrument, and we were trying to figure out what kind of beast it was.

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When the foxes have legions of accomplices, the perils are commensurately greater. And when both ideology and incentives conspire to make the authorities look the other way, well, chicken dinner is served. Sadly, that was the case in America during the boom years, when regulators stopped regulating, underwriters stopped underwriting, and financial engineering ran amok. The first two villains were bubbles and leverage. We now turn our attention to the other five members of the hall of shame, beginning with the abysmal performances of the nation’s financial regulatory agencies. VILLAIN 3: WHERE WERE THE REGULATORS? Contrary to the complaints you often hear from the financial industry, we have regulations for good reasons.

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Why did so many smart people believe these laissez-fairey tales? It’s a good question. Some of the blame surely goes to the excessive faith in free markets that was the elixir of the day. Some goes to economists who believed and extolled the efficient markets hypothesis—and taught it to their students, many of whom wound up as financial engineers on Wall Street. Another part almost certainly came from people’s collective tendency to forget the past. When times are good, asset values are rising, and loan defaults are rare, it is all too easy to forget one of the laws of financial gravity: What goes up too fast usually comes crashing down.

The Asian Financial Crisis 1995–98: Birth of the Age of Debt
by Russell Napier
Published 19 Jul 2021

It was a form of capitalism that combined individualism with the aggressive use of balance sheet management for primarily personal profit. As early as 1983, Michael Milken was helping corporate America supercharge returns through the issuance of a record amount of speculative credit instruments known as junk bonds. The particular beneficiaries of this form of financial engineering were corporate management and incentives were soon put in place, primarily in the form of stock options, to incentivise such behaviour. The world has seen speculative corporate debt binges before, but this one was launched in a period when interest rates had just begun a decline that would last 40 years.

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John Maynard Keynes, The General Theory of Employment, Interest and Money, 1936 When the tide of capital turned it was indeed to be the asset traders and their financiers and their investors that lost most in this particular casino. That their collapse was to create a set of circumstances that would enfranchise the asset traders and their financiers to play this game on a global basis was something that I never considered. Rather than warn of the dangers of too much debt and financial engineering, the policy reactions to the Asian financial crisis set up the perfect environment for the asset traders and their financiers to ply their trade on an even grander scale. The “whirlpool of speculation” that was to follow dwarfed even the excesses of Asia and changed the world. Underwriting Hong Kong 20 November 1995, Hong Kong Last month, the heads of 30 Chinese state-owned firms in Hong Kong met in secret in Shenzhen, according to the latest Far Eastern Economic Review.

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However, where potentially large profits are involved there will always be someone tempted by the risk. In the mid-1990s, the cheap currency to borrow to fund such investment was the Japanese yen and this is the ‘excess liquidity’ I referred to in the piece from 30 July 1996. Japan was dealing with the consequences from the bursting of an asset-price bubble and the unwinding of the financial engineering – in Japanese, zaitech – that created not just low economic growth but solvency problems for the local financial system. The consequence was a steady decline in inflation and the BOJ was reducing interest rates in an attempt to bolster economic growth and reverse a recent deflation. For many investors the aggressive scale of this monetary response was likely to continue and as Japanese interest rates declined well below US interest rates, the yen was likely to fall relative to the US dollar.

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest
by Andrew W. Lo and Stephen R. Foerster
Published 16 Aug 2021

It seemed that Sharpe had reached the apex of his career. However, he remained active in his research. In 1996 he cofounded Financial Engines, a firm that pioneered independent online investment advice, with a focus on investing for retirement.62 “A colleague of mine in the law school, in securities, Joe Grundfest, who had been on the SEC [Securities Exchange Commission], and I were having coffee. He gave me a long song-and-dance about how if I really wanted to impact real people making these decisions, we needed to form a firm, etc. That was sort of how Financial Engines began. He introduced me to a fellow who was a lawyer, who also could help start firms, Craig Johnson.

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He introduced me to a fellow who was a lawyer, who also could help start firms, Craig Johnson. The three of us, basically, created Financial Engines. The goal was to help individual employees better use the 401(k) plans that were available to them for retirement savings. And, of course, the idea was to apply all the work that had been done in the academic finance field, which we set about doing.”63 Sharpe explained his interest in retirement planning and investing. “I and many others focused for many years on what we call the accumulation phase. You’re saving for your retirement. And while that was difficult, because it was a multiperiod problem en route, we could sort of take a shortcut and say, ‘Well, what you care about is the probability distribution of your wealth on the day you retire.’

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But they don’t all have to be just the market and something riskless. And third, we really don’t know what people’s preferences are.… You kind of need a multiperiod equilibrium model, not the one-period kind of CAPM, but that’s not horribly hard to get.”64 In addition to his practical work with Financial Engines, Sharpe continued to undertake innovative research. In 1992, he developed a simple approach to measuring fund performance that helped to “make order out of chaos” through what he called an asset-class factor model: attributing the overall return on a fund to the return on various stock and bond indices.65 He also produced a book based on his Princeton lectures on finance that reviewed his previous work and presented methods for analyzing security prices that accounted for investor behavior.66 If You Can’t Beat the Market, Join It Sharpe has three key messages that summarize the fundamental insights of the CAPM.

A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History
by Diana B. Henriques
Published 18 Sep 2017

The university’s hillside campus had given birth to the Free Speech Movement, an influential protest against campus curbs on political activism, and Berkeley became a key organizing point for national antiwar marches and civil rights confrontations. By the 1970s, there was another buzz on campus, and it was occurring at the business school. Berkeley’s business school may not have had the wealth and prestige of Harvard’s or the free-market ferocity of the University of Chicago’s, but it was still at the forefront of a revolution in financial engineering. Less than fifty miles south of Berkeley, what would later be called Silicon Valley was producing computers that could analyze huge collections of numbers, such as the daily prices on America’s stock markets. The scholars at Berkeley and elsewhere who used such data to draw conclusions about the movements of the stock market became known as “quantitative” theorists, or “quants.”

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Without physical delivery, the price of a Dow futures contract could fall under or float above the real-world price of the Dow stocks on the NYSE. What would happen then? In the summer of 1981 the answer to that fateful question wasn’t clear—indeed, it wasn’t even considered. As it happened, the financial engineers in the futures markets had already figured out that cash settlement was the only way stock index futures could work for traders in their pits, and Johnson and his fellow CFTC commissioners were inclined to agree. The scene might have been funny if the consequences had not been so profound.

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It was even more remarkable that the brilliant people guiding those giant institutions did not realize that the markets—no, this single market—simply could not function if they all decided, at roughly the same time, to do the same thing with hundreds of billions of dollars. The Brady Report wasn’t about market prices; it was about market power—unprecedented market power, capable of derailing the financial engines of the country, and of any country. All that was required was for a significant portion of the world’s biggest and wealthiest investors to move in the same direction at the same time. The challenge was to build a market structure that could deal with this new reality, to weave America’s haphazard regulatory agencies into a single safety net and then somehow temper the power of the forces that could rip it apart.

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio
by Victor A. Canto
Published 2 Jan 2005

So, what we need to do now is enact a series of positive incentives that can eliminate the corporate manager’s desire to produce financially engineered results and replace it with the desire to pursue true economic profits. One simple way to move corporate officers and accountants in this direction is to require them to use only one set of accounting reports. I don’t care whether the reports are pro-forma or generally accepted accounting principles (GAAP). My view is whatever the investor is shown also should be shown to the IRS, with the appropriate taxes being paid thereafter. If CEOs cook the books to overstate their financially engineered profits, they pay higher taxes, making shareholders unhappy.

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For example, a financial manager would have an incentive to convert dividend returns into capital-gain returns if the tax on capital gains were reduced in a significant way. The incentive to do so would also generate some creative accounting behavior at the corporate level as well as an increase in resources devoted to the financial engineering of after-tax returns. • Altering the relative attractiveness of the way returns are delivered to investors also alters the investment composition of individual corporations. Changes in corporate and investor behavior are most likely noticeable during inflection points in the tax code. If tax-rate changes have the incentive effects I believe they do, the impact of the changes—in the form of behavioral shifts—should be visible to the naked eye.

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The reduction in the capital gains income tax in 1998 added to the corporate incentive to generate capital gains. The advantage of corporate debt over capital gains declined to $9.20 in 1998 from $21.50 in 1990 per $100 of pre-tax income (refer to Table 4.1). In turn, the capital gains advantage over dividends increased to $12.50 in 2000 from $2.00 in 1998. Earnings management and financial engineering became the biggest game in town. Just as in the junkbond 1980s, the changes at the beginning of this cycle were legitimate. But, as the easy pickings got arbitraged away, the game became a bit more complicated and the temptations for illegal behavior increased. The alternative to illegal behavior was often to suffer the investor’s wrath, so the incentive for creative bookkeeping was strong.

The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything
by Jason Kelly
Published 10 Sep 2012

Firms can “exit” their investment by doing an initial public offering, a sale to another private-equity firm, or a sale to a corporation. Financial engineering: A term, usually used derisively, for the practice of buying a company with lots of debt, doing very little to the company itself, and selling it quickly for a profit. Private-equity firms increasingly tout their ability to make changes to the underlying business and its operations to prove they aren’t simply financial engineers. Fund: Private-equity firms collect discrete funds to make investments in a variety of companies. A firm typically manages a number of funds.

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That time period has seen the rise of “ops” as crucial to getting the money to generate the returns private-equity managers have promised their investors. Conklin and her ilk, many of whom are honest-to-goodness engineers, stand in contrast to the so-called financial engineers that earned private equity a nastier reputation. Financial engineering involves using leverage and creative balance sheet work to generate a return. With less debt available and higher prices, private-equity firms are focusing on actually changing companies’ businesses to make money. With rings and watches left back in the office, we grabbed clear safety glasses and disposable earplugs from a dispenser just inside the door to the factory.

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Jordan made an exception in 1988 when he saw that he needed to do something radically different with the business. There was a limited number of things to buy and growing competition. The returns he and his handful of competitors had achieved weren’t going to last on this business model. “The whole industry was financial engineering,” Jordan said. “I always thought the music would stop.” He called his former roommate at Notre Dame, Thomas Quinn, who at the time was an executive at the health care company Baxter International. Jordan convinced him to join the firm to run a new unit, the operations management group, or OMG.

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton
by Colin Read
Published 16 Jul 2012

While he continues to serve on the advisory boards of the Financial Analysts Journal and the Journal of Investment Management, and has taught courses at Columbia University and the University of Southern California, he had devoted much of his career to the corporate sector. Over his career, he has amassed more than 70 directorships, trusteeships, and general partnerships. Treynor’s dedication to the fluid integration between theory and practice won him the International Association of Financial Engineers (IAFE) award as the 2007 IAFE/SunGard Financial Engineer of the Year (FEOY). This award is in recognition of his contributions to the CAPM. Treynor remains President of Treynor Capital Management and lives in Palos Verdes Estates, California. He turned 81 in 2011. In addition to his legacy as one of the originators of the CAPM, Treynor inspired another Nobel Laureate in a way remarkably similar to the inspiration that Harry Markowitz offered William Sharpe.

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He received the 1983 Leo Melamed Prize from the University of Chicago and the 1989 Distinguished Scholar Award from the Eastern Finance Association. He twice received the first prize from the Institute of Quantitative Research in Finance’s Roger Murray Award and a 1993 International INA-Academia Nazionale dei Lincei Prize from Italy’s National Academy of Lincei. He also earned the Financial Engineer of the Year Award from the International Association of Financial Engineers and the FORCE Award for Financial Innovation from Duke University. He was inducted into the Derivatives Hall of Fame by Derivatives Strategy in 1998. Merton also earned the Michael I. Pupin Medal for Service to the Nation from Columba University in 1998, the Distinguished Alumni Award from the California Institute of Technology, and the Mathematical Finance Day Lifetime Achievement Award from Boston University in 1999.

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For instance, he produced a discrete-time binomial option pricing procedure that offered a readily applicable procedure for BlackScholes securities pricing, which will be covered in the next part of this book. He also developed the Sharpe ratio, a measure of the risk of a mutual or index fund versus its reward. Sharpe continued to work to make financial concepts more democratic and more accessible. He helped develop Financial Engines, an Internetbased application to deliver investment advice online. 78 The Rise of the Quants Ever concerned about the practitioner’s side of finance, Sharpe began to consult with investment houses, first Merrill Lynch and then Wells Fargo. At Merrill Lynch, he helped set up their CAPM analysis capacity.

Valuation: Measuring and Managing the Value of Companies
by Tim Koller , McKinsey , Company Inc. , Marc Goedhart , David Wessels , Barbara Schwimmer and Franziska Manoury
Published 16 Aug 2015

Our alternative approach is simple: if you can’t point to specific sources of increased cash flow, the stock market won’t be fooled. Financial engineering Another area where the value conservation principle is important is financial engineering, which unfortunately has no standard definition. For our purposes, we define financial engineering as the use of financial instruments or structures other than straight debt and equity to manage a company’s capital structure and risk profile. Financial engineering can include the use of derivatives, structured debt, securitization, and off-balance-sheet financing. While some of these activities can create real value, most don’t.

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In general, capital markets typically do a good job of pricing financial instruments, and companies will have difficulty boosting their share prices by accessing so-called cheap funding, however complex the funding structures are. Nevertheless, financial engineering can create shareholder value under specific conditions, both directly (through tax savings or lower costs of funding) and indirectly (for example, by increasing a company’s debt capacity so it can raise funds to capture more value-creating investment opportunities). However, such benefits need to outweigh any potential unintended consequences that inevitably arise with the complexity of financial engineering. This section considers three of the more common tools of financial engineering: derivative instruments that transfer company risks to third parties, off-balance-sheet financing that detaches funding from the company’s credit risk, and hybrid financing that offers new risk/return financing combinations.

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For example, when the Swiss-Swedish engineering company ABB announced a €775 million bond buyback in July 2004, its share price increased 4 percent on the day of the announcement. The stock market apparently saw the buyback as further evidence that the company was on a trajectory to recover from an earlier financial crisis. CREATING VALUE FROM FINANCIAL ENGINEERING Financial engineering means different things to different people. We define it as managing a company’s capital structure with financial instruments beyond straight debt and equity. It typically involves more complex and sometimes 35 See, for example, W. Mikkelson and M. Partch, “Valuation Effects of Security Offerings and the Issuance Process,” Journal of Financial Economics 15, nos. 1/2 (1986): 31–60; and Smith, “Investment Banking and the Capital Acquisition Process.” 670 CAPITAL STRUCTURE, DIVIDENDS, AND SHARE REPURCHASES even exotic instruments such as synthetic leasing, mezzanine finance, securitization, commodity-linked debt, commodity and currency derivatives, and balance sheet insurance.

The Impulse Society: America in the Age of Instant Gratification
by Paul Roberts
Published 1 Sep 2014

So we aren’t necessarily being antibusiness or antitechnology to be worried by the way business now reflexively applies technology to raise profits with almost no consideration for the broader consequences. Or to feel uneasy at the fact that more and more of our technological skills and resources—which once lifted all society and advanced very broad social goals (and which remain crucial to solving our looming challenges)—are now devoted to fields such as financial “engineering,” whose social costs are now painfully well known. It is instructive that both the United States and the United Kingdom, which once generated most of their profits in their manufacturing sectors, now get their biggest profits from the financial industry. Telling, too, that most of the excitement around Big Data comes, not from its potential to solve the very complex problems of our times (nor even its potential to be abused), but for the way it is already letting the marketplace move closer to the self, with more immersive games, more adaptive personal technologies—even, fittingly, eyeglasses that place the entire digital economy just centimeters from your brain.

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Nearly all companies tie their management directly to the financial markets with stock-based compensation. (By 2000, stock options had lifted the average CEO’s compensation to more than four hundred times that of the median employee, up from a ratio of twenty to one in the 1970s.36) Likewise, “financial engineering,” or the use of financial techniques, such as share buybacks, to raise share prices, is now a standard part of the corporate strategic repertoire. During the 1990s stock market boom, hundreds of companies used their own rapidly appreciating shares as a kind of übercurrency to go on acquisition sprees.

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Marriage continues to decline as partners now hold out the possibility for a better romantic return elsewhere. And of course the business world remains locked in the finance mind-set. The tenure of the average company CEO has fallen to five years, from nine two decades ago.49 Stock-based pay remains the norm, as does the strategy of share buybacks and other financial engineering. Lazonick has calculated that between 2001 and 2012, buybacks by the five hundred companies of the S&P 500 sucked up a stunning three and a half trillion dollars—roughly three-quarters as much as the U.S. government spent to win World War II.50 These are the classic symptoms of the Impulse Society—an economy so thoroughly reconfigured around the desire for rapid returns that it is increasingly incapable of producing what we need.

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril
by Satyajit Das
Published 9 Feb 2016

But, as fund managers customarily state in their solicitations to invest, the past is no guarantee of future performance. Financial engineering continues to be used to mask the true performance and real position of enterprises and nations. To maintain or increase earnings in a difficult environment, businesses have re-engineered their structure and finances rather than their operations. They have merged with or acquired companies. Since 2009, US share buybacks totaling nearly US$2 trillion, frequently financed by low-cost debt, have boosted share prices and now make up an increasing proportion of the value of stocks traded. Since the crisis, governments too have resorted to financial engineering to deal with economic problems.

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The dominant figures were star mutual fund managers, who gained ascendancy over conservative investment professionals, aggressively chasing growth with rapid purchases and sales of stocks to take advantage of market momentum. In a pattern that was to be repeated in the 1980s, 1990s, and 2000s, the boom was driven by a mixture of glamorous technology stocks, speculation, and financial engineering. Conglomerates such as Ling-Temco-Vought, International Telephone & Telegraph, and Gulf & Western anticipated future private equity firms, buying and selling disparate businesses in sectors such as missiles, hotels, real estate, car rentals, golf equipment, and film studios. Low interest rates and cheap financing costs helped fuel the rapid increase in stock and asset prices.

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The range of financial instruments and services expanded; the sector became large relative to the size of the real economy, and a major contributor to growth. In previous eras, the creation, production, and sale of goods and services were the means to success. Now, the structuring and trading of financial products representing claims on businesses and underlying activities was the path to wealth. Financial engineering was to ultimately become more important than real engineering. Commencing in the 1980s, there was unprecedented expansion in cross-border trade and flow of capital. The large US deficits resulting from the Vietnam War and Great Society programs had created significant overseas holdings of US dollars.

Nothing but Net: 10 Timeless Stock-Picking Lessons From One of Wall Street’s Top Tech Analysts
by Mark Mahaney
Published 9 Nov 2021

Simplistically, there are three ways companies can generate earnings: grow revenue, reduce operating costs, or engage in “financial engineering.” And by “financial engineering,” I mean things like selling loss-generating assets, reducing tax rates through a shuffling of profits toward lower-tax locations, generating one-time gains by selling investment stakes, sharing buybacks, better positioning the cash and equivalents on a company’s balance sheet to generate higher investment income, and the like. Maybe this is the realization of the simple maxim “The greater the effort, the greater the return.” “Financial engineering” is easy. There are armies of consultants who can help a company better execute on tax and asset strategies.

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But when it’s an appropriate time for a company to do take these steps, well, that’s the exact time a tech investor may not want to be around. One of the earnings growth strategies that I didn’t mention above, but is used quite often, is M&A or acquisitions. I would still put this in the “financial engineering” camp, though I realize that is clearly cheapening the term. As a rule, I would argue that organic revenue growth—driven by increased unit sales, new product offerings, geographic market expansion, or price increases—is more impressive and should be worth more to tech investors than acquired growth.

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Usually, so does the P/S ratio (the price-to-sales ratio). Depending on the driver of that earnings growth acceleration, the multiple can re-rate a little or a lot. This ties back to the prior discussion of the three ways of driving earnings: growing revenue, reducing operating costs, or engaging in “financial engineering.” The market will be most impressed by an earnings growth acceleration that is driven by accelerating revenue growth, because that is the hardest of the three ways. And what drives accelerating revenue growth is GCIs. So what are GCIs? These are steps that companies take to drive new top-line growth.

Financial Statement Analysis: A Practitioner's Guide
by Martin S. Fridson and Fernando Alvarez
Published 31 May 2011

With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com. Copyright © 2011 by Martin Fridson and Fernando Alvarez. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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By acquiring the smaller company at a price of 12 times earnings with stock valued at a multiple of 14 times, Big Time spreads Small Change's earnings across fewer shares than would be the case if the market valued the two companies at the same multiple. The effect, achieved purely through financial engineering, is a parody of the economies of scale realized in mergers premised instead of improvements in operations. In fairness to the many real-world companies that have exploited disparities in price-earnings multiples over the years, Big Time's share-price-enhancing acquisition rests squarely within the bounds of fair play.

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Over the years, many voracious acquirers have temporarily achieved stratospheric multiples on their acquisition currency through financial reporting gimmicks that hard-nosed analysts were able to detect before the share prices fell back to earth. In some instances, the basis for an exaggerated P/E multiple is rapid earnings per share (EPS) growth achieved through financial engineering rather than bona fide synergies. Starting with a modest multiple on its stock, a company can make a few small acquisitions of low-multiple companies to get the earnings acceleration started. Each transaction may be too small to be deemed material in itself. That would eliminate any obligation on the company's part to divulge details that would make it easy for analysts to quantify the impact of the company's exploitation of disparities in P/E multiples.

For Profit: A History of Corporations
by William Magnuson
Published 8 Nov 2022

This belief pervades not just society but also the leaders of corporations themselves. It has tended to make business leaders less reflective about society’s great problems and more intensely focused on extracting profit. It has contributed to the growth of financial capitalism, a species of corporate activity devoted to financial engineering rather than material production. It has also promoted the “move fast and break things” ethos of Silicon Valley, which values rapid technological growth over responsible behavior. And while corporate leaders occasionally pay lip service to their role as guardians of the public interest, with a few notable exceptions they appear less and less convinced of it.

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Though the Medici didn’t invent double-entry bookkeeping—other Florentine banks of the time also used the method, and there is evidence of its use in Genoa as early as 1340—they perfected the art. The bank’s accounting records were so comprehensive that we are still able to reconstruct with pinpoint accuracy the profits and losses made by individual branches in individual years for most of the bank’s existence. It is a remarkable testament to the Medici Bank’s fine-tuned system of financial engineering. GIOVANNI KNEW THAT ALL OF HIS COMPLEX SCHEMES AND STRUCTURES would mean nothing if his bank did not have customers. And so, from the very beginning, he went to work cultivating them. His first stop was the church, and he gambled big on it. In the late 1390s, a young Neapolitan archdeacon named Baldassare Cossa was making a name for himself within the Vatican.

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Foster, a Pittsburgh drilling-equipment company, for $106 million; twelve years later, investors received back six times their money. US Natural Resources, an Oregon-based coal-machinery company, sold to KKR for $22 million; seven years later, investors would receive back twenty times their money. With a few deals under their belts, Kohlberg, Kravis, and Roberts could tell that they were onto something. And if their financial engineering worked for these small companies, wouldn’t it work for bigger ones too? The trio thought it would. But in order to target bigger fish, they needed more investments—and bigger ones. So, in 1978 they went out and raised a buyout fund. Now that they had a slightly longer track record, they could target the institutional investors who had passed on their offers the first time around.

The Theft of a Decade: How the Baby Boomers Stole the Millennials' Economic Future
by Joseph C. Sternberg
Published 13 May 2019

Despite a bumper year in 1983 as the economy roared back from its recessionary malaise, fixed investment grew by an average of only 4.1 percent per year between 1983 and 1990—higher than the doldrums of the late 1970s and early ’80s, to be sure, but far off America’s mid-century investment peak. Output per hour worked grew a relatively sluggish 1.9 percent per year during this span.18 Instead, falling borrowing costs, as America emerged from the stagflationary 1970s and the high interest rates of the early 1980s, and low taxation on capital created a new boom in financial engineering: leveraged buy-outs, mergers and acquisitions, and other Gordon Gekko–like techniques. The basic principle was that companies would use cheap credit to borrow heavily against their assets and expected future revenue and then use the money either to buy other companies or to buy back the company’s own stock.

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The only difference was that the gap widened a little after a 1997 tax reform pushed by a Republican Congress cut the top capital gains tax rate to 20 percent, while the top corporate income rate stayed at 35 percent. And if anything, the regulatory thicket that discouraged productive investment compared to financial engineering got worse in the 1990s, despite the Clinton administration’s “Reinventing Government” gimmick. Labor regulations such as the new Family and Medical Leave Act and new standards on indoor air quality—plus an expansion of the scope of earlier labor rules to encompass more small companies—raised the cost of employing human beings, indirectly discouraging capital investments that would require more workers to pay off.

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Bush years again saw ultralow interest rates—the federal funds rate sat well below 2 percent for most of Bush’s first term, ostensibly to help the economy recover from the dual shocks of the dot-com bust and the September 11 terror attacks—and again saw reductions in capital gains taxes relative to other forms of taxation, with the top capital gains rate falling to 15 percent, while the top corporate-income rate remained stuck at 35 percent. Financial engineering exploded again.* Fixed investment hit a blistering 5.4 percent growth rate during the five years of Bush’s two terms when it grew, excluding the tail of the dot-com recession in his first year and the downturn in investment that presaged the financial crisis starting in 2007.26 But the growth rate in output per hour worked was starting to drift downward again from its 1990s peak (which already had failed to match the mid-twentieth-century boom), hitting an average of 1.9 percent per year in Bush’s first seven years.27 The big boom was not in productivity but in housing—one of the less productive sectors of the economy, since once a house is built, it contributes only weakly to output growth.

Keeping at It: The Quest for Sound Money and Good Government
by Paul Volcker and Christine Harper
Published 30 Oct 2018

I found myself sitting in the audience next to William Sharpe, a 1990 Nobel laureate in economics whose “Sharpe ratio” has become a widely accepted measure of risk-adjusted returns for fund managers. I nudged him and asked how much this new financial engineering contributed to economic growth, measured by GNP. “Nothing,” he whispered back to me. It was not the answer I anticipated. “So what does it do?” was my response. “It just moves around the [economic] rents* in the financial system. Besides it’s a lot of fun.” (Later, at dinner, he suggested the possibility of small ways in which economic welfare could be advanced, but I felt I had already gotten the gist of his thinking.) One aspect of financial engineering soon took off. Credit default swaps, originally designed to provide banks with an efficient way to insure their own loan portfolios, proliferated as trading instruments.

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Training graduates in the arguably more mundane tasks of effective administration doesn’t fit their definition of an academic discipline. The irony for me is that there is today far more practical training at Princeton and elsewhere than when I was a student. The training is in the engineering school, considered a second rate option in my day but now richly rewarded for turning out new financial engineers and data wizards for Wall Street and Silicon Valley. That’s where the money is and that’s where the talent flows, including two of my grandsons. The point was driven home to me one evening when, by chance, I was walking with a young economics professor toward the Woodrow Wilson School. I idly remarked that “this university doesn’t pay enough attention to public administration.”

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Jim Leach was only partly successful in making sure the legislation maintained the Fed’s primary role as the overseer of the entire bank holding company. (A decade later, in the wake of the financial crisis, he ruefully told me that his support for repeal of Glass-Steagall had been a mistake.) The World of Derivatives I cannot claim expertise, or even close familiarity, with the rapid development and application of “financial engineering.” Along with other members of my generation, I was struck a couple of decades ago by the enthusiastic presentation of a young London investment banker to a high-level business conference at the Villa d’Este in Lake Como, Italy. He concluded with a strong warning: businesses, particularly financial businesses, that were not fully aware of and capable of using the new instruments of finance would be doomed to failure.

Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis
by Scott Patterson
Published 5 Jun 2023

Published in 1996, it was the culmination of more than a decade of research and hard-won experience on the trading floor. In an interview that year for the trade journal Derivatives Strategy titled “The World According to Nassim Taleb,” he attacked the heavy reliance on math in the chaotic world of Wall Street, which had come to be known as financial engineering to give it a patina of a hard science. “What problems do you have with financial engineering?” the interviewer asked. “Some folks looked at the literature and saw differential equations and said, ‘Gee it’s like engineering,’ ” Taleb said. “Engineering relies on models because you can capture the relationships in the physical world very well.

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They could sleep at night. In a post-crash letter to Universa investors, Spitznagel wrote that “going forward, there is every good reason to expect that protecting against large drawdowns with Universa should remain the superior risk mitigation strategy, saving you the needless costs and risks associated with most financial engineering and Modern Finance solutions, while providing superior ‘crash-bang-for-the-buck’ should the crash continue.” Universa’s 2020 bonanza had been decades in the making. By the late 2000s, it was managing positions to protect billions of dollars against outsize losses, making Spitznagel extremely rich indeed.

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Financial markets, and the economies that depend on them, have become increasingly complex, unstable, and prone to crashes. In the early 2000s, economists such as Ben Bernanke, who would later become chairman of the Federal Reserve, claimed that the global economy had entered a so-called Great Moderation. The steady hand of economic technicians, the spread of derivatives and other products of Wall Street’s financial engineers (the quants), and low inflation meant the world was set to enjoy untold prosperity, the gift of not-too-hot-not-too-cold, centrally managed perpetual growth. Then came 2008, when the collapse of the U.S. subprime mortgage market ignited a global economic panic attack. The loss of a few hundred billion dollars in mortgages spread like a contagion through derivatives markets, leading to trillions in losses.

Derivatives Markets
by David Goldenberg
Published 2 Mar 2016

To summarize, the payoff to the difference between a long spot position and a long forward position is exactly the same as the payoff to a long position in a zero-coupon bond with face value equal to the forward price, and maturing at the same time as the forward contract. In the language of financial engineering, we have replicated the payoff to the original (natural) difference strategy by a synthetic strategy which is simply to buy the appropriate zero-coupon bond. Buy because we need to generate a positive cash flow equal to +Ft,T at time T. A basic principle of finance (the no-arbitrage principle, or the law of one price) is that if you can do what we just did, then the current costs of the two strategies must be the same.

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This hedges against the risk of rising variable rates, but it creates another hedging problem which we will discuss under the section that describes how the swaps dealer finds a counterparty firm AAA. We confine our attention to BBB issuing variable-rate financing. Of course, this won’t make BBB happy, because BBB wants fixed-rate financing. As financial engineers, we are going to give BBB fixed-rate financing. The only thing is that it will be synthetic fixed-rate financing, as opposed to the natural fixed-rate financing available to it in the fixed-rate bond market. Synthetic fixed-rate financing is a product structured from variable-rate financing in combination with a swap.

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These options can be viewed as the most fundamental derivative securities because they serve as the building blocks for constructing other derivative securities, including forward contracts and swaps. Synthesizing and pricing complex derivative securities from simpler, relatively well-known financial instruments such as stocks, bonds, and plain vanilla options is the subject of financial engineering. Options are important to both professionals and the average investor because they appear in many different financial scenarios that investors will routinely encounter. Most investors are familiar with ordinary securities like stocks and bonds. The stock market is constantly in the limelight.

Frequently Asked Questions in Quantitative Finance
by Paul Wilmott
Published 3 Jan 2007

Based on proven techniques that have been tested time and again, this comprehensive resource provides readers with the knowledge and guidance to effectively use credit derivatives pricing models. Principles of Financial Engineering by Salih Neftci “This is the first comprehensive hands-on introduction to financial engineering. Neftci is enjoyable to read, and finds a natural balance between theory and practice.” Darrell Duffie Publisher Academic Press Publication date 2004 Format Hardback ISBN 0125153945 On a topic where there is already a substantial body of literature, Salih Neftci succeeds in presenting a fresh, original, informative, and up-to-date introduction to financial engineering. The book offers clear links between intuition and underlying mathematics and an outstanding mixture of market insights and mathematical materials.

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References and Further Reading Chapter 3 - The Most Popular Probability Distributions and Their Uses in Finance References and further reading Chapter 4 - Ten Different Ways to Derive Black-Scholes Hedging and the Partial Differential Equation Martingales Change of Numeraire Local Time Parameters as Variables Continuous-time Limit of the Binomial Model CAPM Utility Theory A Diffusion Equation Black-Scholes for Accountants References and Further Reading Chapter 5 - Models and Equations Equity, Foreign Exchange and Commodities Fixed Income Credit References and Further Reading Chapter 6 - The Black-Scholes Formulæ and the Greeks Chapter 7 - Common Contracts Things to Look Out for in Exotic Contracts Examples Chapter 8 - Popular Quant Books Paul Wilmott Introduces Quantitative Finance by Paul Wilmott Paul Wilmott On Quantitative Finance by Paul Wilmott Advanced Modelling in Finance Using Excel and VBA by Mary Jackson and Mike Staunton Option Valuation under Stochastic Volatility by Alan Lewis The Concepts and Practice of Mathematical Finance by Mark Joshi C++ Design Patterns and Derivatives Pricing by Mark Joshi Heard on the Street by Timothy Crack Monte Carlo Methods in Finance by Peter Jäckel Credit Derivatives Pricing Models by Philipp Schönbucher Principles of Financial Engineering by Salih Neftci Options, Futures, and Other Derivatives by John Hull The Complete Guide to Option Pricing Formulas by Espen Gaarder Haug Chapter 9 - The Most Popular Search Words and Phrases on Wilmott.com Chapter 10 - Brainteasers The Questions The Answers Chapter 11 - Paul & Dominic’s Guide to Getting a Quant Job Introduction Writing a CV Interviews Appearance What People Get Wrong More Copyright © 2007 Paul Wilmott.

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Whether you use Monte Carlo for probabilistic or deterministic problems the method is usually quite simple to implement in basic form and so is extremely popular in practice. References and Further Reading Boyle, P 1977 Options: a Monte Carlo approach. Journal of Financial Economics 4 323-338 Glasserman, P 2003 Monte Carlo Methods in Financial Engineering . Springer Verlag Jäckel, P 2002 Monte Carlo Methods in Finance. John Wiley & Sons What is the Finite-difference Method? Short Answer The finite-difference method is a way of approximating differential equations, in continuous variables, into difference equations, in discrete variables, so that they may be solved numerically.

Other People's Money: Masters of the Universe or Servants of the People?
by John Kay
Published 2 Sep 2015

The company is awash with cash, but much of that money is overseas, and there would be a tax charge if it were repatriated to the USA. For many other companies, the tax-favoured status of debt relative to equity encourages financial engineering. Most large multinational companies have corporate and financial structures of mind-blowing complexity. The mechanics of these arrangements, which are mainly directed at tax avoidance or regulatory arbitrage, are understood by only a handful of specialists. Much of the securities issuance undertaken by Goldman Sachs was not ‘helping companies to grow’ but represented financial engineering of the kind undertaken at Apple. What does this capital market activity have to do with business – to return to the question Burrough and Helyar raised?

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The bonus culture in both financial and non-financial sectors, far from aligning the interests of managers and traders with those of shareholders, produced an outcome in which the objectives of managers and traders were materially different from those of the organisations for which they worked. This agency problem – companies being run for the benefit of a group of senior employees – was most acute in the financial sector but also infected the corporate sector more widely. The very large fees paid to investment bankers for their role in facilitating deals and financial engineering were another aspect of this agency problem. Managers were spending other people’s money, with the profusion and negligence that Adam Smith had anticipated. The extension of Smith’s agency problem throughout modern business and finance – the divorce of ownership and control – was identified by Adolf Berle and Gardiner Means eighty years ago.42 The attempt to tackle this issue by designing complex incentive schemes did not, in fact, align managerial interests with those of shareholders, still less align them with the long-term success of the company: today it has become the principal source of friction between companies and their shareholders.

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Venture capital had been devised for start-up and early-stage businesses, such as the Apple of the 1970s: the focus of private equity was on buy-outs of existing businesses from large corporations, or the refinancing of established companies with additional leverage. The high fee levels appropriate for investments of small size which required careful monitoring were applied to the much larger sums of money deployed in financial engineering. The industry drifted from its initial purposes, in ways that generated more revenue for intermediaries but less economic value. Apple, along with many other transformational new companies, was founded in the small area of California now known as Silicon Valley. Some other companies – such as Facebook – moved there at an early stage in their life.

The Finance Curse: How Global Finance Is Making Us All Poorer
by Nicholas Shaxson
Published 10 Oct 2018

Trainline’s corporate structure is an example of this second aspect of financialisation, where the bosses of companies that create real wealth in the economy – by making widgets and sprockets, finding cures for malaria, selling toys or package holidays, or creating efficient platforms for selling rail tickets – are increasingly encouraged to turn their attentions away from the hard slog of trying to boost productivity and genuine entrepreneurship, and towards the more profitable sugar rush of financial engineering to tease out more profits for the owners. Half a century ago it was widely accepted that the purpose of corporations was not just to make profits, but also to serve employees, communities and wider society. In the era of financialisation of the last few decades, our businesses have undergone a massive transformation.

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In all countries this game isn’t just about the big players taking a bigger share of the pie; the pie has actually shrunk as workers have lost purchasing power and thus found themselves less able to buy goods, sapping demand for corporate output. This in turn has refocused the attention of corporate managers – away from investment and towards more financial engineering (and even more monopolisation) to improve profits. In the process we’ve traded balanced economies with plentiful, stable well-paying jobs and thriving communities for unbalanced economies, zero-hour contracts, atomised communities and cheap televisions – and they probably aren’t much cheaper, either.

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There’s certainly nothing wrong in principle with private-sector firms running care homes; a husband-and-wife team, for example, may be able to provide a better and more personalised service for forty patients than employees working directly for the council. The problem isn’t the private sector; it’s private equity, whose underlying business model is aggressive, financially engineered wealth extraction from as many stakeholders in a business as it can get its hands on. To borrow from the old Heineken commercials, private equity extracts from the parts that other companies can’t reach. It represents perhaps the clearest example of financialisation at work in our economies.

In FED We Trust: Ben Bernanke's War on the Great Panic
by David Wessel
Published 3 Aug 2009

During the reign of Alan Greenspan — which wasn’t much of a republic — the smart people of the Federal Reserve allowed the housing bubble to inflate. They stood by as banks and investors made ever bigger bets on the flawed assumption that housing prices would never fall across the country. They encouraged financial engineering that created securities so complex that neither inventor nor seller nor buyer could fully understand them, instruments that proved toxic to those who bought them and to everyone around them. They shielded financial engineers from attempts at government regulation and restraint. With huge sums at stake, they trusted investors and traders to protect themselves — and the rest of us — better than even the smartest government regulator could hope to.

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But with no textbook or contingency plan beyond Ben Bernanke’s lifelong obsession with the Great Depression, he and those closest to him responded aggressively and creatively enough to reduce the chances of the Great Panic becoming another Great Depression. Using tools invented by discredited financial engineers, the Fed devised ways to lend money and buy assets that Bernanke’s predecessors hadn’t dared to contemplate. Despite resistance from inside the Fed — and a sluggish start — Bernanke ultimately took to heart his own critique of the Japanese central bank, which over a decade earlier had proved unwilling to experiment or try any policy that wasn’t absolutely guaranteed to work.

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Instead, Bush appointed Kohn to be Bernanke’s vice chairman in the spring of 2006, passing over Mishkin, who was named a plain old governor. Kohn was the institutional memory in the Bernanke brain trust, the one man in the room who could plausibly say: “This is what Greenspan would have done in this situation.” He was often the one to find the flaws in Bernanke’s latest bit of creative financial engineering. Kohn had been among Bernanke’s intellectual adversaries when both were mere governors. Bernanke thought Greenspan’s approach to monetary policy relied too much on the chairman’s discretion and not nearly enough on well-explained rules. Along with Geithner, Kohn long had been on the other side, defending Greenspan’s approach.

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
by Simon Johnson and James Kwak
Published 29 Mar 2010

“It is the prototype of the thoroughly modern investment bank—the not-so-benevolent King of the Street.”2 Salomon was the epitome of the new breed of Wall Street investment bank, built around a swashbuckling, risk-taking bond trading operation powered by “quants” recruited from academic research institutions and filled with “financial engineers” designing new products. Its strategy was to take large risks on its own account rather than simply taking fees for providing advice or executing trades. As Bianco put it, “What sets Salomon apart is the sheer scale on which it oper-ates in the markets, reflecting an appetite for risk unrivaled among financial middlemen.”

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Claudia Goldin and Lawrence Katz have examined data on Harvard undergraduates and found that while only 5 percent of men in classes around 1970 were in finance fifteen years after graduation, that figure tripled to 15 percent for classes around 1990.79 The share of each class entering banking and finance careers grew from under 4 percent in the 1960s to 23 percent in recent years.80 At Princeton’s School of Engineering and Applied Science, “Operations Research and Financial Engineering” became the most popular undergraduate major.81 The banks thus became major beneficiaries of the American educational system. Whether society benefited is another question. Kevin Murphy, Andrei Shleifer, and Robert Vishny have argued that society benefits more when talented people become entrepreneurs who start companies and create real innovations than when they go into rent-seeking activities that redistribute rather than increase wealth.82 If this is true, then this diversion of talent to Wall Street constituted a real tax on economic growth over the last two decades.

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It was possible to combine low-rated MBS tranches, mix them together, and create a new CDO, 60 percent or even 80 percent of which was rated AAA; even though the MBS (the inputs) had low ratings, it was unlikely that many of them would default at the same time—at least according to the models. Financial engineers even created CDO-squareds—CDOs whose raw material was other CDOs—and higher-order variants, in order to squeeze out higher yield at lower supposed risk.5 In the late 1990s, Wall Street became addicted to mortgage-backed securities and CDOs. As housing prices took off, it became easy to build models showing that MBS and CDOs had virtually no risk, because borrowers could always refinance their mortgages as long as prices were rising; even if they defaulted, rising prices meant that the investors would own valuable collateral.

Money for Nothing
by Thomas Levenson
Published 18 Aug 2020

For several years, the South Sea Company itself had nibbled around the edges of this market, completing a handful of minor deals, but its directors now aimed at a vastly more ambitious project—one that would, if it worked, solve Britain’s borrowing problem once and for all. They proposed a heroic attempt at what we would now call financial engineering—taking the whole of the national debt, accumulated over a seemingly endless series of wars, and turning it into shares of a private company—theirs—which could be traded back and forth at will in the nascent stock exchange. In its partisans’ view, that would be the saving of the nation. Alternatively, as the skeptical Defoe warned, the clever men of Exchange Alley had figured out a way to get rich off of the public interest: they were “ready, as Occasion offers, and Profit presents, to Stock-jobb [buy and sell] the Nation, couzen [trick] the Parliament, ruffle the Bank, run up and run down Stocks, and put the Dice upon the whole Town.”

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The proposition to lottery holders—exchange your assets for something that paid a bit less but offered more flexibility—was wholly dependent on Exchange Alley. That was where loathed jobbers and brokers would turn this new asset, shares in a joint-stock company, into cash. The market’s reaction, then, was a measure of how well this early example of financial engineering actually worked in real life. So how did it go? Just fine! Throughout the summer of 1719, none of Defoe’s dire warnings about Exchange Alley came true. Quite the reverse, in fact, as the progress of the Company stock for lottery bonds demonstrated, revealing a basic flaw in Defoe’s grasp of the new markets in money.

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There had been no change in the numbers for the deal, no land bought or projects launched…nothing. This was the triumph of hope, or perhaps a demonstration of just how easy it was to push the unwary along Exchange Alley—with more to come. In late April the Company’s shareholders voted to allow the directors to lend money with South Sea stock as the collateral—creating a kind of circular financial engine, pumping more cash into a rising market, where each step up inflated the nominal value of the pledged shares, which could then be used to justify more lending, more cash, and, when brought to Jonathan’s or Garraway’s, more demand and hence higher prices on the Exchange. As financial chronicler P.

Adaptive Markets: Financial Evolution at the Speed of Thought
by Andrew W. Lo
Published 3 Apr 2017

By recruiting a young engineer with a master’s degree in applied mathematics from Caltech in 1967 to MIT’s Ph.D. program in economics, Samuelson passed his baton to the next generation of financial scholarship. His Nobel Prize–winning protégé, Robert C. Merton, went on to create much of what is now known as financial engineering, as well as the analytical foundations of at least three multi-trillion-dollar industries: exchange-traded options markets; over-the-counter derivatives and structured products; and credit derivatives. But the exalted role of theory in economics isn’t due to Samuelson alone. It was created by the cumulative efforts of a number of intellectual giants during the half-century following the Second World War.

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When you’re swinging for the fences and going for home runs, you’re going to strike out a lot more than if you’re trying for singles or doubles. So that’s where things stand: drug development is getting harder; the financial risks are getting bigger; and early-stage funding is getting scarcer. What can we do about it? Well, what if we could change the risk/reward profile of the drug development process through financial engineering? We do it all the time for other investments. Here’s how. Instead of investing in one project at a time, suppose we invest in 150 of them, all at the same time. I know that sounds crazy. First, you’d need 150 × $200 million, or $30 billion; where are you going to get that kind of money? As an economist, my answer is simple: Assume we have $30 billion.

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(This isn’t a total loss for the bondholders. The intellectual property of 150 biopharma projects, even if unsuccessful, is still likely to be valuable.) At current interest rates, more than $27 billion can be financed by issuing long-term A-rated bonds.14 And if we use all the other tools of financial engineering—securitization, collateralized debt obligations, credit default swaps, and other types of derivative securities—we can do even better. At this point, you’re probably wondering whether this is really a good idea. After all, didn’t we encounter these very same financial innovations in chapter 10, when we were reviewing the recent financial crisis?

Palace Coup: The Billionaire Brawl Over the Bankrupt Caesars Gaming Empire
by Sujeet Indap and Max Frumes
Published 16 Mar 2021

Caesars filed for bankruptcy in early 2015 under Chapter 11 of the Bankruptcy Code, leading to a court-supervised free-for-all to determine who would have the right to take control of the revitalized company: Apollo and its partner TPG Capital, or the vulture distressed-debt investors, who happened to be the world’s biggest, baddest hedge funds. The bankruptcy would eventually shine a harsh light on Rowan and Sambur’s relentless financial engineering that had sustained Apollo’s investment in Caesars. Their machinations had led to credible accusations of a modern day casino heist; fraudulent transfers and boardroom impropriety to the tune of $5 billion in liability. All the while, a complicated game of three-dimensional chess had broken out between multiple creditor groups and the private equity owners.

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Distressed investing was a natural extension of the junk bond explosion of the 1980s and its subsequent collapse. Loans and bonds were no longer just a passive financing tool that earned steady interest payments; rather they could be opportunistically bought up and weaponized to take over troubled companies. Financial engineers like Black and Rowan who were experts in valuation, deal structuring, and complex negotiations, were the ideal distressed investors. Years later, Rowan recalled that when he had joined Drexel, he believed that he was five years too late—all the money had been made and all the fun had. What he said he had learned from the Drexel blow-up and the subsequent birth of Apollo was that, “you want chaos, you want things to be shaken up, you want the system to be brought down and built up again.

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In its early years, Texas Pacific Group bought such household names as America West Airlines, J.Crew, Ducati, and Burger King. Bonderman also took a personal stake in Ryanair in 1996, where he remained on the board until 2020. On the strength of the Continental investment, TPG developed a reputation less as a slash-and-burn financial engineer and more as an operations expert that could fix and grow underperforming assets. Its 1993 inaugural fund returned an annual rate of 36 percent to investors. Meanwhile, Apollo’s initial 1990 and 1993 funds returned roughly 50 percent. Rowan would boast that Apollo became the largest profit center of Credit Lyonnais in those years, earning the French institution billions of dollars.

Finance and the Good Society
by Robert J. Shiller
Published 1 Jan 2012

Printed in the United States of America 10 9 8 7 6 5 4 3 Contents Preface to the Paperback Edition Preface vii xiii Introduction: Finance, Stewardship, and Our Goals Part One Roles and Responsibilities 1 1. Chief Executive Officers 2. Investment Managers 3. Bankers 4. Investment Bankers 5. Mortgage Lenders and Securitizers 6. Traders and Market Makers 7. Insurers 8. Market Designers and Financial Engineers 9. Derivatives Providers 10. Lawyers and Financial Advisers 11. Lobbyists 12. Regulators 13. Accountants and Auditors 14. Educators 15. Public Goods Financiers 16. Policy Makers in Charge of Stabilizing the Economy 17. Trustees and Nonprofit Managers 18. Philanthropists 19 27 37 45 50 57 64 69 75 81 87 94 100 103 107 119 124 Part Two Finance and Its Discontents 19.

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The intelligent response to stories of human su ering in the BP oil spill or the Haitian earthquake or agricultural famines around the world is to recognize that the real costs of these disasters could be met by better risk management—by better insurance. There is certainly a role for those who wish to enter the field of insurance to make this happen. Chapter 8 Market Designers and Financial Engineers Market designers, sometimes called mechanism designers, start with a problem—the need for a market solution to some real human quandary—and then design a market and associated contracts to solve the problem. They are using nancial and economic theory to create “trades” that leave people better o .

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The point of the dating service example is to provide a real sense of the mathematical and theoretical complexity of even our most intimate problems, and to help us appreciate that nancial theory ought to be involved in the future solution of these problems. In the future—thanks to improvements in information technology as well as economic science—we can expect to see more and better mechanisms to help us make all manner of economic decisions. Financial engineers can help us solve such problems in the future just as mechanical engineers have designed the arti cial heart or electrical engineers have designed the mobile phone. Chapter 9 Derivatives Providers In recent years, the term derivatives has become a dirty word, blamed by many for real evils, including the severe nancial crisis that began in 2007.

The Cost of Inequality: Why Economic Equality Is Essential for Recovery
by Stewart Lansley
Published 19 Jan 2012

In the case of the fourteen most successful deals between 2005 and 2007, ones which yielded exceptionally high returns, as much as a half of these yields came from financial engineering, almost a third from the stock market boom, and less than a fifth from improved management.349 Once debt leveraging is stripped out, the returns achieved suggest ‘mixed and in some cases, even mediocre results’. According to a study by Manchester Business School, the main impact of private equity has been the use of financial engineering to ‘rearrange claims for the benefit of those who own equity, and ensure value capture by a managerial elite of general partners who run funds and senior managers who run the operating businesses invested in.’350 While the architects of public-to-private deals have walked away with giant jackpots, companies have mostly been stripped of their key assets, especially property portfolios, and landed with heavy debt burdens.

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Boardrooms, led by the hand of a newly rejuvenated finance sector, one awash with access to great pools of global cash, have turned to buying, merging, breaking up, repackaging and selling on existing companies. Scores of high-street names—from the AA to Debenhams—have been bought up by consortiums of corporate financiers. Far from bringing a more productive economy, healthier companies and more jobs, the financial engineering of these companies in a diversity of ways has often been detrimental to the firms, while fuelling the construction of a separate economy of the super rich. The categorical division between the money and the productive economy is well illustrated by the 2007 crisis and its aftermath. After hopeful signs of recovery in 2010, productive activity in the world’s richest economies has stalled and growth forecasts are being adjusted sharply downward.

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They calculate the possible synergies of a merger and entice companies with the prospect of a soaring share price.’191 This ‘incessant pressure to transact’ as former senior investment banker Philip Augar has described it, explains the increasing emphasis on merger and acquisition activity, financial engineering and the big top-down cost reduction strategies which have brought big short-term rewards but mostly limited, if any, benefit for long-term performance.192 All this was made possible by the huge cash surpluses being generated across the world. Once cautious pension-funds and endowment trusts deposited, along with oligarchs and monopolists, an increasing proportion of their funds into the highly risky investments being made by the racier end of the City.

Crisis Economics: A Crash Course in the Future of Finance
by Nouriel Roubini and Stephen Mihm
Published 10 May 2010

All of them worked according to the same principle. Anyone holding a plain-vanilla mortgage-backed security necessarily took on a certain amount of risk: the homeowner might default, for example, or simply prepay the loan, thereby depriving the lender of the additional interest payments it would earn if the loan was paid off on schedule. Financial “engineers” on Wall Street came up with an elegant solution: the CDO. The CDO would be divided into slices, or tranches. The simplest CDOs had only three tranches: equity, mezzanine, and senior. The purchasers of an equity tranche got the highest return but took on the greatest risk: if any homeowners in the underlying pool defaulted, the holders of the equity tranche would see losses before anyone else.

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This state of affairs may seem unique and unprecedented, and it was, but only in the particulars. Lack of transparency, underestimation of risk, and cluelessness about how new financial products might behave when subjected to significant stress are recurrent problems in many crises, past and present. Moral Hazard While the financial engineers who gave us monstrosities like the CDO3 deserve plenty of blame, many other problems were accumulating that went far beyond the obvious flaws in the securitization food chain. The faulty ways in which financial firms governed themselves helped lay the groundwork for the recent crisis as well.

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As compensation soared, graduates of elite schools increasingly went to Wall Street. In fact, among Harvard seniors surveyed in 2007, a whopping 58 percent of the men joining the workforce were bound for jobs in finance or consulting. In a curious paradox, the United States now has too many financial engineers and not enough mechanical or computer engineers. Not coincidentally, the last time the United States saw comparable growth in the financial sector was in the years leading up to . . . 1929. In the 1930s, compensation in the financial sector plummeted, a victim of regulatory crackdowns that made banking a boring, if more respectable, profession.

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown
by Philip Mirowski
Published 24 Jun 2013

So I think that people who are in finance today have a moral obligation to help advance the trend toward democratisation of finance.48 So how will more financial engineering help us out of the hole left by the global crisis? Some say the working-class “democratization” was just feedstock so that Wall Street and the City could securitize ever-expanding volumes of debt (while getting it graded AAA and foisting it off onto gullible money-market funds) as inadequate compensation for the dismantling of the welfare state; but people like Shiller say that the poverty and inequality could actually be mitigated by further financial engineering. The detailed examples provided in above turn out to be a little underwhelming, such as a “social impact bond” that pays a return if a particular social goal is met, or crowdfunding of public investment projects.

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There is a fourth case, highlighted here not so much because of this figure’s intimate direct involvement in the crisis (unlike Summers, Feldstein, and Gorton), but rather because he was the other designated reviewer of a marathon evaluation of twenty-one books devoted to the crisis in the JEL.112 Andrew Lo is the Harris & Harris Group Professor of Finance at the MIT Sloan School of Management and the director of MIT’s Laboratory for Financial Engineering. In other words, in the rarefied world of the “quants” who built the models that underpinned most of the complexity in the run-up to the crisis, he was chief guru. The only private affiliation listed on his personal website is as founder and chief scientist at the hedge fund AlphaSimplex, but on its website we learn, “Andrew has 24 years of industry experience.

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(This was probably one of the reasons he was chosen to survey the crisis landscape by the JEL.) He opted for this position as early as October 2009, in a public lecture produced by the National Science Foundation (so much for the neutrality of the funders of the natural sciences), which argued that blaming financial engineering for the crisis was on a par with blaming accounting, or the system of natural numbers.113 There he also mooted a proposition he has returned to repeatedly in the interim, that the causes of the crisis should instead be rooted in individual psychology, such that any blame is diffuse, or “all of us participated to some extent in the crisis.”

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right
by George R. Tyler
Published 15 Jul 2013

It has even featured extraction of a sort, with the deregulated banking industry mining customers, families, and even taxpayers, using the tools made available by credit creation and deregulation to conduct opaque financial engineering. Like Hapsburg Spain, record wealth has been redistributed during the Reagan decline to enrich relatively few, while weakening the American metropole, especially the high-value technical services sector and industrial foundation that made the twentieth century the American century. The Financialization of America That portion of the American economy composed of financial engineering by Alan Greenspan’s pollinators was 8.3 percent of GDP in 2011, surpassing health care to be the second largest sector.

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Wall Street and local bankers were forced to be cautious and methodical, careful with your money, not jittery financial entrepreneurs seeking windfalls, eager and able to gamble with your deposits. And they earned far less than executives at firms such as GM, which actually generated real wealth. Manufacturing careers were the ticket to a bright future back then, rather than the financial engineering jobs of today, conjuring opaque securities. That same prudent mentality carried over to the government, where federal budget deficits were tiny, with taxes and spending nearly in balance and the national debt from World War II shrinking steadily under both Democratic and Republican presidents.

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In reality, real wages for college graduates are lower today than a generation or more ago. Education and pluck are obviously not sufficient keys to riches; if they were, computer scientists and other engineers, mathematicians, and Harvard professors would be reaping millions of dollars a year rather than financial engineers and corporate executives. Another myth is that the economies of northern Europe are misfiring and sclerotic. Yet, these are economies where productivity has grown one-third faster than America’s for three decades. In fact, those in the best position to know—American corporations—are enthralled with rich old Europe, where they have created many thousands of jobs paying $10 an hour more than at home.

The Decline and Fall of IBM: End of an American Icon?
by Robert X. Cringely
Published 1 Jun 2014

The resource actions, LEAN, cost-cutting atmosphere, etc. are all symptoms of the bigger problem, in that IBM cannot maintain high value for the business. To put it bluntly, management has run the company into the ground. For their part, the top executives have focused on financial engineering — preserving stock value while they themselves cash out at opportune moments. IBM’s 2015 plan is just another example in a long line of financial tricks. The real “crime” in this whole scenario is that people are confused about what IBM actually is. At its heart, IBM has become a financial engineering operation masquerading as a technology firm. The corporate emphasis is not on product or services (“content” per Steve Jobs), but on EARNINGS PER SHARE.

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Chapter Six The 2015 Roadmap to $20 earnings per share: IBMers call it the “Death March 2015” Chapter Seven A Tale of Two Division Sales: IBM sells its PC division to Lenovo in 2004, and ten years later negotiates a deal to sell its server business to the same company. Big mistake? Chapter Eight Financial Engineering: How are all those share buybacks with borrowed money working out for ya, IBM? Chapter Nine An IT Labor Economics Lesson from Memphis for IBM: The company carelessly loses two big customers. Chapter Ten The Ginni Paradox or How to Fix IBM: CEO Ginni Rometty bets the farm that Palmisano was right to focus on shareholder earnings.

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IBM could become the leader of large arrays of inexpensive Power- and ARM-based servers. The market is moving to commodity processors. IBM needs to evolve too, and be part of that future. But as the Intel server sales show, they aren’t evolving and won’t evolve. And this is another reason I fear the company is doomed. CHAPTER EIGHT Financial Engineering If, as is the case at IBM, the primary corporate goal is to hit a certain earnings target set years before by a guy who no longer even works at the company, you’d better have some powerful financial tools to help the company get there. Growing earnings-per-share can be done by increasing profits, by decreasing the number of outstanding shares or by a combination of both techniques.

Optimization Methods in Finance
by Gerard Cornuejols and Reha Tutuncu
Published 2 Jan 2006

While individuals generally just have to live with such risks, financial and other institutions can and very often must manage risk using sophisticated mathematical techniques. Managing risk requires a good understanding of risk which comes from quantitative risk measures that adequately reflect the vulnerabilities of a company. Perhaps the best-known risk measure is Value-at-Risk (VaR) developed by financial engineers at J.P. Morgan. VaR is a measure related to percentiles of loss distributions and represents the predicted maximum loss with a specified probability level (e.g., 95%) over a certain period of time (e.g., one day). Consider, for example, a random variable 3.3. RISK MEASURES: CONDITIONAL VALUE-AT-RISK 37 X that represents loss from an investment portfolio over a fixed period of time.

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While stochastic programming models have existed for several decades, computational technology has only recently allowed the solution of realistic size problems. The field continues to develop with the advancement of available algorithms and computational power. It is a popular modeling tool for problems in a variety of disciplines including financial engineering. In analogy to the generic optimization problem (OP) we considered in the Introduction, a generic stochastic programming problem can be formulated as follows: (SP) minx E[f (x, p)] E[gi (x, p)] = 0, i ∈ E E[gi (x, p)] ≥ 0, i ∈ I, x ∈ S. (6.1) In this formulation, x represents our n-dimensional decision variable vector and p represents the uncertain parameters of the optimization problem.

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Journal of Portfolio Management, Fall:49–58, 1994. [16] R. H. Tütüncü and M. Koenig. Robust asset allocation. Technical report, Department of Mathematical Sciences, Carnegie Mellon University, August 2002. To appear in Annals of Operations Research. [17] S. Uryasev. Conditional value-at-risk: Optimization algorithms and applications. Financial Engineering News, 14:1–6, 2000. 

The Lords of Easy Money: How the Federal Reserve Broke the American Economy
by Christopher Leonard
Published 11 Jan 2022

It showed that the decision to fight price inflation rather than asset inflation happened gradually, but was unmistakable by the 1990s. This wasn’t just a quirk of the Greenspan era. It set a permanent pattern. Greenspan was rewarded for the decision. It helped explain why lawmakers in both parties praised him at the public hearings. Greenspan appeared to be the most talented financial engineer of his generation, and the key to this success, along with the mystery of it, was that he managed to stimulate the economy without stoking price inflation. Asset inflation, however, was out of control by 1998. But this didn’t raise much public concern. When asset inflation gets out of hand, people don’t call it inflation.

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The company had just borrowed $1.5 billion in cheap debt, but it didn’t plan to use the cash to build a factory, invest in research, or hire workers. Instead, the company used the money to buy back shares of its own stock. This made sense because the stocks paid a dividend of 2.5 percent, while the debt only cost between 0.45 percent and 1.6 percent to borrow. It was a finely played maneuver of financial engineering that increased the company’s debt, drove up its stock price, and gave a handsome reward to shareholders. Fisher drove home the point by relating his conversation with the CFO. “He said—and I have his permission to quote—‘I’m not going to use it to create a single job,’ ” Fisher reported. “And I think this is the issue.

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Rexnord wouldn’t turn a profit until 2012, and it paid millions of dollars in interest costs each year. But Adams wasn’t deterred. Apollo still owned Rexnord, and in the world of private equity, there was more to running a business than turning a profit or being debt-free. Rexnord had become Apollo’s strategic vehicle to generate periodic windfalls through financial engineering. Right after Apollo bought the company, for example, it loaded Rexnord down with $660 million in new debt, which was used to buy an industrial plumbing firm called Zurn Industries. This expanded Rexnord’s reach into new markets, and created a new pathway for even more debt-fueled acquisitions.

Tools for Computational Finance
by Rüdiger Seydel
Published 2 Jan 2002

Algorithms 18 (1998) 209-232. [GeG03] T. Gerstner, M. Griebel: Dimension-adaptive tensor-product quadrature. Computing 70,4 (2003). [GiRS96] W.R. Gilks, S. Richardson, D.J. Spiegelhalter (Eds.): Markov Chain Monte Carlo in Practice. Chapman & Hall, Boca Raton (1996). [Gla04] P. Glasserman: Monte Carlo Methods in Financial Engineering. Springer, New York (2004). [GV96] G. H. Golub, C. F. Van Loan: Matrix Computations. Third Edition. The John Hopkins University Press, Baltimore (1996). [GK01] L. Grüne, P.E. Kloeden: Pathwise approximation of random ODEs. BIT 41 (2001) 710-721. [Ha85] W. Hackbusch: Multi-Grid Methods and Applications.

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Pergamon Press, Elmsford (1964). I. Karatzas, S.E. Shreve: Brownian Motion and Stochastic Calculus. Second Edition. Springer Graduate Texts, New York (1991). I. Karatzas, S.E. Shreve: Methods of Mathematical Finance. Springer, New York (1998). H.M. Kat: Pricing Lookback options using binomial trees: An evaluation. J. Financial Engineering 4 (1995) 375–397. T.R. Klassen: Simple, fast and flexible pricing of Asian options. J. Computational Finance 4,3 (2001) 89-124. P.E. Kloeden, D. Platen: Numerical Solution of Stochastic Differential Equations. Springer, Berlin (1992). P.E. Kloeden, E. Platen, H. Schurz: Numerical Solution of SDE Through Computer Experiments.

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C.A. Los: Computational Finance: A Scientific Perspective. World Scientific, Singapore (2001). T. Lux: The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions. J. Economic Behavior & Organization 33 (1998) 143-165. Y.-D. Lyuu: Financial Engineering and Computation. Principles, Mathematics, Algorithms. Cambridge University Press, Cambridge (2002). L.W. MacMillan: Analytic approximation for the American put option. Advances in Futures and Options Research 1 (1986) 119-139. R. Mainardi, M. Roberto, R. Gorenflo, E. Scalas: Fractional calculus and continuous-time finance II: the waiting-time distribution.

The Clash of the Cultures
by John C. Bogle
Published 30 Jun 2012

Creating Value versus Subtracting Value In yet another distortion aided and abetted by our financial system, too many of the best and brightest young people in our land, instead of becoming scientists, physicians, educators, or public servants, are attracted by the staggering financial incentives offered in the investment industry. These massive rewards serve to divert vital human resources from other, often more productive and socially useful, pursuits. Even in the field of engineering, “financial” engineering, which is essentially rent-seeking in nature, holds sway over “real” engineering—civil, electrical, mechanical, aeronautical, and so on—which is essentially value-creating. The long-term consequences of these trends simply cannot be favorable to our nation’s wealth, growth, productivity, and global competitiveness.

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The desideratum is steady earnings growth—manage it to at least the 12 percent level if you can—and at all costs avoid falling short of the earnings expectations at which the corporation has hinted, or whispered, or “ballparked” before the year began. If all else fails, obscure the real results by merging, raising assumptions for future returns on the pension fund, taking a big one-time write-off, or accelerating the booking of orders for goods. All of this creative financial engineering apparently serves to inflate stock prices, to enrich managers, and to deliver to institutional investors what they want. But if the stock market is to be the arbiter of value, it will do its job best, in my judgment, if it sets its valuations based on punctiliously accurate corporate financial reporting and a focus on the long-term prospects of the corporations it values.

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The Financial Press With a few wonderful exceptions, journalists and business-page editors failed to adequately consider the smoke that was forming and would culminate in the financial firestorm of 2008–2009. Perhaps it would have required too much tedious digging. Perhaps the machinations were simply too complicated. Perhaps our financial engineers were clever enough to hide what they were cooking up. Less understandable, however, is the fixation of financial journalism on the momentary movements of the stock market, in which every sudden rise or fall is treated as a newsworthy event, even though the trading activity merely reflects the transfer of stock ownership from one investor to another.

Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever
by Robin Wigglesworth
Published 11 Oct 2021

But I hope I have written a book that does justice to the magnitude of the story I wanted to tell. As we shall see over the following chapters, this is a revolution whose seeds were sown in Belle Époque Paris, first harvested in boho San Francisco, and transformed into a world-conquering invention by Wall Street’s financial engineers. It features a colorful cast of former farmhands turned computer geeks, amateur jazz musicians, former seminarians, fallen academics, avuncular acoustic physicists, a charismatic secretary turned CEO, finance industry titans, and even a brief cameo from the Terminator. They faced enormous hurdles, public lack of interest, and often widespread scorn from the investment world’s haughty mainstream.

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During his travels around the Pacific, he had appreciated the efficiency of how traders would buy and sell warehouse receipts of commodities, rather than the more cumbersome physical vats of coconut oil, barrels of crude, or ingots of gold. This opened up a panoply of opportunities for creative financial engineers. “You store a commodity and you get a warehouse receipt and you can finance on that warehouse receipt. You can sell it, do a lot of things with it. Because you don’t want to be moving the merchandise back and forth all the time, so you keep it in place and you simply transfer the warehouse receipt,” he later recalled.19 Most’s ingenious idea was to, after a fashion, mimic this basic structure.

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But they can also be tied to the longevity of individual people, so it was later amended and pegged to eleven children born around 1990–93, such as Weber’s daughter Emily, who was born on the same day that SPDR was established.35 As a result, SPDR will expire either on January 22, 2118, or twenty years after the death of the last survivor of the eleven people mentioned in the trust, whichever occurs first. After a hefty internal debate, the Amex team decided against trying to patent their invention—with seismic consequences. Given SPDR’s public filings, it was easy for rivals to copy the design. Virtually anything can be put inside an ETF “warehouse,” and over the years Wall Street’s financial engineers have used the variants of the structure to create vehicles for investors to bet on everything from the US bond market to risky bank loans, African stocks, the robotics industry, and even financial volatility itself. Today, ETFs are a $9 trillion industry, and they account for about a third of all trading on US exchanges.

Our Lives in Their Portfolios: Why Asset Managers Own the World
by Brett Chistophers
Published 25 Apr 2023

In the face of significant criticism, some asset managers have shown increasing willingness to share that burden – for instance by offsetting a proportion of transaction and monitoring fees against the management fees paid by LPs – but not always, and usually only to a limited degree. The Role of Financial Engineering In 2005, the UK firm Terra Firma Capital Partners, led by the renowned financier Guy Hands, achieved what at the time was the largest ever buyout of a residential real-estate company by an asset manager. One of its funds acquired Viterra, the property subsidiary of the German utility E.ON, which owned and let 150,000 apartments across Germany.

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The fund has not now doubled its money, but trebled it. Needless to say, given asset managers’ use of large amounts of debt to finance their purchases of real assets, anything that can be done to reduce the cost of that debt also helps to boost returns – which is where more complex methods of financial engineering enter the picture. Philip Ashton and colleagues have noted, for example, that the consortium that purchased both the Chicago Skyway and Indiana Toll Road concessions in 2005 and 2006, respectively – namely, a partnership between Macquarie’s American infrastructure fund and the Spanish transportation-infrastructure developer Cintra – used interest rate swaps to this end.43 Similarly, while it was under the ownership and control of Blackstone funds, Invitation Homes used securitisation techniques to lower the cost of the debt that it raised to finance its single-family-housing acquisition spree.

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The securitised debt was cheaper: the coupons (interest rates) on the rental-backed bonds ranged from 2.21 to 2.89 per cent; interest rates on the loans advanced to Invitation Homes ranged from 3.03 to 3.54 per cent.44 When borrowing billions of dollars, that is a huge cost differential. Moreover, there is an additional important rationale for such financial engineering: debt can be, and often is, used to hasten fund returns from infrastructure and housing investments – to bring those returns forward in time. I will turn to the mechanisms of such hastening shortly, but first there is the question of motivation. Partly, this is straightforward: all other things being equal, partners in a fund prefer to earn returns sooner rather than later; time is indeed money.

The Economics of Belonging: A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All
by Martin Sandbu
Published 15 Jun 2020

The new communication and information technologies that have arrived like whirlwinds since the 1980s have created “winner-takes-all” dynamics in many sectors. As it has become easier for top performers to serve bigger markets—in fields from pop music and film to highly specialised services like litigation, financial engineering, and management—the market rewards for being number one rather than second best have ballooned.12 (Globalisation has added to this—but the technology that drives it would have made it happen within national economies in any case.) In some countries, and particularly clearly in the United States, this has encouraged a growing concentration of profits in the hands of a few firms in the affected sectors (most obviously technology and web services), amplified by policies that make it harder for competitors to challenge dominant firms.13 In parallel, many countries have seen the share of national income going to capital owners rising while that going to wages and salaries has fallen.

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Chapter 4 already showed the ways in which financialisation aggravates the economy’s post-industrial tendency to leave some people behind. But it does so through largely domestic mechanisms: reckless domestic bank lending creates financial instability; financialisation diverts resources away from the most productive investments; and financial engineering shifts the balance of power and the division of national income in favour of domestic capital owners over domestic workers, which also increases regional inequality. Financialisation has all these effects. But it would have them in a perfectly closed national economic system, too. This is where we come to the second accusation, which is that financial globalisation is the cause of domestic financialisation—either directly or by stunting national policymakers’ ability to regulate it (or both).

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One harmful effect of financial sophistication is to increase the ability of the managers and financiers who control the allocation of capital to extract economic value for themselves. Much of the increase in financial activity has had that function. That includes practices such as using stock market options to engineer payouts for top executives out of all proportion to the value they create;5 using financial engineering to break apart or merge companies, which on the whole does not increase productivity but generates fees for investment banks; or individualising savings that used to be implicit and collective, such as pensions provision or student funding. Similarly, the number of intermediaries in the financial chain between savers and borrowers has multiplied while there has been a general increase in financial trading—for which financiers are paid by volume, rather than for creating any underlying economic value.

Mastering the Market Cycle: Getting the Odds on Your Side
by Howard Marks
Published 30 Sep 2018

But borrowers were assured that, thanks to the generous capital market conditions, they would always be able to refinance into yet another mortgage, again with a sub-market teaser rate. Investment banks were eager to turn the raw material of plentiful sub-prime mortgages into tranched mortgage backed securities with the highest average credit rating, in order to maximize their salability. The ardor for this activity at just the time that “financial engineering” came into favor gave rise to ratings for tranches that turned out to have been totally divorced from how they actually would perform under stress. The investment banks that created and sold these securities often were willing to retain the equity layer at the bottom of the tranched structure in order to facilitate a high volume of issuance or simply out of a desire to hold high-yielding assets (i.e., even they were oblivious to the toxic nature of their product).

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Rather, the GFC was a largely financial phenomenon that resulted entirely from the behavior of financial players. The main forces that created this cycle were the easy availability of capital; a lack of experience and prudence sufficient to temper the unbridled enthusiasm that pervaded the process; imaginative financial engineering; the separation of lending decisions from loan retention; and irresponsibility and downright greed. It must be noted, however, that this chain reaction was abetted by elected officials who were eager to expand the American dream of home ownership and naively thought it would be great if everyone was enabled to buy a home.

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(Incentives like these—which allow participants to engage in pro-risk behavior without having to worry about the consequences—were described in the Global Financial Crisis as creating “moral hazard,” a term that came into widespread use. While it’s heard less often these days, the concept survives, and it remains dangerous.) The key to the purported success of sub-prime mortgage backed securities lay in “financial engineering” performed by “quants” and Ph.D.’s, many of them in their first jobs. They modeled risk based on the flawed assumption that mortgage defaults would remain uncorrelated and benign as in the past. The creation of large amounts of sub-prime MBS meant there was a lot of business for the rating agencies whose imprimatur was essential.

Trading Risk: Enhanced Profitability Through Risk Control
by Kenneth L. Grant
Published 1 Sep 2004

As is the case elsewhere, this limitation contains a hidden opportunity: I believe it is useful to compare correlations between securities across different time spans so as to gain a better The Risk Components of an Individual Portfolio 91 understanding of interactive pricing dynamics across the fullest range of available market conditions. VALUE AT RISK (VaR) Through the efforts of modern-day financial engineers, a new paradigm has emerged: It is now possible, nay, even fashionable, to combine the concepts of volatility and correlation into a single, portfolio-based exposure estimate. This work, most of which has been conducted over the past 15 or so years, is most broadly synthesized under the heading of Value at Risk, which is now thought of as the standard methodology for risk management in the financial services industry.

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Method 1: Inverted Sharpe Ratio We’ll start the process by focusing on the less intuitive task of developing a methodology for setting a sensible lower bound for portfolio exposure. If we accept the critical notion that risk and return are interrelated, then we ought to be able to express one in units of the other. Indeed, as we have already covered, some of the most important work done in the era of financial engineering is the expression of return in units of risk. Most famously, and most relevantly for our purposes, these concepts are embodied in the Sharpe Ratio calculation, which you may recall is a ratio of returns to their associated volatility. If we can estimate our Sharpe Ratio with relative accuracy, we have a pretty good notion of the kind of return we can expect for a given level of performance volatility.

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Although, as becomes such an eclectic enterprise, LNV’s eccentric lead singer died in 1993 (yup, heroin overdose); I’m pretty sure the band is still kicking around somewhere. I hope they come to New York some time; I’d really like to catch their act. In my work at Soc Gen, I had an opportunity to interact pretty extensively with many of its principal financial engineers; and I want to tell you the story of my dealings with one such individual, a small, wiry, chain-smoking politechnician whose exact name I can’t recall, so I’ll simply refer to him as Petit. One of my missions in the bank was to negotiate with Petit and his entourage, to entreat, beseech, and otherwise plead with him to temper Justice with Mercy in the setting of certain risk parameters for a pet project of my boss’s, the details of which escape me in the fog of the years that have since passed.

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite
by Duff McDonald
Published 24 Apr 2017

Just before it all came crashing down, Enron shares were trading at 60 times earnings, despite it basically having turned itself into a bank, and banks tend to trade for 10 to 15 times earnings. To keep it up there, he had to keep giving the market what it wanted. It’s not easy being a winner. People start to expect things from you. 3.He gave in completely to the temptations of financial engineering, specifically off-balance-sheet financing and securitization. While you don’t need to be an investment banker to know when a financial engineering decision is being made for the wrong reasons, you probably need one to help you pull that kind of move off. Skilling wouldn’t work on Wall Street, but he’d work with them, just for this one thing. To ramp up growth on paper, he turned Enron into a company without enough assets to sustain the debt that had been piled on top of them.

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He even ventured into the coining of aphorisms, some of which were essentially truisms (“An average idea in the hands of an able man is worth much more than an outstanding idea in the possession of a person with only average ability”) but others of enduring insight (“Be wary of investment bankers; they’ve got a totally different view of the world,” and “Somebody, somewhere, is designing a product that will make your product obsolete”). Georges Doriot was also one of a long string of HBS professors who stressed the importance of understanding everything about a company. Whereas later generations of Harvard MBAs emerged from the School understanding little more than their desire to use financial engineering in order to become rich, Doriot demanded that his students study not just a company’s inputs and outputs, but the relationships that made it work as well. “He had more influence on what has happened in American business than the rest of the Harvard faculty put together,”14 said Zalman Bernstein, founder and chairman of Sanford Bernstein & Company. 14 A Decade in Review: 1930–1939 In 1915, the New York Times ran an editorial in support of college-educated businessmen: “We are confident that the young man with a college education is better fitted for advancement in modern business than the one who begins at the foot of the ladder with small learning.”

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Revelations that the legendary cost-cutting chief of GE was enjoying some $2.5 million a year in retirement perks that included free flowers, wine, and even vitamins flew in the face of his reputation, and he relinquished them under the glare of criticism.20 His record as CEO of General Electric was also being dissected, and his once-heralded ability to “manage” earnings decried as financial engineering that skated too close to the edge. His successor at the helm of GE, Jeffrey Immelt (’82), even felt compelled to clarify that “[w]e manage businesses, not earnings.” This imbroglio destabilized what at that point had become a $100 million a year arm of the HBS operation.21 But not for long.

The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America—and How to Undo His Legacy
by David Gelles
Published 30 May 2022

The collectivist spirit of the postwar years might have helped create the great American middle class, but such idealistic conceptions of business’s role in society were no roadmap for success in the hypercompetitive economy of the 1980s. Welch foresaw a different future for GE, one defined not by electric light bulbs, but by quarterly earnings; one powered not by mechanical engineering, but by financial engineering. Speaking to a room full of analysts from research firms and banks—the people who told investors whether or not to buy GE stock—Welch dispensed with the usual business of describing the company’s financial results. Instead, in twenty minutes, he laid out his vision for the future. Titled “Growing Fast in a Slow-Growth Economy,” the speech depicted a winner-take-all world, where companies were either dominating their industry or sliding into irrelevance.

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At the very moment he was selling off some of GE’s signature businesses—air-conditioning and small appliances—he was gobbling up companies that had nothing to do with manufacturing. Soon after those deals, he acquired Kidder Peabody. He was laying the groundwork for the most radical transformation GE would experience under his leadership: its evolution from a company that relied on its industrial prowess to one that depended on financial engineering. During his first decade in charge, Welch grew GE Capital at a modest clip. When he took over, the unit had $11 billion in assets. A decade later, it had $70 billion in assets, and had expanded its operations from the United States to other countries as well. Kidder Peabody, problematic as it was, had given GE a foothold on Wall Street.

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Dave Cote, a senior GE executive who was among the final half dozen candidates to succeed Welch, went on to have a strong run at Honeywell after Bossidy left. Over more than a decade, Cote emerged as a durable leader who oversaw sustained growth in his company’s core business, without resorting to massive layoffs or financial engineering. Honeywell stock soared during his tenure, making him one of the few Welch protégés to deliver sustained growth for investors. Another Welch disciple, Omar Ishrak, left GE after feeling like he didn’t have the support to innovate and develop new products, according to Bill George, who recruited Ishrak to Medtronic, the medical device maker.

Commodity Trading Advisors: Risk, Performance Analysis, and Selection
by Greg N. Gregoriou , Vassilios Karavas , François-Serge Lhabitant and Fabrice Douglas Rouah
Published 23 Sep 2004

With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals, as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more. For a list of available titles, visit our web site at www.WileyFinance.com. Commodity Trading Advisors Risk, Performance Analysis, and Selection GREG N. GREGORIOU VASSILIOS N. KARAVAS FRANÇOIS-SERGE LHABITANT FABRICE ROUAH John Wiley & Sons, Inc. 

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He is the author of four books on financial markets and has published over 60 research articles on the topics of corporate governance, hedge funds, real estate, currency overlay, credit risk, private equity, risk management, and portfolio management. Dr. Anson is on the editorial boards of five financial journals and sits on Advisory Committees for the New York Stock Exchange, the International Association of Financial Engineers, AIMR’s Task Force on Corporate Governance, the Center for Excellence in Accounting and Security Analysis at Columbia University, and the Alternative Investment Research Centre at the City University of London. Zsolt Berenyi holds an M.Sc. in Economics from the University of Budapest and a Ph.D. in Finance from the University of Munich.

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Fernando Diz is the Whitman Associate Professor of Finance at the Syracuse University Martin J. Whitman School of Management. He also has been Visiting Associate Professor of Finance at the Johnson Graduate School of Management, Cornell University, where he taught courses on derivatives and financial engineering. Professor Diz is also the Founder and President of M&E Financial Markets Research, LLC. He specializes in About the Authors xvii managed futures, money management, market volatility, and the use of derivative securities in investment and speculative portfolios as well as distress and value investing.

The Trade Lifecycle: Behind the Scenes of the Trading Process (The Wiley Finance Series)
by Robert P. Baker
Published 4 Oct 2015

Some swift political intervention was required to overcome this obstacle. The credit event feeder system was canned due to unreliability so the project was diverted to taking this data from Bloomberg. The financial engineering team who wrote the calculation engine and a few other mathematical tools used by RABOND finished long before the IT team. This meant that by the time the system was ready for full testing, the financial engineers were 234 THE TRADE LIFECYCLE on other projects and had to re-acquaint themselves with code they had forgotten in order to provide specialist help or fix bugs. There were a series of credit events just after the project went live.

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Like most banks, Rabobank held a large portfolio of bonds and was active in hedging using credit default swaps (CDS). The fixed income desk was a very important component of the London-based Capital Markets division. The desk comprised traders, structurers, salespeople, middle and back office and a dedicated quantitative team of financial engineers drawing resources from a global pool of IT staff. 225 226 THE TRADE LIFECYCLE Project background This case study features a problem that existed in the bank in the mid-2000s. Bonds were being booked into multiple systems depending on their type. It was very hard to identify them for reporting and management information and for any consolidated view of the entire portfolio.

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Case Studies 227 There were also reasons why they perceived RABOND as being negative from a trading perspective. They were concerned that having a system to accurately measure credit and bond exposures might focus attention on this area and negatively impact their trading limits. They needed the financial engineering team (who were primarily behind RABOND) for other projects. Historically traders had never had much communication with the IT department. Taken together, this meant that the project manager for RABOND had to steer a path away from the traders, only involving them where absolutely necessary.

A Man for All Markets
by Edward O. Thorp
Published 15 Nov 2016

Companies came with families of securities, which included convertible bonds and preferreds, warrants, and put and call options. These derived most of their value from that of the underlying stock and were called derivatives. They proliferated in number, type, and quantity in the decades to follow, as so-called financial engineers invented new ones to possibly decrease risk and certainly increase fees. I used my methodology to price these derivatives and the others that followed. This enabled Princeton Newport Partners to price convertible bonds more accurately than anyone else. Hedging with derivatives was a key source of profits for PNP during its entire nineteen years.

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But if I did that, then, in addition to the fun parts, I would be responsible for things I didn’t enjoy. I changed my mind and gradually wound down our PNP office in Newport Beach, finding good jobs in the securities industry for some of our key people at places like the giant hedge fund D. E. Shaw, the financial engineering firm Barra, and the investment group running the multibillion-dollar pension and profit sharing plan at Weyerhaeuser. Then I called Fischer Black, who was now at Goldman Sachs, after hearing that he wanted to build a computerized analytic system for trading warrants and, especially, convertible bonds.

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The hedge fund Long-Term Capital Management was launched in 1994 with a dream team of sixteen general partners, led by the legendary former Salomon Brothers trader John Meriwether and two future (1997) Nobel Prize winners in economics, Robert Merton and Myron Scholes. The group included other former Salomon traders, more distinguished academics, and a former Federal Reserve vice chairman. Investors included the central banks of eight countries, plus major brokerages, banks, and other institutions. The principals of a financial engineering group I knew, who were coincidentally doing work for LTCM at that time, asked if I had an interest in investing in the fund. I declined because Meriwether had a history at Salomon of being a major risk taker and the partnership’s theorists were, I believed, lacking in “street smarts” and practical investment experience.

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues
by Alain Ruttiens
Published 24 Apr 2013

FABOZZI, The Mathematics of Financial Modeling and Investment Management, John Wiley & Sons, Inc., Hoboken, 2004, 800 p. Lawrence GALITZ, Financial Times Handbook of Financial Engineering, FT Press, 3rd ed. Scheduled on November 2011, 480 p. Philippe JORION, Financial Risk Manager Handbook, John Wiley & Sons, Inc., Hoboken, 5th ed., 2009, 752 p. Tze Leung LAI, Haipeng XING, Statistical Models and Methods for Financial Markets, Springer, 2008, 374 p. David RUPPERT, Statistics and Finance, An Introduction, Springer, 2004, 482 p. Dan STEFANICA, A Primer for the Mathematics of Financial Engineering, FE Press, 2011, 352 p. Robert STEINER, Mastering Financial Calculations, FT Prentice Hall, 1997, 400 p.

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Helyette GEMAN, Commodities and Commodity Derivatives – Modelling and Pricing for Agricultural, Metals and Energy, John Wiley & Sons, Ltd, Chichester, 2005, 416 p. Helyette GEMAN, Insurance and Weather Derivatives – From Exotic Options to Exotic Underlyings, RISK Books, 1999, 300 p. Espen Gaarder HAUG, The Complete Guide to Option Pricing Formulas, Irwin Professional Publishing, 1997, 232 p. Lawrence GALITZ, Financial Times Handbook of Financial Engineering, FT Press, 3rd ed., 2011, 480 p. Robert A. HAUGEN, Modern Investment Theory, Prentice Hall, 4th ed., 1996, 748 p. Peter JACKEL, Monte Carlo Methods in Finance, John Wiley & Sons, Ltd, Chichester, 2002, 222 p. Robert JARROW, Andrew RUDD, Option Pricing, Irwin, 1987, 235 p. E. JONDEAU, S.H.

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SHARPE, Investors and Markets – Portfolio Choices, Asset Prices, and Investment Advice, Princeton University Press, 2006, 232 p. Jan de SPIEGELEER, Wim SCHOUTENS, The Handbook of Convertible Bonds: Pricing, Strategies and Risk Management, John Wiley & Sons, Ltd, Chichester, 2011, 400 p. Dan STEFANICA, A Primer for the Mathematics of Financial Engineering, FE Press, 2011, 352 p. Robert STEINER, Mastering Financial Calculations, FT Prentice Hall, 1997, 400 p. Nassim TALEB, Dynamic Hedging: Managing Vanilla and Exotic Options, John Wiley & Sons, Inc., Hoboken, 1997, 506 p. Peter TANKOV, Financial Modelling with Jump Processes, Chapman and Hall, 2003, 552 p.

The Pyramid of Lies: Lex Greensill and the Billion-Dollar Scandal
by Duncan Mavin
Published 20 Jul 2022

For businesses looking for investment from so-called PE firms, there was so much money sloshing around. GA’s youthful European chief, Gabe Caillaux, a former Merrill Lynch banker, was already an old hand in the industry, having joined GA in 2004. He once told one of my Dow Jones colleagues in an interview that too many private equity firms relied on the ‘trick’ of financial engineering to generate returns, and that wasn’t sustainable. The implication was that you needed smarts, not just pots of cash, to make an investment pay off. Under Caillaux’s leadership, GA in Europe had a stellar track record. Several companies he’d invested in had listed their shares, netting GA enormous profits.

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Gupta scrambled to grab cash from around the GFG empire, using facilities he owned in Australia and elsewhere to raise more funds there, and then funnelling it into the European acquisition. Europe’s regulators were satisfied. Then, having bought the steelmaking facilities – in Romania, and the Czech Republic and elsewhere – for €740 million, Gupta used them to secure €2.2 billion in new loans from Greensill. And with that trick of financial engineering, he had enough to buy back the LRBs from GAM. As this dizzying alchemy was taking place, Jacob, the temporary GAM CEO, had been sweating on whether Gupta would come through on his new deadline for closing the funds in mid-July. There was little contact from Gupta or Greensill. In typical Gupta–Greensill style, the deal was arranged informally, not much more than a nod and a handshake.

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It mentioned the Credit Suisse funds specifically and noted that NMC had been less than forthcoming about the nature of these loan facilities. Block also told a colleague of mine at Dow Jones US-based investor magazine Barron’s that, ‘Accounting standards don’t really address reverse factoring . . . There’s not necessarily a standardized way to report. That’s the whole point of financial engineering, to take something that’s not flattering and to hide it.’ Greensill had loaned NMC $137 million from the Credit Suisse funds. NMC was eventually placed into administration and revealed that debts of $2.7 billion had not previously been reported. (There was another oddity about NMC. Companies linked to its founder, Indian businessman B.R.

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return
by Mihir Desai
Published 22 May 2017

Guess who provided funds to the French government by buying annuities? Unsurprisingly, old people didn’t take up the offer, but young people flocked to it—precisely those who would be the most expensive annuitants for the French government. It gets better. In probably the earliest example of financial engineers bringing havoc to the world, a group of Swiss bankers bought annuities on behalf of groups of Swiss five-year-old girls who were found to come from particularly healthy stock. They then allowed people to invest in portfolios of these annuities, in what is likely the earliest example of securitization.

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This transaction is the essence of an options transaction—relatively small premia are paid to secure the rights to enter into transactions rather than obligating someone to do something, thereby enabling them to access resources they might need but don’t know if they will need. A stock option, for example, allows you the right to buy a share at a predetermined price at some point in the future for a relatively small price today. Options, which today are sometimes regarded as esoteric manifestations of financial engineering, are as old as any traded financial instrument. When trading of financial instruments truly began, in Amsterdam in the late seventeenth century, options were a dominant instrument. Joseph de la Vega, in Confusion de Confusiones, highlighted the importance of options. In a dialogue between the philosopher and the shareholder, the philosopher is intrigued by financial markets but is concerned that he won’t be able to participate given his poverty and the fact that nobody will “lend me money on my beard.”

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Dowries (payments from a bride’s family to a groom’s) were a dominant social institution in Florence, and Francesca shows me numerous archival records of all the dowries paid in Florence in the fifteenth and sixteenth centuries. The importance of marriages and dowries gave rise, along with other circumstances, to the Dowry Fund. The Dowry Fund—an early feat of financial engineering—solved three seemingly unrelated problems. First, parents of daughters were faced with a marriage market where young women significantly outnumbered eligible older men, in part due to the plague. As one reflection of this, dowries were escalating in price rapidly, creating more risk for fathers and their daughters.

Corporate Finance: Theory and Practice
by Pierre Vernimmen , Pascal Quiry , Maurizio Dallocchio , Yann le Fur and Antonio Salvi
Published 16 Oct 2017

Chapter 37: Distribution in practice: dividends and share buy-backs Section 37.1 Dividends Section 37.2 Exceptional dividends, share buy-backs and capital reduction Section 37.3 The choice between dividends, share buy-backs and capital reduction Chapter 38: Share issues Section 38.1 A definition of a share issue Section 38.2 Share issues and finance theory Section 38.3 Current and new shareholders Section 38.4 Share issues and accounting criteria Part Three: Debt capital Chapter 39: Implementing a debt policy Section 39.1 Debt structure Section 39.2 Covenants Section 39.3 Renegotiating debt Section 39.4 Why keep cash on the balance sheet? Section 39.5 The levers of a good debt policy Section V: Financial management Part One: Corporate governance and financial engineering Chapter 40: Setting up a company or financing start-ups Section 40.1 Financial particularities of the company being set up Section 40.2 Some basic principles for financing a start-up Section 40.3 Investors in start-ups Section 40.4 The organisation of relationships between the entrepreneur and the financial investors Section 40.5 The financial management of a start-up Section 40.6 The particularities of valuing young companies Section 40.7 Example inspired by a real case: Example.com Chapter 41: Choice of corporate structure Section 41.1 Shareholder structure Section 41.2 How to strengthen control over a company Section 41.3 Organising a diversified group Section 41.4 Financial securities’ discounts Chapter 42: Initial public offerings (IPOs) Section 42.1 To be or not to be listed?

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The shareholder can realise his investment only by selling it to someone else. The investor obtains certain corporate rights, however: a claim on the company’s earnings and – via his voting rights – management oversight. (c) Other securities (Chapter 24) As you will discover in Chapter 24, financial engineering specialists have invented hybrid securities that combine the characteristics of the two categories discussed above. Some securities have the look and feel of equity from the point of view of the company, but the corresponding cash flows are fixed, at least partially. Others instruments have yields that are dependent on the performance of the company, but are considered loans, not equity capital.

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Followed by the major financial decisions of the firm, viewed in the light of both market theory and organisational theory (Section IV: Corporate financial policies). Finally, if you persevere through the foregoing, you will get to taste the dessert, as Section V: Financial management presents several practical, current topics in financial engineering and management. Summary The summary of this chapter can be downloaded from www.vernimmen.com. The financial manager has three main roles: To ensure the company has enough funds to finance its expansion and meet its obligations. To do this, the company issues securities (equity and debt) and the financial manager sells them to financial investors at the highest possible price.

Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond: The Innovative Investor's Guide to Bitcoin and Beyond
by Chris Burniske and Jack Tatar
Published 19 Oct 2017

ETFS AND MUTUAL FUNDS ARE WRAPPERS, NOT ASSET CLASSES It should be noted that when we talk about asset classes we are not doing so in the context of the investment vehicle that may “house” the underlying asset, whether that vehicle is a mutual fund, ETF, or separately managed account. With the growth of financial engineering and securitization of nearly every asset—and especially with the growing popularity of ETFs—one may find every type of asset at some point housed within an ETF. For example, ETFs for bitcoin and ether are already in the filing process with the SEC. For the purpose of our definition of asset classes, we are distinguishing the asset class from the form within which they are traded.

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Every bubble by definition deflates.”27 “THIS TIME IS DIFFERENT” When asset markets are taken over by mass speculation and prices reach nosebleed territory, a common refrain can often be heard: “This time is different.” Typically, the logic goes that the markets have evolved from more primitive years, and financial engineering innovations have led to robust markets that can’t possibly crash. Time and again this thesis has been refuted by subsequent market crashes. In their well-regarded book This Time Is Different: Eight Centuries of Financial Folly, Carmen Reinhart and Kenneth Rogoff deliver a 300-page tour de force to prove that this time is never different.

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About 80 years after Tulipmania, in the early 1700s, the first international bull market came to rise.16 Kick-started by infamous entities such as John Law’s Mississippi Company in France and John Blunt’s South Sea Company in Britain, the equity markets were whipped into a buying frenzy fueled largely by duplicity. Both the Mississippi Company and South Sea Company had convoluted structures and were heavily marketed as pursuits to establish a presence and exploit trade in the burgeoning Americas, even though they had only marginal success in doing so. Both Blunt and Law used elaborate and unproven financial engineering to advance the price of their companies’ stocks at all costs. Law’s scheme was particularly intricate and dangerous, as it involved controlling France’s first central bank, in addition to the Mississippi Company, which was the country’s largest enterprise. Law won his way into a place of financial power in France with promises to resolve the country’s financial woes, which were dire: the government was on the verge of its third bankruptcy in less than a century.

Bean Counters: The Triumph of the Accountants and How They Broke Capitalism
by Richard Brooks
Published 23 Apr 2018

‘They were out of control, and they didn’t even know it because it was so cool to associate yourself with the top, with the guys who run a multi-billion-dollar company.’36 Many moved through a well-oiled revolving door into Enron jobs laden with stock options and other perks. But it was at the top that the relationship was particularly close. As Fastow turned up the financial-engineering dial, Andersen chose as its new lead audit partner for Enron 35-year-old David Duncan, described in profiles as impeccably polite and non-confrontational. A later court case heard he was a ‘client-pleaser’.37 He had become a partner only two years earlier, but was thought the right man for this major account because he was friendly with Enron’s chief accounting officer (and former Andersen auditor) Rick Causey.

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A few months later, this senior citizen received an answer, possibly because she was the Queen of the United Kingdom, from some of the most eminent brains in the land. The British Academy gathered thirty intellectuals, central bankers and assorted great-and-good and identified some now widely accepted causes: an expansion of credit in response to a largely Chinese savings glut; financial engineering magnifying and hiding risks within the ensuing credit bubble; lax financial regulation; skewed and excessive incentives for bankers, and political indulgence of their methods. Overall, they said, there was a ‘psychology of denial’ and it was ‘difficult to recall a greater example of wishful thinking combined with hubris’.

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‘These management consultants are just making money out of suckers,’ harrumphed former Chancellor Denis Healey.) In government the following year, the appeal of the consultants to New Labour was twofold. They were more malleable than civil servants, who, Blair would claim a couple of years later, blocked change and inflicted ‘scars on his back’. And, of more immediate value, they were adept at the financial engineering of which he and his Chancellor Gordon Brown had urgent need. PRIVATE PARTY Central to New Labour’s election victory was renouncing high taxes and committing to sound public finances. These twin new commitments were enshrined in a self-imposed limit on government debt. But the party had also distinguished itself from the Tories by promising to improve public services that had been starved of investment.

Don't Be Evil: How Big Tech Betrayed Its Founding Principles--And All of US
by Rana Foroohar
Published 5 Nov 2019

Stiglitz, who heads up the Independent Commission for the Reform of International Corporate Taxation, a group of academics and policy makers pushing for global tax reform. “Firms like this can use financial engineering to play all sorts of games,” says Stiglitz, who favors a global flat tax on such firms to avoid a zero-sum race to the bottom to the lowest-cost tax havens.9 How would this actually work in practice? A key idea found in many of the proposals from tax reform advocates is to tax revenues at the point of sale, rather than profits, which would reduce the sort of financial engineering that allows IP- and data-rich companies like Apple and Google to offshore profits in tax havens like Ireland and the Netherlands.

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But hidden within these bullish headlines are a number of disturbing economic trends of which Apple is already an exemplar. Study this one company, and you begin to understand how Big Tech companies—the new too-big-to-fail institutions—could indeed sow the seeds of the next crisis. * * * — THE FIRST THING to consider is the financial engineering done by such firms. Like most of the largest and most profitable multinational companies, Apple has loads of cash—$285 billion—as well as plenty of debt (close to $122 billion). That is because—like nearly every other large, rich company—it has parked most of its spare cash in offshore bond portfolios over the past ten years.

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Or, as my Financial Times colleague Martin Wolf has put it, “[Apple] is now an investment fund attached to an innovation machine and so a black hole for aggregate demand. The idea that a lower corporate tax rate would raise investment in such businesses is ludicrous.”19 In short, cash-rich corporations—especially tech firms—have become the financial engineers of our day.20 The House Always Wins There are the ways in which Big Tech is driving the mega-trends in global markets, as we’ve just explored. Then, there are the ways tech companies are playing in those markets that grant them an unfair advantage over consumers. For example, Google, Facebook, and increasingly Amazon now own the digital advertising market, and can set whatever terms they like for customers.

Crashed: How a Decade of Financial Crises Changed the World
by Adam Tooze
Published 31 Jul 2018

Leaving behind the GSE-centered model of the 1990s, they deprioritized conforming mortgages in favor of private label “unconventional” lending—subprime, slightly better Alt-A and oversized jumbo loans. What the private issuers discovered was that if scrutinizing conventional mortgages was profitable, subprime was even more so.40 The financial engineering was more elaborate and one could charge more money for the services. The techniques of the fixed-income investment bankers were now brought fully into play. A surprisingly large share even of nonconforming private label MBS could still attract an AAA rating once combined in structured products.

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What they did not pay attention to, because they did not dirty their hands with technicalities like MBS, was the effect the influx of emerging market funds might have in financial markets. Emerging market investors bought first Treasurys and then GSE-issued agency debt. This left other institutional investors looking for alternatives. What filled the gap was financial engineering. If pension funds, life insurers and the managers of the gigantic cash pools accumulated by profitable corporations and the ultrawealthy needed safe assets, AAA-rated securities were a product America’s mortgage machine knew how to synthesize. Foreign Reserves and Institutional Investors Compete for US Short-Term Safe Assets (in $ billions) Outstanding Amounts: 2005 2006 2007 2008 2009 2010 Short-term Treasury securities* 1,146 1,173 1,192 1,909 2,558 2,487 Short-term agency securities** 568 489 560 903 844 618 Total 1,714 1,662 1,752 2,812 3,402 3,105 (−) Foreign Official Holdings: Short-term Treasury securities 216 193 181 273 562 na Short-term agency securities 112 110 80 130 34 na Total 328 303 261 403 596 na (−) Demand from Institutional Cash Pools: Institutional cash pools (based on available data) 1,771 2,120 2,216 1,834 2,041 1,911 Institutional cash pools (estimate of total volume) 3,120 3,735 3,852 3,467 3,596 3,432 Average 2,445 2,927 3,034 2,650 2,818 2,672 = Deficit of safe, liquid, short-term products (1,059) (1,568) (1,543) (241) (12) na *Includes Treasury bills and Treasury securities with a remaining maturity of one year or less.

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The commonplace recommendation to tighten fiscal policy might have helped. But this pointed the finger away from where the stress really was, in the financial system. Indeed, from the point of view of financial stability it might have been desirable if more of the AAA securities in circulation had been genuine US government debt rather than the products of financial engineering. In the final analysis, it was convenient to make the case at the level of macroeconomic aggregates. It was particularly easy to demand that a Republican president change his course. It was far less comfortable to question the house price boom and the giant Wall Street edifice erected on top of it.

Rigged Money: Beating Wall Street at Its Own Game
by Lee Munson
Published 6 Dec 2011

All traders are concerned about is risk. Like gambling, traders look at what you have to put up and what you can get, or simple odds. Investment theories were always trying to compete for the expected return of the bet. This is when I started to listen more carefully to what Dr. Andrew Lo, a thought leader on hedge funds and financial engineering from the MIT Sloan School of Finance, was trying to get across. A peddler of ideas himself, he came up with Adaptive Market Hypothesis. I don’t know why it is a hypothesis—it’s simple. Survival is the game, and the game changes with each new crop of investors. Academia is not wrong, it is just too slow to adapt to the reality on the ground.

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In constructing modern, sophisticated, risk-budgeted portfolios, investors have a reasonable tool that Wall Street invented to circumvent an even more esoteric draconian structure from getting in the way. Is there a catch? Of course. The postscript to what is otherwise a feel-good tale of financial engineering for the good of portfolios is the seedy reminder that an edge costs money. Within a few years following the April 2009 inception of AMJ, a half dozen other MLP ETNs and a single ETF have come on the scene. Some weight the index differently, others just focus on gas, others focus on infrastructure over production, and some leverage the returns.

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Apparently, no one was watching despite the regulations on the brokerage and banking side. Just ask a bank trust officer and they will tell you about the hours of compliance work when you walk on both sides of the fence. Regulators were watching, but they didn’t have the tools to keep up with the financial engineering and technology that Greenspan thought would usher in a new era of prosperity. This Internet speed of change allowed a few players like AIG and Lehman Brothers to get away with poor risk management, greed, and ultimately a system that would fail. It took almost eight years for things to go wrong.

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse
by Mohamed A. El-Erian
Published 26 Jan 2016

Internally, they had started to play a game of catch-up with dangerous circumstances that gradually became increasingly obvious over the next year, culminating in cascading failures that very few policymakers and market participants will ever forget. The second big visible tremor hit in March 2008. Bear Stearns, once one of America’s most established and reputable investment banks, found itself on the verge of a total collapse. Once again, complex financial engineering and extremely leveraged positioning were at the heart of the problem, together with inadequate understanding, sloppy supervision, and lax accounting given the extreme risk taking that all this entailed. And once again, dramatic central bank action—this time quarterbacked by the Federal Reserve under Chairman Bernanke—was needed to restore calm before things got really out of hand.

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GDP levels in the United States, United Kingdom, Japan, and EU This generally disappointing outcome speaks to an unfortunate reality: Too many advanced economies lack proper growth engines—though it’s not surprising, since they had gotten deeply hooked on an unsustainable approach that substituted financial engineering and credit entitlement for proper drivers of growth. To make things worse, rather than spur efforts to do better, the persistent recent underperformance has made it harder to secure the consensus needed to revamp growth engines in a fundamental and durable fashion. As I argued in 2013, quite a long list of countries emerged from the crisis saddled with the legacy of ill-designed, inadequate, and sputtering growth engines: “Some countries (for example, Greece and Portugal) relied on debt-financed government spending to fuel economic activity.

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While time will continue to heal many (but not all) balance sheets, this is unlikely to prove sufficient to produce high growth let alone enhance potential, and while cyclical rebounds will please many, they will prove frustratingly insufficient if they do not hand off to longer-term inclusive growth momentum (a point that the Economic Report of the President, prepared by the White House Council of Economic Advisers, led by Jason Furman, made in February 2015).2 With that, here are four key outputs of a reduced-form approach to the ten major challenges facing the global economy. 1. GETTING SERIOUS ABOUT INCLUSIVE ECONOMIC GROWTH The first component of a comprehensive solution involves rejecting financial engineering as a growth strategy and instead returning to the basic building blocks of economic prosperity. It entails a decisive exit from a global monetary configuration, public and private, that has depended for more than a decade now on injection after injection of artificial liquidity to mask the real, structural impediments to growth.

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis
by Tim Lee , Jamie Lee and Kevin Coldiron
Published 13 Dec 2019

Carry trades can include everything from undertaking classic currency carry positions, writing insurance or selling credit default swaps, buying higher-yielding equities or junk debt on margin, taking out buy-to-rent mortgages to finance property investments, to writing put options on equities or equity indexes or buying exchange-traded funds that do so—but that is not all. Carry trades can also include dealings such as companies issuing debt to buy back their own equity or private equity leveraged buyouts, plus a whole gamut of more complex financial strategies and financial engineering. In all cases the carry trader is either explicitly or implicitly betting that changes in underlying capital values will not wipe out his or her income return; the carry trader is betting that underlying asset price volatility will be low or will decline. The final feature of carry trades is their sawtooth return pattern.

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But with the Federal Reserve cutting interest rates to close to zero and longer-term rates ratcheting down as global trend economic growth decayed further, other sectors of the US economy (and global economy) ramped up leverage in carry-type activities. Foremost in this development was the corporate sector. It was well known that corporates increased debt to finance share buybacks, thus raising earnings per share (see Chapter 5, Figure 5.2). But much less well understood is that it must have been also true that corporates were using financial engineering in ways that increased aggregate earnings; basically generating profits from carry trade activities. Circumstantial evidence for this is the behavior of profit share in GDP for the United States (Figure 8.3). Profit share developed in a rather similar pattern to the S&P 500 itself, which, as was explained in Chapter 6, became a giant carry trade.

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He also specializes in quantitative modeling of financial markets. He previously worked as a macro analyst for asset management companies GMO in Boston and Ruffer Asset Management in London. Jamie holds BA degrees in mathematics and in English from Dartmouth College, New Hampshire. Kevin Coldiron is a lecturer in the Masters in Financial Engineering Program at the Haas School of Business, University of California, Berkeley. From 2002 to 2014 he was the co-chief investment officer at San Francisco– based hedge fund Algert Coldiron Investors, which he cofounded. Prior to this he was managing director at Barclays Global Investors in London where he worked for eight years.

Value of Everything: An Antidote to Chaos The
by Mariana Mazzucato
Published 25 Apr 2018

A new breed of financial operator has moved into the market, largely following a PE model, often ‘selling' many of its places to local authorities but also generating private profit. In 2015, the five biggest care home chains controlled about a fifth of the total number of care home beds in the UK. These operators were attracted by stable cash flows, part of which came from local authorities, and opportunities for financial engineering: cheap debt; property which could be sold and leased back; tax breaks on debt interest payments and carried interest; and - ultimately - frail and vulnerable residents whom the state would have to look after if the business failed. The corporate structures of some care home owners became exceedingly complex and often hidden in tax havens, while corporation tax payments were low or nil.

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Interestingly, the company with the lowest gearing (ratio of debt to equity) and the highest credit rating was Welsh Water, which is mutually owned. The four companies with the highest gearing and the lowest credit ratings were all PE-owned. Just like some of the care home groups, WSC ownership structures are often opaque. The combination of shadowy corporate structures and complex financial engineering may well explain high payouts to water company owners. Between 2009 and 2013 Anglian, Thames, United Utilities, Wessex and Yorkshire paid out more in dividends than they made in after-tax profits. Directors saw their share of the companies' income rise from 0.1318 per cent in 1993 to 0.2052 per cent in 2013.

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But the financialization of the industry was not anticipated in 1989, and neither price controls nor limits to returns on capital imposed on the companies by the Water Services Regulation Authority (Ofwat), the industry's economic regulator, appear to have prevented what looks like value extraction. The cases of care homes and water in Britain are not a blanket argument against PE or financialization. But they do illustrate how financial engineering of socially essential services can change the nature of an industry. It is at the very least debatable whether the opaque ownership and excessive financialization which characterize these PE-owned businesses serve their customers more than their owners. THE RETREAT OF ‘PATIENT' CAPITAL Agency theory and MSV, then, are essentially straightforward concepts.

Automate This: How Algorithms Came to Rule Our World
by Christopher Steiner
Published 29 Aug 2012

Assuming he was being robbed of proprietary code, Griffin sued Malyshev, eventually winning a big fine and largely scuttling Teza’s business.2 Employers like Citadel, while they pay incredible sums to their quantitative minds, are left vulnerable to defections. Ken Griffin’s firm had another one of its former financial engineers, Yihao Pu, arrested in late 2011 for allegedly pilfering code before he left. Pu responded by flinging his computer into a river outside of Chicago. Divers recovered the hardware; it contained building blocks of Citadel’s most important trading code.3 The decadent pay and hiring wars continued until, during the course of one fall day in 2008, everything changed for Wall Street.

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This moment, the scrawling of the algorithm on the window, may never have happened—The Social Network was nothing if not hyperbolic—but it’s still an iconic scene and a myth of creation for many savvy young hackers. Facebook deserves more credit than any other company for helping to swing the momentum of minds from Wall Street to the West Coast, but many other success stories in recent years have beaten anything even the greatest financial engineer can offer. Look at Twitter, Groupon, Square, Dropbox, Zynga, and YouTube, among a bevy of others. Then there are dozens of names, such as Tellme Networks, Tacoda, Zimbra, and others, that you may never have heard of but that still fetched prices of $250 million to $900 million each when they were acquired.

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While that practice continues, even if in smaller numbers, the difference now is that most of the industry’s profits come from the creation, sales, and trading of complex products, like the collateralized debt obligations (CDOs) that played a central role in the recent financial crisis. These new products require significant financial engineering, often entailing the recruitment of master’s- and doctoral-level new graduates of science, engineering, math, and physics programs. Their talents have made them well-suited to the design of these complex instruments, in return for which they often make starting salaries five times or more what their salaries would have been had they stayed in their own fields and pursued employment with more tangible societal benefits.

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds
by Maneet Ahuja , Myron Scholes and Mohamed El-Erian
Published 29 May 2012

he exclaimed, half-jokingly as we sat in his glass office surrounded by forest and a lake in Westport, Connecticut. “What we’re called and how we’re categorized, by our basic structure, doesn’t capture the essence of what we are,” he quipped. “I trade long and short,” he continued. “Does that make me a hedge fund?” he asks rhetorically. “No. I consider myself a financial engineer. I started trading commodities. Then commodities became various futures, which evolved into various swaps and derivatives. I could separate things in a way that was unique. I evolved.” These elements are not exactly encompassed by the definition of a hedge fund, which, at its core, groups many of the world’s most sophisticated investors by nothing more than a compensation structure.

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In January 2008, Dalio forewarned of the dangers of overreliance on tools like historical models during an interview with the Financial Times. “What is the most common mistake of investors?” he warned. “It is believing that things that worked in the past will continue to work and leveraging up to be on it. Nowadays, with the computer, it is easy to identify what would have worked and, with financial engineering, to create overoptimized strategies. I believe we are entering a period that will not be consistent with the back-testing, and problems will arise. When that dynamic exists and there’s close to zero interest rate, we knew that the ability of the central bank to ease monetary policy is limited.”

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Pershing’s TIP REIT was initially well received by Target’s senior management and its adviser Goldman Sachs. In September 2008, Target’s board considered the potential REIT transaction. Unfortunately for Pershing, the Target board met shortly after Fannie, Freddie, AIG, and Lehman failed, and the board did not have any appetite for what looked like a financial engineering transaction. Rejected by the company, Ackman decided to go public with his TIP REIT proposal in a town hall format. Shortly after its November 2008 presentation, Target summarily rejected Pershing’s proposal, citing a number of concerns. A few weeks later Ackman made a second public presentation attempting to address Target reservations about the plan, but which Target again rejected.

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It
by Stephen Davis , Jon Lukomnik and David Pitt-Watson
Published 30 Apr 2016

One might have thought that the banks’ “owners,” meaning the institutional investors who use our money to hold the banks’ stock, would have discouraged such behavior for fear of being burnt. In fact, their virtual fingerprints were all over the banks that undertook excessive risks. According to a forensic report by economist John Kay, Wall Street–style investors encouraged “companies to engage in financial engineering, to run their businesses ‘to make the numbers,’ or otherwise to emphasize short term financial goals at the expense of the development of the business capabilities.”18 “Short-termism is a disease that infects American business and distorts management and boardroom judgment,” asserted Martin Lipton, Theodore Mirvis, and Jay Lorsch in a 2009 paper.

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Your bank likely will sell your mortgage to an underwriter, who will combine your mortgage with others into a pool of mortgages that can then be traded, which then adds a plethora of other agents such as traders, mortgage desks at investment banks, risk management professionals, derivative salespeople, and financial engineers. Every agent along the way gets paid and, to be sure, deserves to get paid, just as they do in any other industry that has a complex supply chain. Each step along the way makes perfect sense, but there are a lot of steps. Seemingly simple transactions become very complicated when you actually look at the mechanics of finance, and at each step there are numerous opportunities for agents to extract fees, often without our being aware of it.

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DE-EMPHASIZE TRADING AND SPECULATION, AND REWARD INVESTING FOR THE LONG TERM Market conditions encourage trading in public stocks based on price, rather than investing in public companies based on value. Here are suggestions for how to reverse that trend. Tim MacDonald of the Capital Institute has proposed a different form of ownership for long-term investors. In a back-to-the-future synthesis of modern financial engineering and old-fashioned direct ownership, he would have pension funds, endowments, insurance companies, sovereign wealth funds, and other large long-term investors curtail their public market investments, getting away from what he calls the tyranny of the trading tape. MacDonald’s idea, which he calls “evergreen direct investing,” is that an investor would make a direct investment into a company.

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit
by William Keegan
Published 24 Jan 2019

However, Brown freely acknowledged in retrospect that it had been a mistake to subscribe to what had become an international consensus. This consensus, led by the then chairman of the Federal Reserve, Alan Greenspan, held that the sophistication of modern financial markets had reduced the dangers of a financial crisis via the diversification of risk, all those fancy new ‘products’ and what became known as ‘financial engineering’. During the summer of 2007, and the advent of the Northern Rock crisis, Brown had moved on to No. 10, and his long-time colleague and fellow Scot Alistair Darling was installed at the Treasury. Governor King may not have been over-interested in regulation, but Darling certainly was. Indeed, in his instant memoir of the crisis, Darling disarmingly admits that, as shadow minister for the City in the run-up to the 1997 election, he had been largely responsible for the architecture of the FSA.

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I myself first became aware of the international repercussions when on holiday at our annual retreat in Puyméras, the heart of Côtes du Rhône country, near Gigondas and Chateauneuf du Pape. On 9 August, the French bank BNP Paribas froze three of its investment funds. As the crisis unfolded, it became evident that globalised financial engineering had certainly spread risk. But there were also the risks of ‘irrational exuberance’. Way back in the late ’90s, the then Governor of the US Federal Reserve, Alan Greenspan, had expressed concern about ‘irrational exuberance’ in the markets. But they had seen nothing yet. The spreading of risk had ensured that European financial institutions, not least supposedly staid German banks, were also severely affected by what had begun as the US sub-prime crisis.

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After I had duly introduced myself, he said, ‘We didn’t have a banking crisis in Canada.’ Canada’s experience was the exception to the rule that, in a globalised financial world, with sub-prime ‘paper’ turning up on bank balance sheets all over Europe, it was difficult to avoid being tainted by the crisis. For a time, it was fashionable to blame financial engineering for the banking crisis but in Thucydidean terms the truest cause could well have been a recrudescence of the historical pattern of greed and excessive risk-taking – parallels with the Dutch tulip mania and South Sea Bubble – to relieve so many people of their senses. But the assumed sophistication of the global financial system was the proximate cause and was to magnify the effects.

Finding Alphas: A Quantitative Approach to Building Trading Strategies
by Igor Tulchinsky
Published 30 Sep 2019

This is a particularly ideal pursuit for individuals who are undertaking a college education, as well as those who are ambitious and highly interested in breaking into the financial industry. Qualified candidates are those highly quantitative individuals who typically come from science, technology, engineering, or mathematics (STEM) programs. However, majors and expertise vary and may include statistics, financial engineering, math, computer science, finance, physics, or other STEM programs. xviii About the WebSim Website You can find more details on WebSim in Part IV of this book. More information on the Research Consultant program is available at WebSim’s official website. PART I Introduction Finding Alphas: A Quantitative Approach to Building Trading Strategies, Second Edition.

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In general, liquid broad-market 234 Finding Alphas equity ETFs like SPY have few tracking errors because they hold a large number of underlying stocks, each of which is liquid. The tracking error issue tends to be more substantial for some futures-based ETFs (which can suffer from negative roll yields) and commodity ETFs, as well as their inverse and/or leveraged counterparts. •• Inverse or leveraged ETFs: By using various derivatives and financial engineering techniques, some ETFs are constructed to achieve returns that are opposite and/or more sensitive to the price movements of the underlying securities. The common types of these ETFs are leveraged (2x), triple leveraged (3x), inverse (−1), double inverse (−2x), and triple inverse (−3x). Under volatile market conditions, the rebalancing of these leveraged ETFs may incur significant costs.

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Most notably, the Sharpe ratio almost doubled, from 0.40 to 0.77, while the maximum drawdown was reduced by half. Seasonal trends appear not only in equities but also in various commodities. Investopedia (Picardo 2018) describes the tendency of gold to gain in September and October, which can be captured by using gold ETFs. On his website, financial engineer Perry Kaufman (2016) has delineated several classic seasonality examples in agricultural products and their related ETFs. Frankly, the seasonality phenomena discussed so far are more like market-timing tricks than practical hedged alpha ideas. Nonetheless, by studying such patterns one may come up with interesting technical or macro indicators, which, in turn, can be implemented as alphas to capture statistical arbitrage across some correlated instruments. 

The Levelling: What’s Next After Globalization
by Michael O’sullivan
Published 28 May 2019

Debt levels (global debt to GDP) today are higher than at the beginning of the financial crisis. China, emerging-market governments, corporate America, and select European countries (that is, France) have taken on most new debt. Most of this debt is not productive, in that it doesn’t fuel growth; rather, it has been taken on to patch up economic holes, fuel financial engineering, and buy time rather than to fund new investments. In China, for instance, the impact on the GDP of a dollar (or renminbi) spent on investment (mostly infrastructure) has fallen steadily in the last five years. If interest rates rise, as they are beginning to as of this writing, the burden of this debt will weigh down economic activity and fuel future crises.

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A more clear-cut reason why productivity is low is that since the global financial crisis, investment has been tepid by historical standards. There are several reasons: low economic growth implies relatively fewer investment opportunities, but it has not deterred companies from more financialized growth. That is, low interest rates have enticed executives at many corporations to focus more on financial engineering (management consultants might call it “financial productivity”) in which debt is issued cheaply in order to fund share buybacks and dividend payouts. Higher share buybacks make earnings per share look better, which means greater executive pay. More broadly, over the last ten years on average, confidence among business leaders has not been high, which has probably led to deferment of investment.

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It should be mentioned that these figures do not account for household or corporate debt, which in some countries has reached gargantuan levels—notably China, where debt levels are topping those reached in Japan in 1989 (Japanese land prices today are still worth half what they were in 1991), Thailand in 1996, and Spain in 2009, and we know what happened next in those instances. We should, of course, add into this mix the sharp rise in US corporate debt, much of it taken on for the purposes of financial engineering. In this context, a recession in the near future may well lead to an international debt crisis and a period of dislocation in debt markets. In response, governments may look to the two avenues of monetary and fiscal policy to steady economies. However, we have already seen that monetary policy, even in its most inventive forms, can be ineffective in the context of high debt, low potential growth, and unfriendly demographics because these dull the spark it provides.

Billionaires' Row: Tycoons, High Rollers, and the Epic Race to Build the World's Most Exclusive Skyscrapers
by Katherine Clarke
Published 13 Jun 2023

In the subsequent years, as more copycat supertalls started to rise along the same corridor, each vying for the same small pool of billionaire purchasers, it became clear that this was a much bigger story. It was a story about the enormous rise in global wealth and the people who work to capture a piece of it for themselves. It was a story about hubris, sophisticated financial engineering, architectural daring, shady money, and one-upmanship. I was hooked. * * * — IN THE COURSE of the reporting for this book, I spoke with a source who invoked the work of Michel Foucault, a French philosopher whose writings about power and social control I had studied only briefly as an undergraduate.

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In these pages, I will attempt to show that the true stories behind the rise of these towers and the people that built them are far from black-and-white. They are messy and filled with moments of ingenuity, fuzzy math, hubris, triumph, and despair. And beneath the gleaming façades of these skyscrapers is an unseen underbelly of complicated financial engineering, litigation, and sabotage. One thing I can tell you for sure: The world of ultra-luxury real estate development is not for the faint of heart. It’s a blood sport. The risks involved in assembling a well-located site, lining up financiers and overseeing construction at more than a thousand feet—never mind then finding billionaire buyers to fill up the new towers—are almost unimaginable to a person unfamiliar with this world.

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New billionaires were being minted every day in countries like China, Russia, Brazil, and India. Many of them looked to America as somewhere they could secure their capital when things were dicey at home. Following the lessons of the financial crisis, they would be wary of any investment that required financial engineering. Real estate transactions may have caused the world’s financial meltdown, but real estate itself was still the ultimate “hard asset” in contrast to the fickle performance of fluid markets like stocks and bonds. Barnett would thus build the world’s most expensive safety deposit boxes, where investors could stash their money whether they intended to actually live in them or not.

Trading and Exchanges: Market Microstructure for Practitioners
by Larry Harris
Published 2 Jan 2003

Since they often compete with many other traders, they must be very quick to capitalize on arbitrage opportunities as they arise. * * * ▶ Financial Engineering The term financial engineering has emerged to describe the highly technical body of knowledge that traders use to manage risk and to convert it from one form to another. The word engineering very accurately suggests that financial engineers engage in a productive process that consumes feedstock (various instruments) and produces products (other instruments). Unlike other productive processes, most financial engineering processes are completely reversible. ◀ * * * Actual shippers are most successful when they can ship the instrument cheaply between markets.

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The assumption that Vivendi’s share price on the effective date will equal the average closing price is too unrealistic to produce useful valuation formulas and hedge portfolios for the risk arbitrage. This analysis, however, shows that the merger agreement introduces option characteristics into the valuation of Seagram shares. Financial engineers who undertake this arbitrage must derive appropriate formulas that do not depend on our simplifying assumption. They also must adjust for options to buy 19.9 percent of Seagram’s stock at 77.35 dollars that Vivendi received in the merger agreement. The July 26, 2000, NYSE closing price for Seagram was 57 dollars.

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If the underlying risk is traded in different forms in the various markets, arbitrageurs also act as repackagers. When they buy an instrument in one market and sell a similar but different instrument in another market, they essentially repackage the underlying common factor risk. In the derivative markets, risk repackaging is a productive process generally run by financial engineers. Arbitrageurs who buy cash instruments and then sell derivative contracts are essentially derivative contract manufacturers. They allow other traders to buy long contract positions. If the arbitrageur sells short to someone who is not covering a short position, the transaction increases the open interest in the contract.

Red-Blooded Risk: The Secret History of Wall Street
by Aaron Brown and Eric Kim
Published 10 Oct 2011

We didn’t know exactly what we were, but we knew it was something in between. A more general term for people who use quantitative methods in finance is “quant,” but that term also describes less rebellious researchers with quantitative training who came to Wall Street later and called themselves “financial engineers.” I am aware that “rocket scientist” is a stupid name, both boastful and inaccurate. I didn’t make it up, and don’t use it much. I describe myself as a “quant” with a lowercase q, unpretentious as in, “just a simple quant.” I’m not humble, as you’ll figure out if you keep reading, but I’m not given to overstatement.

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Most had no interest in finance before coming to Wall Street, and of course many had not even lived in a capitalist society. In some cases their interest started and ended with financial equations. They expected to be trained in their new duties, after which they would try to advance the state of the art through incremental improvements, all for salary and bonus. They were financial engineers, in a few cases Einsteins, not rocket scientists. They did not come to beat the Street, but to praise it. I don’t mean to overgeneralize about a large, diverse group. I am not speaking about any one individual, but the aggregate stereotype of a generation. There were old-school quants among this new group, and individualists of many stripes.

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A share of stock is always worth one share of stock, whatever the price is in dollars. Since the option price can be stated as a fixed number of shares, at least in theory and for an instant, the option is also riskless in the stock numeraire. This is a general technique in derivative pricing, and financial engineering in general. Picking the right numeraire can make a hard problem easy (and we saw in Chapter 1 that it can reverse the answer). It can make a problem that required estimation of probabilities into one that can be answered directly from observation. The numeraire is what connects frequency to degree of belief.

Python for Finance
by Yuxing Yan
Published 24 Apr 2014

Python for Finance Build real-life Python applications for quantitative finance and financial engineering Yuxing Yan BIRMINGHAM - MUMBAI Python for Finance Copyright © 2014 Packt Publishing All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, without the prior written permission of the publisher, except in the case of brief quotations embedded in critical articles or reviews. Every effort has been made in the preparation of this book to ensure the accuracy of the information presented. However, the information contained in this book is sold without warranty, either express or implied.

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In particular, they will learn how to use AutoRegressive Conditional Heteroskedasticity (ARCH) and Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) models. [4] Preface Who this book is for If you are a graduate student major in finance, especially studying computational finance, financial modeling, financial engineering, and business analytics, this book will benefit you. If you are a professional, you could learn Python and use it in many financial projects. If you are an individual investor, you could benefit from reading this book as well. Conventions In this book, you will find a number of styles of text that distinguish between different kinds of information.

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Because of this, after learning the first three chapters in addition to Chapter 5, Introduction to Modules, readers could jump to the chapters they are interested in. On the other hand, the book is ideal to be used as a textbook for Financial Modeling using Python or simply Python for finance courses to master degree students in the areas of quantitative finance, computational finance, or financial engineering. The amount of content of the book and expected effort needed is suitable for one semester. The students could be senior undergraduate students with a reduced depth. To teach undergraduate students, the last chapter should be dropped. Reader feedback Feedback from our readers is always welcome.

What's Your Future Worth?: Using Present Value to Make Better Decisions
by Peter Neuwirth
Published 2 Mar 2015

It didn’t help that from 1982 to 2000 the US stock market enjoyed the greatest bull market in its history,32 making actuaries’ pronouncements on what future investment returns might be (a key assumption that actuaries make every time they value a pension plan) look fearful and out of touch with the modern world where sophisticated financial engineers created and ran investment funds that could generate double-digit returns while keeping the probability of losses (at least according to their models) at an acceptably low level. What is important is that all of these models make specific assumptions about the probability of future events.

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.; Verney (Arthur), Tad Disability Insurance Specialists Inc., 103 discounted cash flow method, 117–118 inadequate for organizations, 128 discount rate(s), 11 definition of, 51–57 example of, 26 Don’t Work Forever (Vernon), 158 E econometric model, 89–90, 91 education, investing in, 45–49 expanding funnel of doubt, 80–83, 98 F FCC, 84–85, 91 financial crisis of 2008–9, 155 financial engineers, 93 financial planning, 157–160 5-step process, 7–13 in day-to-day decisions, 24–37 discount rate and, 11 evaluating impacts of what might happen, 9 non-attachment to a specific scenario and, 9 only calculation in, 8 fooled by randomness, 83–96 Fooled by Randomness (Taleb), 87–88 foregone investment, 118, 119 Foundation Trilogy (Asimov), 66 Frohlich, Rob, 130–138 future.

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves
by Andrew Ross Sorkin
Published 15 Oct 2009

Trillions of dollars in wealth had vanished, and the financial landscape was entirely reconfigured. The calamity would definitively shatter some of the most cherished principles of capitalism. The idea that financial wizards had conjured up a new era of low-risk profits, and that American-style financial engineering was the global gold standard, was officially dead. As the unraveling began, many on Wall Street confronted a market unlike any they had ever encountered—one gripped by a fear and disorder that no invisible hand could tame. They were forced to make the most critical decisions of their careers, perhaps of their lives, in the context of a confusing rush of rumors and policy shifts, all based on numbers that were little more than best guesses.

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As a result of the banks owning various slices of these newfangled financial instruments, every firm was now dependent on the others—and many didn’t even know it. If one fell, it could become a series of falling dominoes. There were, of course, Cassandras in both business and academia who warned that all this financial engineering would end badly. While Professors Nouriel Roubini and Robert J. Shiller have become this generation’s much-heralded doomsayers, even as others made prescient predictions as early as 1994 that went unheeded. “The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A.

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When in August of 2007 credit markets began seizing up, Cassano was telling investors, “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions.” His boss, Martin Sullivan, concurred. “That’s why I am sleeping a little bit easier at night.” The pyramidlike structure of a collateralized debt obligation is a beautiful thing—if you are fascinated by the intricacies of financial engineering. A banker creates a CDO by assembling pieces of debt according to their credit ratings and their yields. The mistake made by AIG and others who were lured by them was believing that the ones with the higher credit ratings were such a sure bet that the companies did not bother to set aside much capital against them in the unlikely event that the CDO would generate losses.

The Misbehavior of Markets: A Fractal View of Financial Turbulence
by Benoit Mandelbrot and Richard L. Hudson
Published 7 Mar 2006

And if you are a high-roller with a death wish, put everything you have into the stocks—and then borrow to buy even more. Thus, Markowitz and others transformed investing from a game of stock tips and hunches to an engineering of means, variances, and “risk aversion” indices. In fact, the term “financial engineering” has been popular on Wall Street ever since. There were problems, of course. First, as Markowitz himself pointed out, it is not certain that using the bell curve is the best way to measure stock-market risk; it is easy, but not necessarily right. Second, to build efficient portfolios you need good forecasts of earnings, share prices, and volatility for thousands of stocks.

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For instance, a Cartier-Bresson photograph can be compressed for e-mailing to someone, then reconstituted upon receipt into something that is grainier than the original photograph—but not noticeably so on a normal computer screen. It is “good enough” for the purpose at hand. In the same way, in financial modeling all we need is a model “good enough” to make financial decisions. If you can distill the essence of GE’s stock behavior over the past twenty years, then you can apply it to financial engineering. You can estimate the risk of holding the stock over the next twenty years. You can estimate how many shares of the stock to buy for your portfolio. You can calculate the proper value of options you want to trade on the stock. And here’s one I made earlier.... This is an example of the final product of my Multifractal Model of Asset Returns: A very faithful copy of a real price chart (with the chart of price changes below it).

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It let corporations hang a price tag on the stock options they granted their executives. It let banks devise new and ever-fancier financial products. It even allowed “portfolio insurance,” a precisely calculated number of options designed to rise in value if your main stock portfolio falls. It seemed to be financial engineering of the highest form. It had abolished risk. Of course, the truth was re-discovered on Black Monday, October 19, 1987, when a sudden drop in stock prices was turned into a rout by a wall of insurance options crashing down on the market. A fundamental problem is the Black-Scholes assumption of constant volatility—in essence, that the world does not change.

Better, Stronger, Faster: The Myth of American Decline . . . And the Rise of a New Economy
by Daniel Gross
Published 7 May 2012

In the weeks and months after Lehman Brothers collapsed in September 2008, the bailout machine kicked into higher gear. Between them, the Fed, the Treasury, the Federal Deposit Insurance Corporation, and, by implication, American taxpayers guaranteed pretty much every credit-related security ever concocted by an MBA with a bent toward financial engineering. The Fed opened its lending windows to all comers: international banks, high-flying investment banks, pretty much every type of bank except blood and sperm banks. Thanks to Bloomberg’s intrepid reporting and litigation, we know that the Fed made available up to $7.7 trillion in total credit and guarantees to banks and other financial institutions.

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In the early decades of the twentieth century Henry Ford provided one of the original and paradigmatic stories of U.S. business engineering: scaling up cottage manufacturing to mass production and continually reimagining and restructuring the business. A century later, in the years before, during, and after the financial crisis, Ford provided another great case study in engineering. But this time it was financial engineering. Under the leadership of Alan Mulally, who joined the company from Boeing in September 2006, Ford borrowed $18 billion from banks and investors. Doing so was like taking out a huge home equity line of credit to remodel the house. But unlike most bubble-era homeowners, Ford spent the cash wisely.

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Manufacturers realized they could save more money simply by relocating production to Shenzhen, China, than they could by dispatching Six Sigma ninjas to improve operations. With debt flowing like a mighty stream and prices and asset values rising to the sky, what was the point of worrying about operational efficiencies? The discipline of business engineering was subordinated to financial engineering, as elite business schools created degrees and concentrations in the dark art. Productivity growth actually was quite weak during the credit boom, rising just 1.8 percent in 2007 and 2.1 percent in 2008. But in the wake of the Lehman Brothers crash, the U.S. economy retrenched, rebooted, rebuilt—and rediscovered the virtue and power of efficiency.

Lessons from the Titans: What Companies in the New Economy Can Learn from the Great Industrial Giants to Drive Sustainable Success
by Scott Davis , Carter Copeland and Rob Wertheimer
Published 13 Jul 2020

Special leasing arrangements were sometimes used so that even shipping a unit across the street would constitute a sale and revenue booked. Tax gains and losses were created when needed to smooth results. GE would fight the IRS on every penny. Most quarters saw some sort of “tax gain,” and that gain was buried in a financial statement category called “other.” It was beyond complex. It was financial engineering at its most extreme—perhaps on a scale never seen before and not since. And there was no one outside the walls of corporate HQ that had any ability to follow all the pieces. Those of us who followed the company for a living were just kidding ourselves that we understood all the financials.

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Compounding via pure operations creates increments of productivity that add up over time: processes that can add low-cost capacity to factories just by making small process improvements and freeing up factory space, while helping employees get a little bit better at their jobs every day. Compounding via financial engineering is powerful as well—doing smart deals, bringing acquisitions into the culture successfully, improving the asset, and paying off the associated debt. This all creates a powerful flywheel effect. Compounding via DBS—making the business system itself better over time by incorporating tools learned from others, while constantly modernizing the core tenets, is foundational to Danaher’s success.

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You needed a long-term view, because in the short term the deal would rarely look all that attractive. This was exactly the reason for the mispricing in the first place: deals just looked expensive, both to M&A bankers and to the CEOs and boards they advised. Jellison’s successes were often explained by critics as luck and pure financial engineering. In hindsight, too many good things happened at Roper over too many years for it to be mere accident. He bought good assets, seemed to run them better than they had ever been run, and developed a consistent growth pattern driven not just by M&A and R&D investments but also by high operating leverage within the assets themselves.

Ghost Road: Beyond the Driverless Car
by Anthony M. Townsend
Published 15 Jun 2020

On ClearRoad’s servers, you wouldn’t simply load some new code to change one vehicle’s behavior. You could change an entire market with the press of a key. The possibilities to charge for any kind of movement, at any time, slicing and dicing the market to reap every last penny it was willing to pay, were almost endless. It could become a hothouse for financial engineering. Governments would surely want to cash in, and the potential for perverse incentives to creep in disturbed me deeply. I imagined road managers tuning highways to find the perfect balance of traffic and cash flow, twisting knobs and flipping switches to juggle political and fiscal realities.

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The huge risks of this marriage between high tech and high finance are clear. Uber’s 2019 IPO filings revealed—despite the company’s nice talk about congestion pricing a year earlier—its true intentions toward cities all along. Public transit was the competition, and Uber planned to win. What’s more, instead of using financial engineering to produce socially beneficial outcomes—like surge pricing’s (supposed) supply-inducing effects—the company had shifted instead to a sophisticated new form of microtargeted “dynamic pricing.” By mining data on current traffic, your ride history, the weather, and even the remaining charge on your phone’s battery, the company showed its eagerness to deploy predatory pricing with little regard for unintended consequences.

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Coord’s clever bet is that cities will simply outsource the collation, dissemination, and enforcement of traffic rules instead. It’s sure to be a growth market. As the driverless revolution gives rise to more kinds of vehicles, more ways to use them, and new driving behaviors, cities will need more complex regulations. Coord’s platform will also be a great tool for financial engineering to milk revenue from future city streets. Imagine a taxibot entering a city center, destination in hand, looking for a curbside spot to discharge its passenger. The AV, or its dispatching daemon in the cloud, sends a request to Coord’s servers. Curbs API, as the company’s service is called, writes back with availability and rates for several suitable pull-overs.

The Production of Money: How to Break the Power of Banks
by Ann Pettifor
Published 27 Mar 2017

The indifference and neglect of central bankers and the resulting system of deregulated finance has encouraged financiers in the ever-expanding ‘shadow banking system’ to create or ‘securitise’ more and more artificial or synthetic ‘credit’ products or assets. This has led (since the mid 1980s) to a new type of financial engineering de-linked from the real economy and known as the ‘originate and distribute’ model for packaging and ‘originating’ financial instruments or collateral. These assets are ‘synthetic’ in that, unlike property, works of art and other typical forms of collateral, they are created artificially from, for example, promises to repay.

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Although their debts were not substantial in the grand scheme of things, nevertheless they were the poorest, most vulnerable borrowers in the market – and because they were charged the highest rates, were most likely the first to go under. Balanced precariously above sub-prime debts were huge sums of ‘structured’ and often ‘synthetic’ debt, made up of collateralised securities, credit default swaps and other complex financial products. These financially engineered products, created artificially by the shadow banking system in the run-up to the crisis, were explosive precisely because they bore no relation to the real world of productive activity. However, they were tenuously linked to the properties and mortgages – the assets – of poor workers. It took only the default of some of the poorest borrowers at the bottom of the financial pyramid to blow up the entire global financial system.

Firefighting
by Ben S. Bernanke , Timothy F. Geithner and Henry M. Paulson, Jr.
Published 16 Apr 2019

The systemic danger was that the securities they backed had come to underpin much of modern finance, which made the health of the entire financial system dependent on the perceived condition of the mortgage market in ways few people recognized at the time. That dependence would have been dangerous even if the securities had been straightforward, transparent, and traded on public exchanges. But “collateralized debt obligations,” “CDOs-Squared,” and other new products of financial engineering were often complex, opaque, and embedded with hidden leverage. These products were supposed to help reduce risk by spreading it around and customizing it to the needs of the investor, but, in the confluence of forces at the end of the long boom in credit, they made the overall system both more vulnerable to a crisis of confidence and harder to stabilize after the crisis began.

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Hank wasn’t even sure he had the legal power to have the government provide the necessary long-term guarantee for the thirty-year mortgages that Fannie Mae and Freddie Mac insured, since Congress had given Treasury only temporary authority, which would expire at the end of 2009. With the help of advisers from Morgan Stanley, Treasury did some clever financial engineering to create what was in effect a long-term guarantee, but Hank was so concerned he might be overstepping congressional intent that he confided to the president and a few of his Treasury colleagues that he was worried he might be impeached. Ultimately, everybody was so shocked when Hank fired his bazooka that nobody even raised that particular question.

Handbook of Modeling High-Frequency Data in Finance
by Frederi G. Viens , Maria C. Mariani and Ionut Florescu
Published 20 Dec 2011

Handbook of Modeling High-Frequency Data in Finance Published Wiley Handbooks in Financial Engineering and Econometrics Viens, Mariani, and Florescu · Handbook of Modeling High-Frequency Data in Finance Forthcoming Wiley Handbooks in Financial Engineering and Econometrics Bali and Engle · Handbook of Asset Pricing Bauwens, Hafner, and Laurent · Handbook of Volatility Models and Their Applications Brandimarte · Handbook of Monte Carlo Simulation Chan and Wong · Handbook of Financial Risk Management Cruz, Peters, and Shevchenko · Handbook of Operational Risk Sarno, James, and Marsh · Handbook of Exchange Rates Szylar · Handbook of Market Risk Handbook of Modeling High-Frequency Data in Finance Edited by Frederi G.

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Kercheval, Department of Mathematics, Florida State University, Tallahassee, FL Khaldoun Khashanah, Department of Mathematical Sciences, Stevens Institute of Technology, Hoboken, NJ Steven R. Lancette, Department of Statistics, Purdue University, West Lafayette, IN Kiseop Lee, Department of Mathematics, University of Louisville, Louisville, KY; Graduate Department of Financial Engineering, Ajou University, Suwon, South Korea Yang Liu, Department of Mathematics, Florida State University, Tallahassee, FL xiii xiv Contributors Maria Elvira Mancino, Department of Mathematics for Decisions, University of Firenze, Italy Maria C. Mariani, Department of Mathematical Sciences, University of Texas at El Paso, El Paso, TX Yanhui Mi, Department of Statistics, Purdue University, West Lafayette, IN Emmanuel K.

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Ulibarri, New Mexico Institute of Mining and Technology, Socorro, NM Jim Wang, Department of Mathematical Sciences, Stevens Institute of Technology, Hoboken, NJ Junyue Xu, Department of Economics, Louisiana State University, Baton Rouge, LA Part One Analysis of Empirical Data Chapter One Estimation of NIG and VG Models for High Frequency Financial Data J O S É E . F I G U E ROA - L Ó PE Z a n d STEVEN R. LANCETTE Department of Statistics, Purdue University, West Lafayette, IN KISEOP LEE Department of Mathematics, University of Louisville, Louisville, KY; Graduate Department of Financial Engineering, Ajou University, Suwon, South Korea YA N H U I M I Department of Statistics, Purdue University, West Lafayette, IN 1.1 Introduction Driven by the necessity to incorporate the observed stylized features of asset prices, continuous-time stochastic modeling has taken a predominant role in the financial literature over the past two decades.

Wall Street: How It Works And for Whom
by Doug Henwood
Published 30 Aug 1998

Treasury securities • synthetic convertible debt • tuition futures • unbundled stock units • universal commercial paper • variable coupon/rate renewable notes • variable cumulative preferred stock • variable duration notes • warrants to purchase bonds • yield curve/maximum rate notes • zero-coupon convertible debt source: Finnerty (1992) B1 WALL STREET can be made to correspond to the pure beauty of financial theory, the better life will be. It's fashionable among liberal intellectuals to treat "financial engineering" as an invention of the Reaganbush years. But financial engineering was a favorite term of Andre Meyer, the supremo of Lazard Freres from the 1950s to the 1970s, who was the professional godfather of the liberal intellectuals' favorite investment banker, Felix Rohatyn. By that term, Meyer meant the creation of "a structure that somehow enabled him to wring all he could out of the deal with a minimum amount of risk."

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Norton & Co.). Ferenczi, Sandor (1976). "The Ontogenesis of the Interest in Money," in Bomeman (1976). Finance & Treasury {1995)- "Time to Confess" (London: Economist Intelligence Unit, June 14). Financial Times (1995)- "The Lex Column: Daimler's New Gloss," October 6. Finnerty, John D. (1992). "Financial Engineering," in Newman et al. (1992). Fisher, Irving (1933). "The Debt-Deflation Theory of Great Depressions," Econometrica 1, pp. 337-357. Fisher, Peter R. (1996). "Treasury and Federal Reserve Foreign Exchange Operations, January-March 1996" (New York: Federal Reserve Bank of New York, May). Fitch, Robert (1971a).

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(Freddie Mac), 91-92 Federal National Mortgage Association (Fannie Mae), 91-92 Federal Reserve, 92-98 beige book, 131-132 Board of Governors, 96 chair's dominance, 96 concern with strength of labor, 219 Congressional posturing over, 132 democratizing, 307-309 dollar activities during trading week, 130 and dollar policy, 44 Federal Open Market Committee, 97, 132 minutes, 218 Fed-watching, 97 flow of funds accounts, 56-58; see also specific sectors history, 92-96 monetary policy, 25-26 deliberations, 97 policy, and endogenous money, 220 profits on currency intervention, 44, 54, 136 protection of bondholder interests, 123 secretiveness, 97 self-financing, 96 structure, 95-96 Survey of Consumer Finances, 64,69,79,114,115 Wall Street pressures on, 308-309 Federal Reserve Bank of New York, 96 Federal Savings and Loan Insurance Corp., 87 Federal Trade Commission, 279 fees, investment banking, for M&A, 273, 281, 299 bad structure in LBOs, 284 high even in failed deals, 299 Rohatyn's inspiration to Perella, 285 Ferenczi, Sandor, 226 feudalism, usury as killer of, 237 fictitious capital, 13 finance blending with industry, 135, 262 how it matters, 153-161 vs. money, 183 finance capital. 5ee Hilferding, Rudolf finance-industry split, absence of, 95, 123-124 financial capacity (Gurley and Shaw), 153, 158 financial engineering, 52 financial reform, difficulty of, 302 financial slack, 298 financial structures, social aspects institutional differences between debt and equity, 247 stockholder-bondholder conflicts, 248 financial system costs of, 76-77 employees, demographics, 78 institutional overview, 76-86 borders, 56 "output", 76 profits and taxes, 78 salaries, 78-79 systemic risk, 40-41, 85, 86 see also flow of funds accounts financial theory, assumptions, 138 Finland, 235 firm.

The Startup Way: Making Entrepreneurship a Fundamental Discipline of Every Enterprise
by Eric Ries
Published 15 Mar 2017

Of course, this is the ultimate short-term solution since once you’ve done it, the forest will have almost no remaining value. Yet this is what too many of our public companies are doing: cannibalizing their long-term value by destroying their own brand, squeezing vendors, shortchanging customers, failing to invest in employees, and using the company’s resources to enrich insiders and activist investors via financial engineering. All of these activities share the same problem: They work only in the short term. In companies that have grown a sufficiently large and productive “forest” over years or decades, there’s an awful lot of firewood to be cut down before the damage becomes evident. This is the inevitable result of treating companies as if their obligation to maximize shareholder value means maximizing quarterly returns.

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And we are going to need this adaptability in the years to come, for we are in danger of confronting the four horsemen of economic stagnation: AN EPIDEMIC OF SHORT-TERMISM: A lack of sustainable investment, companies that stay private, and poor circulation of illiquid returns result in a reduction of investments in the next generation. Short-termism is exacerbated by the over­finan­ciali­zation of the economy and the rise of management through financial engineering instead of customer value creation. LACK OF ENTREPRENEURIAL OPPORTUNITY: The rise of high-growth startups coincides with a massive reduction in opportunities for regular small business. Traditional ladders of advancement are being closed off, and new ones are not replacing them fast enough.

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A reversal in the decline of new-business formation by making entrepreneurship more accessible to all. A reversal in the trend toward the bureaucracy of large organizations and, therefore, More growth through organic breakthroughs in customer delight, rather than simply mergers, reorgs, and financial engineering. The opportunity to redesign our economy to be more inclusive, more sustainable, and more innovative—all at the same time. Achieving these goals across every kind of organization is not the job of politicians or managers or founders or investors alone. It is going to require a vast movement of like-minded idealists and visionaries to integrate these values into the very fabric of their organizations, in every industry, geography, and sector.

Financial Modelling in Python
by Shayne Fletcher and Christopher Gardner
Published 3 Aug 2009

Generic Programming and Design Patterns Applied. Addison Wesley, 2001. [2] Martin Baxter and Andrew Rennic. Financial Calculus. An Introduction to Derivative Pricing. Cambridge University Press, 1998. [3] Don Box. Essential COM. Addison Wesley, 1998. [4] Daniel J Duffy. Finite Difference Methods in Financial Engineering. A Partial Differential Equation Approach. John Wiley & Sons, Ltd, 2006. [5] William H. Press, Brian P. Flannery, Saul A. Teukolsky and William T. Vetterling. Numerical Recipes in C. The Art of Scientifi Computing (Second Edition). Cambridge University Press, 1999. [6] Christian P. Fries. Foresight bias and suboptimality correction in Monte-Carlo pricing of options with early exercise: Classification calculation & removal.

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SSRN, 2005. [7] Christian P. Fries. Valuing American options by simulation: a simple least-squares approach. SSRN. 2007. [8] Christian P. Fries and Mark S. Joshi. Partial proxy simulation schemes for generic and robust Monte-Carlo greeks. SSRN, 2006. [9] Paul Glasserman. Monte Carlo Methods in Financial Engineering. Springer, 2003. [10] John C. Hull. Options, Futures, and Other Derivatives (Third Edition). Prentice Hall, 1997. [11] Peter Jäckel. Monte Carlo Methods in Finance. John Wiley & Sons, Ltd, 1999. [12] Jaan Kiusalaas. Numerical Methods in Engineering with Python. Cambridge University Press, 2005. [13] Peter Kohl-Landgraf.

Models. Behaving. Badly.: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life
by Emanuel Derman
Published 13 Oct 2011

Thought: Extension and three meta-affects time Tomonaga, Shin’ichiro transparency: ethics of designing financial products and Treasury bills Treasury bonds Treynor, Jack Trumpeldor, Yosef truth uncertainty: EMM and financial models and physics and quantifiable risk and theory and unquantifiable of value unconscious underliers understanding: action and of adequate causes of body of experience intuition and of passions self- will and of world Universal Law of Gravitation (Newton) universe, laws of the University of Cape Town untouchables utility functions utility stocks value: benefits of financial models and Black-Scholes Model and definition of determination of EMM and estimates of financial markets and financial models and Law of One Price and mysteries of the world and determining price and purpose of finance models and ranking of securities by uncertainty of and universal value for risk and valuing of options vulgarity of financial models and vanilla options volatility: benefits of financial models and Black-Scholes Model and CAPM and EMM and financial models and futility of using financial models and purpose of finance models and risk and stochastic vulgarity of financial models and Volta, Alessandro voltaic pile W-bosons War of Independence, Israeli waves: electromagnetic theory and weather models Weinberg-Salam Model Weinberg, Steven Wells, Robin will Wilmott, Paul The Wind in the Willow (Grahame) wonder: Spinoza’s emotions theory and words: limitations of world: composition of as focus of physics intuition as way of understanding the invention/discovery as synthesis of mind and mysteries of World War II. See Second World War/ World War II worth: definition of Yahweh, Z-bosons Zionism Zippy model airplane About The Author Emanuel Derman is head of risk at Prisma Capital Partners and a professor at Columbia University, where he directs the program in financial engineering. He is the author of My Life as a Quant, one of Businessweek's top ten books of the year, in which he introduced the quant world to a wide audience. He was born in South Africa but has spent most of his professional life in New York City, where he has made contributions to several fields.

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The financial models he developed there, the Black-Derman-Toy interest rate model and the local volatility model, have become widely used industry standards. In his 1996 article “Model Risk” Derman pointed out the dangers that inevitably accompany the use of models, a theme he developed in My Life as a Quant. Among his many awards and honors, he was named the SunGard/IAFE Financial Engineer of the Year in 2000. He has a PhD in theoretical physics from Columbia University and is the author of numerous articles in elementary particle physics, computer science, and finance.

Boomerang: Travels in the New Third World
by Michael Lewis
Published 2 Oct 2011

“Everyone was learning Black-Scholes” (the option-pricing model), says Ragnar Arnason, a professor of fishing economics at the University of Iceland, who watched students flee the economics of fishing for the economics of money. “The schools of engineering and math were offering courses on financial engineering. We had hundreds and hundreds of people studying finance.” This in a country the size of Kentucky, but with fewer citizens than greater Peoria, Illinois. Peoria, Illinois, doesn’t have global financial institutions, or a university devoting itself to training many hundreds of financiers, or its own currency.

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Sheehy once had been a smooth, self-possessed character whose authority was beyond question. “If you saw the guy now,” says my stockbroker friend, “you’d buy him a cup o’ tea.” The Irish real estate bubble was different from the American version in many ways. It wasn’t disguised, for a start. It didn’t require a lot of complicated financial engineering beyond the understanding of mere mortals. It also wasn’t as cynical. There aren’t a lot Irish financiers, or real estate people, who have emerged with a future. In America the banks went down but the big shots in them still got rich; in Ireland the big shots went down with the banks. Sean Fitzpatrick, a working-class kid turned banker who built Anglo Irish Bank more or less from scratch, is widely viewed as the chief architect of Ireland’s misfortune: today he is not merely bankrupt but unable to show his face in public.

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
by Richard Bookstaber
Published 5 Apr 2007

I believe that we will discover, as we continue in our attempts to grapple with hedge funds, that we have enveloped the entire world of investments under a name that sounds a lot more exotic than it is. 253 ccc_demon_243-254_ch11.qxd 2/13/07 1:47 PM Page 254 ccc_demon_255-260_conc.qxd 2/13/07 1:47 PM Page 255 CONCLUSION BUILT TO CRASH? The question posed by this book, simply put, is: Why can’t the financial markets seem to get their act together? Why, in spite of reduced risk in the underlying economy, in spite of the march of innovation and the contributions of financial engineering, do we not enjoy reductions in financial risk that we find in other areas of our lives? Why are markets actually becoming more crisis-prone? One answer can be found in the effects of innovation. It is undeniable that innovation has had some positive effects on the markets. It has improved the markets by making them mechanically more efficient.

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Recall the cockroach—scurrying along over millions of years, as jungles turn to deserts and cities rise and fall, ignoring most of the information the environment has to offer—versus the furu, optimized and specialized to take advantage of every nook and cranny of its niche in Lake Victoria. We are wired to deal with a type of uncertainty we cannot recognize, and this leads us to exhibit behavior that is inconsistent with the mathematical rationality that underlies the paradigm on which financial engineering is based. We fail to take the degree of fine-tuned actions that conventional optimization would dictate, and fortunately so, be- 256 ccc_demon_255-260_conc.qxd 2/13/07 1:47 PM Page 257 CONCLUSION cause, like the furu, conventional optimization pairs off only against the current world with the risks and uncertainties that can be identified within it.

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Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics 3 (1976): 305–360. CHAPTER 11 Hedge Fund Existential 1. Hedge Fund Disclosure for Institutional Investors, July 27, 2001. This was used as a framework for the International Association of Financial Engineers document on hedge fund disclosure. CONCLUSION Built to Crash? 1. This is a point made by John Danaher in the introduction to Brazilian JiuJitsu: Theory and Technique, by Renzo Gracie and Royler Gracie with Kid Peligro and John Danaher (Montpelier, VT: Invisible Cities Press, 2001). 270 bindex.qxd 7/13/07 2:44 PM Page 271 INDEX Accidents/organizations, 159–161 Accountants, failure (reasons), 135 Accounting conventions, problems, 138 Accounting orientation, 137–138 Adaptation, best measure, 232–233 Adverse selection, 191–192 American depositary receipts (ADRs), 68 America Online (AOL), 139 Amex Major Market Index (XMI) futures, 12 Analytically driven funds, 248 Analytical Proprietary Trading (APT), 44–45 initiation, 189 remnant, form, 190 A Programming Language (APL), 43–47 asset, problem, 45 Armstrong, Michael, 130 Arthur Andersen, failure, 135 Artificial markets, 229 Asia Crisis (1997), 3, 115 Asian currency crisis, 114 Asian economies, 118 Asia-Pacific Economic Cooperation (APEC), 63 Assets class, hedge fund classification, 245 direction, hedge fund classification, 246 Asynchronous pricing, 225 AT&T Wireless Services IPO, SSB underwriting, 130 Back-office functions, 39 Bacon, Louis, 165 Bamberger, Gerry, 185–187, 251 Bankers Trust lawsuit, 38 purchase announcement, 75 Bank exposure, 146–147 Bank failures, 146 Bank of Japan, objectives/strategies, 166 Baptist Foundation, restatements/liability, 135 Barings (bank) bankruptcy, 39 clerical trading error, 38–39 derivatives cross-trading, 143 Beard, Anson, 13 Beder, Tanya, 204 Behavior, economic theory, 231 Berens, Rod, 73 Bernard, Lewis, 42, 52 Biggs, Barton, 11 Black, Fischer, 9 Black Monday (1929), 17 Black-Scholes formula, 9, 252 Block desk, 184–185 trading positions, 186 Bond positions, hedging, 30 Booth, David, 29 Breakdowns, explanation, 5–6 Broker-dealer block-trading desk, usage, 184 price setting role, 213–214 Bucket shop era, 177 Buffett, Warren, 62, 99, 181, 198 arb unit closure, 87–88 Bushnell, Dave, 129–131 Butterfly effect, essence, 227 Capital cushions, 106 Capitalism, 250 Cash futures, 251 arbitrageurs, 19, 23 spread, 19 trade, 19 Cerullo, Ed, 41 Cheapest-to-deliver bond, 251 Chicago Board Options Exchange (CBOE), 252 Black-Scholes formula, impact, 9–10 Citigroup Associates First Capital Corporation, 128 consolidation, impact, 132–134 Japanese private banking arm, 133 management change, Fed reaction, 133 organizational complexity/structural uncertainty, 126 Citron, Robert, 38 Coarse behavior benefits, 232–233 consistency, 236–237 271 bindex.qxd 7/13/07 2:44 PM Page 272 INDEX Coarse behavior (Continued) decision rules, 233 in humans, 235–237 measurement of, 238–239 response based on, 236 rules, optimality, 238 Cockroach example, 232–233, 235 Collateral, usage, 218 Collateralized mortgage obligations (CMOs), 71–75, 250 Commercial Credit, Primerica purchase, 126 Competitive prices, 36 Complexity by-product, 143 implications, 156 importance, 144–146 Consumer lending violations, Federal Reserve fine, 132 Control-oriented risk management, 200 Convergence Capital, 80 Convergence trades, 122 Convertible bond (CB) strategy, 57–58 Cooke, Bill, 185–187 Corporate defaults, possibility, 29–30 Corporate political risk, 140 Corrigan, Gerald, 196–198 Countervailing trades, 213 Credit Suisse First Boston, 72–73 Crises, causes, 240 da Vinci, Leonardo, 136 Denham, Bob, 62–63, 99, 195 Derivatives customization, 143 trading strategy, 30 Deterministic nonperiodic flow, 228 Detroit Edison, Fermi-1 experimental breeder reactor, 161–164 Deutsche Bank, investment banking (problems), 72–73 Dimon, Jamie, 77–78, 91, 97–98, 126 Distressed debt, event risk, 248–249 Dow Jones Industrial Average (DJIA), 2, 12 Dynamic hedge, 12, 161 Dynamic system, 228–229 Ebbers, Bernard, 70 Economic catastrophe, 257 Efficient markets hypothesis, 211 Einstein, Albert, 224–226 Emerging market bonds, 71 Enron restatements/liability, 135 U.S.

Statistical Arbitrage: Algorithmic Trading Insights and Techniques
by Andrew Pole
Published 14 Sep 2007

Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.Wiley Finance.com. Statistical Arbitrage Algorithmic Trading Insights and Techniques ANDREW POLE John Wiley & Sons, Inc. c 2007 by Andrew Pole. All rights reserved.

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Starting in the early 1980s, statistical arbitrage was a formal and successful attempt to model this behavior in the pursuit of profit. Understanding the arithmetic of statistical arbitrage (sometimes abbreviated as stat. arb.) is a cornerstone to understanding the development of what has come to be known as complex financial engineering and risk modeling. The trading strategy referred to as statistical arbitrage is generally regarded as an opaque investment discipline. The view is that it is being driven by two complementary forces, both deriving from the core nature of the discipline: the vagueness of practitioners and the lack of quantitative knowledge on the part of investors.

Bitcoin: The Future of Money?
by Dominic Frisby
Published 1 Nov 2014

The array of papers and essays he has written on his blog, Unenumerated, and on his website (szabo.best.vwh.net) is breathtaking. Here are just some of the subjects he covered: ecommerce, commodity speculation, internet security, mining the ocean beds, the hourglass, micropayments, insurance, smart contracts, law, distributed systems, financial engineering, software architecture, technology product management, algorithmic information theory, intrapolynomial cryptography, gold, politics, even the United States Constitution. But the subjects that he returns to most are money, money systems and smart contracts. In this area, his knowledge is deeper than almost anyone’s.

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Indeed, in spring 2008, Szabo was actively looking for work. He wrote on his blog, ‘I am now publicly offering my consulting services. Besides topics I regularly blog about, my expertise includes technology product management (especially for e-commerce and wireless products and services), smart contracts, financial engineering, software architecture and engineering, and computer/network security. I can travel just about anywhere.’154 All of these, incidentally, are areas of expertise Bitcoin’s inventor would have needed. The circumstantial evidence continues. In April 2008, Szabo wrote on his blog about bit gold, ‘I suspect this is all obscure enough that (a) it may require most people to sit down and work it out for themselves carefully before it can be well understood, and (b) it would greatly benefit from a demonstration, an experimental market (with e.g. a trusted third party substituted for the complex security that would be needed for a real system)’.

Safe Haven: Investing for Financial Storms
by Mark Spitznagel
Published 9 Aug 2021

There is so much muddled, superficial narrative in the investment industry. So much movement, so little action. There are grandiose forecasts of when to take risk and when to retrench—but which ignore the results of these forecasts. Wise people speak of shunning risk through diversification, dubbed “the only free lunch in finance,” using financial engineering terms that few even bother to understand, and spreading risk across assets in hopes of capturing some safer, mediocre average performance. No matter what it cost you, your intentions were good, and at least you evaded disaster; your risk‐adjusted returns were high—though you’re poorer. The conventional approach to risk mitigation in the investment industry is deceptive and defeatist, with so little substance and significance, and so much smoke and mirrors.

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Investors are always left with more undiversifiable, systematic risk than they tend to recognize ex ante. Because diversification lowers returns in the name of higher Sharpe ratios, investors who use this strategy but aren't content with those lower returns are then forced to apply leverage in hopes of raising them back up. True risk mitigation should not require financial engineering and leverage in order to both lower risk and raise compound annual growth rates. Doing so adds a different kind of risk by magnifying the portfolio's sensitivity to errors in those spurious correlation estimates. To be fair, most investors are constrained (or perhaps too wise) to use leverage like this in practice, and instead live with their lower risk‐mitigated returns.

The Black Box Society: The Secret Algorithms That Control Money and Information
by Frank Pasquale
Published 17 Nov 2014

You would think that after repeated crises, from the S&L crimes of the late 1980s to the accounting scandals of the early 2000s, the finance sector would have cleaned house by 2008. But rather than improving internal processes at companies they could not fully understand (let alone control), financiers started insuring against bad outcomes. “Financial engineers” crafted “swaps” of risk,55 encouraging quants (and regulators) to try to estimate it in ever more precise ways.56 A credit default swap (CDS), for instance, transfers the risk of nonpayment to a third party, which promises to pay you (the first party) in case the debtor (the second party) does not.57 This innovation was celebrated as a landmark of “price discovery,” a day-by-day (or even second-by-second) tracking of exactly how likely an entity was to default.58 114 THE BLACK BOX SOCIETY As with credit scores, the risk modeling here was deeply fallible, another misapplication of natural science methods to an essentially social science of finance.

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In the aggregate, this “noise” should cancel out as a clear price signal emerges. The inventors of credit default swaps hoped that their derivative could achieve in debt markets what stock exchanges were (theoretically) realizing in equity markets.109 The ultimate goal was to set exact prices on a wide array of financial risks. The financial engineers saw this as a great triumph of human ingenuity, a technology of risk commodification that would vastly expand societal capabilities to plan and invest. In the giddy days of the real estate bubble, investors who bought both a CDO and a credit default swap likely felt like Midas, guaranteed gains no matter how the future turned out.

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The fi rst step toward a realistic assessment of value in the fi nancial sector would be to estimate what returns reflect productive contributions to the economy, and which are attributable to fee churning, accounting shenanigans, and rate rigging.38 It would be a sobering exercise.39 Researcher Thomas Philippon confirms that finance firms are becoming more expensive even while they pride themselves on forcing managers in other industries to cut costs and reduce wages.40 Macroeconomists J. Bradford DeLong and Stephen Cohen calculate that the United States experienced a 7 percent drop in manufacturing concomitant with a 7 percent expansion in financial transactions. When we shift labor from real engineering into financial engineering, we’re TOWARD AN INTELLIGIBLE SOCIETY 201 effectively privileging those who shuffle claims on productivity over those who are actually producing real goods and ser vices.41 This means, for example, that Wall Street has pressured pharmaceutical firms to lay off thousands of drug developers and cut R&D in favor of “core competencies,” punishing Merck for investing in research and rewarding Pfizer for cutting it.

Against the Gods: The Remarkable Story of Risk
by Peter L. Bernstein
Published 23 Aug 1996

The vocabulary of the natural sciences gradually found its way into economics. Jevons refers to the "mechanics" of utility and self-interest, for example. Concepts like equilibrium, momentum, pressure, and functions crossed from one field to the other. Today, people in the world of finance use terms like financial engineering, neural networks, and genetic algorithms. One other aspect ofJevons's work as an economist deserves mention. As a man trained in the natural sciences, he could not avoid taking note of what was right in front of his face-the economy did fluctuate. In 1873, just two years after the publication of The Theory of Political Economy, a great economic boom that had lasted for over twenty years in Europe and the United States came to an end.

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Wall Street has always been a hothouse of financial innovation, and brokerage houses are quick to jump into the breach when a new demand for their talents arises. Major banks, insurance companies, and investment banking firms with worldwide business connections lost no time in establishing new units of specialized traders and financial engineers to design tailor-made risk-management products for corporate customers, some related to interest rates, some to currencies, and some to the prices of raw materials. Before long, the value of the underlying assets involved in these contracts-referred to as the "notional value"was in the trillions of dollars, amounts that at first stunned and frightened people who were unaware of how the contracts actually worked.

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M., 1984. "Present Position and Potential Developments: Some Personal Views of Bayesian Statistics." Journal of the Royal Statistical Association, Vol. 147, Part 3, pp. 245-259. Smithson, Charles W., and Clifford W. Smith, Jr., 1995. Managing Financial Risk: A Guide to Derivative Products, Financial Engineering, and Value Maximization. New York: Irwin.* Sorensen, Eric, 1995. "The Derivative Portfolio Matrix-Combining Market Direction with Market Volatility." Institute for Quantitative Research in Finance, Spring 1995 Seminar. Statman, Meir, 1982. "Fixed Rate or Index-Linked Mortgages from the Borrower's Point of View: A Note."

Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy
by Cathy O'Neil
Published 5 Sep 2016

But if the entities holding these insurance policies go belly up, as many did, the chain reaction blows holes through the global economy. Synthetic CDOs went one step further: they were contracts whose value depended on the performance of credit default swaps and mortgage-backed securities. They allowed financial engineers to leverage up their bets even more. The overheated (and then collapsing) market featured $3 trillion of subprime mortgages by 2007, and the market around it—including the credit default swaps and synthetic CDOs, which magnified the risks—was twenty times as big. No national economy could compare.

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How do we start to regulate the mathematical models that run more and more of our lives? I would suggest that the process begin with the modelers themselves. Like doctors, data scientists should pledge a Hippocratic Oath, one that focuses on the possible misuses and misinterpretations of their models. Following the market crash of 2008, two financial engineers, Emanuel Derman and Paul Wilmott, drew up such an oath. It reads: ~ I will remember that I didn’t make the world, and it doesn’t satisfy my equations. ~ Though I will use models boldly to estimate value, I will not be overly impressed by mathematics. ~ I will never sacrifice reality for elegance without explaining why I have done so

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis
by Kevin Mellyn
Published 30 Sep 2009

At their worst, they buy control of companies that have weak stock prices, load them up with debt while stripping out assets, and flog the carcass off to someone else. The problem is that the good model of private equity takes real operating skills and a lot of patience. The bad model is all based on financial engineering, most notably juicing profits by operating the company on borrowed money. Institutional investors hungry for high returns were more likely to put money into the second model than the first, and banks hungry for lending opportunities were more than happy until quite recently to provide the OPM.

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They broke open all the ‘‘contracts in a box’’ that had stood the tests of time and began tinkering with them. 59 60 FINANCIAL MARKET MELTDOWN For example, bank loans used to be simple and easy to understand. They only came in a few flavors, like secured and unsecured. Suddenly, concepts like ‘‘structured finance’’ and ‘‘financial engineering’’ began to seep into the banker’s vocabulary. So did the notion that banks could do things called ‘‘product innovation,’’ ‘‘manufacturing,’’ ‘‘distribution’’ and ‘‘channel management.’’ These concepts had no roots in the traditions of banking and finance. In fact, many of them were imported into banking from industry by ‘‘management consultants.’’

The Long Good Buy: Analysing Cycles in Markets
by Peter Oppenheimer
Published 3 May 2020

Cambridge Journal of Economics, 33(4), 779–805. 22 A collateralised debt obligation (CDO) is a structured financial product that pools together assets that generate cash, such as mortgages, and then packages this asset pool into different tranches that can be sold to investors. Each varies significantly in risk profile. 23 Pezzuto, I. (2012). Miraculous financial engineering or toxic finance? The genesis of the U.S. subprime mortgage loans crisis and its consequences on the global financial markets and real economy. Journal of Governance and Regulation, 1(3), 113–124. 24 Cutts, Power from the ground up. 25 Smith, E. L. (1925). Common stocks as long-term investments.

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Available at http://fessud.eu/wp-content/uploads/2015/01/Kindleberger-and-Financial-Crises-Fessud-final_Working-Paper-104.pdf Perez, C. (2009). The double bubble at the turn of the century: Technological roots and structural implications. Cambridge Journal of Economics, 33(4), 779–805. Pezzuto, I. (2012). Miraculous financial engineering or toxic finance? The genesis of the U.S. subprime mortgage loans crisis and its consequences on the global financial markets and real economy. Journal of Governance and Regulation, 1(3), 113–124. Phillips, M. (2019). The bull market began 10 years ago. Why aren't more people celebrating?

Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game
by Walker Deibel
Published 19 Oct 2018

You can see how this structure doesn’t move the buyer forward with confidence when they start looking at potential companies. Now, I want you to clearly define the growth opportunity you are looking for. Is it a company that needs to build a sales team? Improved marketing? New distribution channels? Financial engineering? Operational improvement? Or a customer base in a certain market? The truth is, you already know. Identifying this clearly is the first part of what will become your target statement. 73 SIZE When it comes to buying a company, size matters. Typically, the size of the target is identified by revenue but then valued on a multiple of SDE or cash flow.

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He was raising 30 percent of the purchase price from investors via an email outreach campaign. This was keeping him from having to put any of his own money into buying the company. This is an advanced tactic and one that a first-time buyer won’t be able to get past the broker unless you have relationships with intermediaries savvy in middle-market financial engineering. My guess is that the buyer had the capital themselves or else they would not get that far in the process. So, it is possible, but this is not the book on how to buy a company with no money down. Brokers want to feel good that you have the means, and they’d like to know that you have at least 50 percent of the purchase amount in accessible, liquid assets.

Two and Twenty: How the Masters of Private Equity Always Win
by Sachin Khajuria
Published 13 Jun 2022

You do not need to be a finance expert to understand how this contrasts starkly from picking stocks or spreading bets in a mutual fund or making passive investments—however large—only to leave management to work alone. The attraction to complexity is one of the most important mental frameworks and identifiers in private equity. The investment committee has little appetite for “low-hanging fruit,” deals where there is less to do and only through financial engineering will there be any hope of making an acceptable return for their investors. These deals make seasoned private equity folks groan. Easy wins rarely make an individual’s career, let alone a firm’s reputation. To make pension fund commitments sticky, to turn the first-time investor into the serial subscriber to fund after fund, across products from buyouts to credit, a private equity firm must have a collection of deals to showcase where they saw something unique, actioned it, and managed the outcome to differentiate themselves.

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At parties, some of their college friends don’t hesitate to launch into the popular accusations thrown at private equity, that the deals make a lot of money but do not create much value and so forth. The deal team duo has heard the narrative many times by now, and it goes something like this: Private equity investors target vulnerable companies to buy, saddle them with debt, cut costs to the bone, and sell for a quick profit. It is financial engineering—private equity is the house flipper of the financial world. If any operating improvements are made to the business, they are superfluous to the primary goal: getting out quick for a tidy profit. Private equity follows a fixed and predictable investment method. Despite their limited time in private equity jobs, the young men already know that this version of events is nonsense.

Age of the City: Why Our Future Will Be Won or Lost Together
by Ian Goldin and Tom Lee-Devlin
Published 21 Jun 2023

The changing job market is a tale of two halves. On one hand, demand for high-skill knowledge professionals has soared. Finance jobs are among those that have experienced the greatest growth since the 1980s, as the increased size and complexity of financial markets has driven up demand for bankers, traders, fund managers and financial engineers. While the global financial crisis took much of the heat – and shine – out of the sector, it did little to structurally reduce the employment share of such activities. Other white-collar professionals, including lawyers, marketers, business consultants and executives, have also seen their role in the overall occupation mix expand significantly.

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These cities have captured the lion’s share of economic growth in recent decades. The first reason for the emergence of these superstars is talent clustering. It was relatively straightforward to train up a worker to perform the manual tasks that once characterized most manufacturing activity, compared to the biomedical scientists, software developers and financial engineers that are critical to today’s economy. While we might like to believe that the internet now allows anyone to become an instant expert in anything, the reality is that many of the high-skill occupations that drive economic activity today rely on years of accumulated knowledge through both formal education and apprenticeship on the job.

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order
by Paul Vigna and Michael J. Casey
Published 27 Jan 2015

Emerging markets such as Brazil, Russia, and Indonesia took in a flood of investment, albeit tinged with periodic crises. This was the brave new world of fiat-currency global finance. But, as we now know, it contained within it a destructive flaw. On Wall Street, new technologies and a mantra of deregulation encouraged by the free market’s apparent victory over communism pushed a financial-engineering machine into overdrive. Here the gremlins were being hatched. All looked good on the macro front—inflation was low, growth was solid—but economists were focused on the wrong things. The real buildup of risks didn’t appear in the mainstream economic numbers. Heck, the risks weren’t even in the routine banking system of deposits and residential and commercial loans.

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He visited the Free State project in New Hampshire, dedicated to libertarian ideals, attended bitcoin meetups across Europe, hooked up with an underground hactivist group led by the legendary London coder Amir Taaki, and hung out for a couple of months in what he described as an “anarcho-leftist” commune in Spain. All the while he picked up thoughts and concepts that would help him flesh out his master idea. Sounding every bit the MBA-qualified financial engineer, Buterin rattles off concepts for apps that could run on Ethereum and help reinvent Wall Street: digital-currency-denominated derivative contracts through which traditional currencies and commodities trade as digital IOU tokens; Ethereum-based security offerings that function without a need for the underwriting and book-running services of an investment bank; decentralized algorithms to challenge the sinister “dark pool” investment vehicles and high-frequency trading machines with which hedge funds, investment banks, and Wall Street high rollers get an edge on the market.

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This concern was highlighted in 2014 when the Securities and Exchange Commission imposed a $35,000 fine on former SatoshiDice owner Erik Voorhees and forced him to forgo $15,000 in profits for having sold shares in that project via an unregistered offering. Big projects such as Ethereum have not only attracted solid developer talent, but they’ve also signed on some experienced lawyers and financial engineers who are trying to draft rules of engagement to keep everybody happy. Still, “everybody” in this sense includes one constituency that’s especially difficult to please: regulators. The lawyers who are currently acting as liaisons between cryptocurrency innovators and government regulators are struggling to get the latter to shape rules around a concept that the existing legal system never contemplated.

The Death of Money: The Coming Collapse of the International Monetary System
by James Rickards
Published 7 Apr 2014

Perhaps the most compelling critique of the flaws in nominal GDP targeting and the inflation embedded within it comes from inside the Fed board of governors itself. In February 2013 Fed governor Jeremy Stein offered a highly detailed critique of the Fed’s easy-money policy and obliquely pointed to its greatest flaw: that increased turnover is not the only channel money creation can find, and that other channels include asset bubbles and financial engineering. Stein’s thesis is that a low-interest-rate environment will induce a search for higher yields, which can take many forms. The most obvious form is a bidding up of the price of risky assets such as stocks and housing. This can be observed directly. Less obvious are asset-liability mismatches, where financial institutions borrow short and lend long on a leveraged basis to capture a spread.

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A market panic stemming from excessive leverage and risk taking occurring so soon after the Panic of 2008 would destroy the Fed’s efforts to lure consumers back into the lending and spending game of the early 2000s. Stein’s paper has been taken to say that Fed must end QE sooner rather than later to avoid the buildup of hidden risk in financial institutions. But there is another interpretation. Stein himself warns that if banks do not take the hint and curtail risky financial engineering, the Fed might force them to do so with increased regulation. The Federal Reserve has life-and-death powers over banks in areas such as loss reserves, dividend policies, stress tests, acquisitions, capital adequacy, and more. Bank managers would be foolhardy to defy the Fed in the areas Stein highlights.

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Likewise, rising home prices have been held up not by traditional family formation but by investor pools purchasing large housing tracts with leverage, restructuring homeowner debt, or converting mortgages to rentals. Cash flows can make these pools attractive bondlike investments, but no one should mistake this financial engineering for a healthy, normalized housing market. Rising asset prices are fine for headlines and talking heads but do nothing to break the deflationary mind-set of typical investors and savers. The fact that central banks are pursuing inflation, and cannot achieve it, is a gauge of the persistence of the underlying deflation.

Shutdown: How COVID Shook the World's Economy
by Adam Tooze
Published 15 Nov 2021

According to the IMF, rapid and well-targeted immunization of the entire world would add $9 trillion to global GDP by 2025.43 Nevertheless, no one was willing to make the bold and unilateral gesture necessary to fund a global program. Countries gave a hundred million here and a hundred million there, and the World Health Organization was left to discuss the ways of leveraging its budget through financial engineering. Bruce Aylward, WHO’s ACT coordinator, reported that the group had discussed concessional loans and catastrophe bonds as ways of raising the funds. It had hired Citigroup as an advisor to help it manage the risks involved in balancing its fragile balance sheet. As Aylward put it: “Right now financing is what stands between us and getting out of this pandemic as rapidly as possible.

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It was no doubt a precarious construction, but looking around the world, one could find nothing unusual about that. If Italy with debt at 155 percent of GDP could still access markets at 0.2 percent for a five-year bond, courtesy of the support of the ECB, why should African borrowers with far better debt-to-GDP ratios face prohibitive interest rates? It was down to political backing and financial engineering. The advocates of a rigorous and comprehensive debt restructuring spoke the language of “economic reality” and “debt sustainability,” but as the experience of the advanced economies themselves showed, if you borrowed in a currency you controlled, those were negotiable parameters, ultimately at the disposition of central banks.

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As German development minister Gerd Müller remarked: “We cannot leave Africa to the Chinese, Russians, and Turks.”66 But what they also had in common was the modesty of the public resources that were committed. The European funds on which the Marshall Plan with Africa was to be based came, altogether, to barely 6.5 billion euros. To get to scale, all of these new facilities relied on the magic of leverage and financial engineering to turn billions into, if not trillions, then at least hundreds of billions. In the spirit of the UNECA proposals, they were public-private partnerships. Public institutions would absorb designated risks—country risk, project risk, exchange rate risk—so as to multiply private capital flows from rich to poor countries.

The Global Minotaur
by Yanis Varoufakis and Paul Mason
Published 4 Jul 2015

The CDOs that sliced up and then spliced together disparate debts belonging to a heterogeneous multitude of families and businesses were put together on the basis of certain formulae, whose purpose was, supposedly, to calculate their value and their riskiness. These formulae were developed by financial engineers working for Wall Street (e.g. for J. P. Morgan, Bank of America, Goldman Sachs, etc.). To render the formulae solvable, certain assumptions had to be made. First and foremost was the assumption that the probability that one slice of debt within a CDO would go bad was largely unrelated to the probability of a similar default by the other slices in the same CDO.

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In the same year American consumers and firms absorbed a staggering $781 billion of net imports from the rest of the world. Almost 70 per cent of the profits that the non-American producers of these goods made returned to Wall Street. Once in the bankers’ hands, they were turbocharged (through so-called ‘financial engineering’) and, thereby, financed the US deficits, with the residual being exported to the four corners of the globe (where it helped build a variety of bubbles). Following the 2008 catastrophe, America’s deficits diverged massively. As all sorts of incomes (from labour, capital and rent) collapsed, asset values fell through the floor, home foreclosures and the ranks of the unemployed burgeoned, it was inevitable that Americans would reduce drastically their consumption of imported goods.

Young Money: Inside the Hidden World of Wall Street's Post-Crash Recruits
by Kevin Roose
Published 18 Feb 2014

Derrick’s boss had often compared the work of private equity to surgery—if they, the surgeons, needed to amputate a limb to save the life of the patient, then it was better than letting the patient go untreated and die. What made private equity different than surgery, Derrick was learning, was that his firm usually succeeded even if its surgeries ultimately failed to save the patient. They pulled this off through the use of leverage, and a financial engineering tactic known as a “dividend recap,” or recapitalization, which involved loading a company with more debt in order to pay out the private equity firm and its investors. The dividend recap had been invented decades ago, but had only truly been popularized during the buyout boom of the early 2000s.

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“the idea of a reporter making those views public had caused them to throw a mass temper tantrum”: I had hoped that my reporting on the Kappa Beta Phi induction dinner would give the group some moral pause; instead, I was told by a member of the group that the following year’s dinner went on as scheduled, except with “Fort Knox–like” security at the entrance. Chapter Twenty-Eight “They pulled this off through the use of leverage, and a financial engineering tactic known as a ‘dividend recap,’ or recapitalization, which involved loading a company with more debt in order to pay out the private equity firm and its investors”: Dan Primack, “Dividend Recaps Are Fine, But Don’t Pretend They Add Value,” Fortune, November 11, 2010. “private equity—an industry that had been attacked as a form of ‘vulture capitalism’ during Mitt Romney’s 2008 presidential run (and that would soon taint his 2012 run)”: See, among many other articles assessing Romney’s career at Bain Capital, Mark Maremont’s Wall Street Journal story, “Romney at Bain: Big Gains, Some Busts,” January 9, 2012.

The Great Tax Robbery: How Britain Became a Tax Haven for Fat Cats and Big Business
by Richard Brooks
Published 2 Jan 2014

In the late 1990s the last Labour government removed the tax on dividends that had ensured companies at least had to cough up some tax on profits if they wanted to pay them out to their owners, and would have presented the Arcadia group with a £300m bill on Mrs Green’s dividend. In 2000, Chancellor Gordon Brown responded to the demands of his new friends in the world of private equity by reducing capital gains tax from 40% to 10%. The income that with some basic financial engineering they transformed into capital gains would famously be taxed at lower rates than their cleaners were paying.‌33 Then, as one of its final measures, New Labour began dismantling the rules that guarded against industrial-scale tax avoidance by British multinationals, exempting from tax profits returned to the UK from overseas subsidiary companies and in the process creating a substantial new impetus to send income offshore.

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The tax result is achieved by setting the refurbishment costs against its income and paying high rates of tax-deductible interest on bonds held by the company’s investors – here 15% on around £6m worth of them.‌9 As the absence of tax payments was to a large extent explained by the fact that costs of building the infrastructure were set against income relatively early in the contract, these PFI deals were at least pregnant with the future profits that should be substantially taxed in the years to come. Unless, that is, the financial engineers could do something about it. And, funnily enough, they could. Once a new PFI building has been built and the PFI company has sub-contracted the basic services for which it was responsible, it has to do little more than sit back and watch the money roll in. At which point, with the big risks out of the way and the income carrying a copper-bottomed government guarantee, its bankers relax.

Lessons From Private Equity Any Company Can Use
by Orit Gadiesh and Hugh MacArthur
Published 14 Aug 2008

Market forces, competition, debt conditions, currency values, and regulation will all cycle up and down during the course of investments. The smartest PE investors have realized that the only way to reliably increase the value of their portfolios is to maximize the operating value of the underlying businesses in them. For this reason, the best PE firms have shifted many of the resources that they once poured into financial engineering toward creating operating value—and they are doing it in a way that is more systematic, focused, and aggressive than the practices found in most companies. The need to provide strong returns to demanding limited partners (LPs) in a defined time frame creates a single-mindedness that fuels the rigor with which these lessons are applied.

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System
by Henry M. Paulson
Published 15 Sep 2010

The market became opaque as structured products grew increasingly complex and difficult to understand even for sophisticated investors. Collateralized debt obligations, or CDOs, were created to carve up mortgages and other debt instruments into increasingly exotic components, or tranches, with a wide variety of payment and risk characteristics. Before long, financial engineers were creating CDOs out of other CDOs—or CDOs-squared. Lacking the ability of traditional lenders to examine the credit quality of the loans underlying these securities, investors relied on rating agencies—which employed statistical analyses rather than detailed studies of individual borrowers—to rate the structured products.

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Although I pressed him to accept reality and to operate with a greater sense of urgency, I was beginning to suspect that despite my blunt style, I wasn’t getting through. With Lehman looking shakier, I asked my senior adviser, Steve Shafran, to begin contingency planning with the Fed and SEC for a possible failure. Steve, a brilliant 48-year-old former Goldman Sachs banker who had retired from the firm in 2000, was an expert financial engineer. A widower who had moved to Washington to raise his four children, he had offered to help me on a part-time basis. As the crisis unfolded, Steve would work around the clock as a go-to problem solver. While Bob Hoyt and his people combed through Treasury history to see what authorities we might use if Lehman failed, Treasury, the Fed, and the SEC worked to assess potential damages and devise ways to minimize these.

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The following year I had asked him to join Treasury as an assistant secretary, but he hadn’t wanted to uproot his family from their new home in Austin, Texas. This time I impressed on him the nature of our emergency, and he signed on immediately, even though it meant leaving his family behind for six months. Unflappable and brilliant, with strong analytical and financial engineering skills, he quickly won the confidence of the Treasury team as he dug into the GSEs’ finances. Ken, who had been a chairman of the financial institutions group at Goldman, also worked on the GSEs, and, equally important, I asked him to be the point of contact for Dick Fuld. With Lehman desperate for a solution, there could have been no better confidant than Ken, who probably knew more people and had better relationships in financial services than anybody in the business.

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society
by Will Hutton
Published 30 Sep 2010

There was a relaxed consensus over the state of the economy that extended across the political class and mainstream, right-of-centre media. The policies that allowed investment banks to prosper should be reproduced for all business. Finance and financial considerations should lead everything. The apex of business life became delivering ‘value’ through financial engineering and deal-making. The patient building of companies through innovation, calculated risk and long-term commitment – productive entrepreneurship – became old hat. In the run-up to the credit crunch banks deliberately chose higher levels of financial borrowing on ever-lower capital to leverage upwards their target rate of return and thus their own executives’ bonuses.

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Business is always political, which is why so many of the billionaires in Forbes’ annual list have amassed their fortunes through their political as much as their entrepreneurial talents. They comprise a ragbag of monopolists, oligarchs who have been gifted assets and profits by the state, mega-financial engineers and plain old family plutocrats. Sixty-two of 1011 billionaires in 2010 were Russian oligarchs. Twenty-eight were Turkish oligarchs. Even Carlos Slim, the richest man in the world, made his fortune from being the monopolist who controls 90 per cent of Mexico’s telephone landlines and supplies 80 per cent of its mobile phone subscribers.

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One of the reasons that so many mergers and takeovers fail afterwards is that predator companies, when they assess the profitability of a hostile takeover, regard eliminating the network of promises, processes and implicit contracts on which most firms depend as a source of a quick win. They are wrong: these elements comprise the glue that holds the company together. Larry Summers and Andrei Shleifer have argued that this type of financial engineering is a form of economic vandalism – wrecking a firm’s social capital for unsustainable short-term cost advantage.28 However, you will look in vain in mainstream economics text-books for such understanding of flesh-and-blood markets peopled by flesh-and-blood economic actors. Firms that make fairness an explicit part of their strategy tend to be more successful.

Traders at Work: How the World's Most Successful Traders Make Their Living in the Markets
by Tim Bourquin and Nicholas Mango
Published 26 Dec 2012

They’re looking at the market not so much through fundamental analysis and technical analysis. They are trying to sense it. They want to predict what people are going to do. I’ll tell you, there’s a real interesting piece of research that came out a couple of years ago from the California Institute of Technology. The research was conducted by some financial engineers—these guys are quants, right, they are mathematicians—and they had two groups of traders. They had a group of traders who were experienced and another group who were total novices, and when they had them trade against each other, of course, the experienced group outperformed the novices. But then they did something interesting.

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What I will tell you, though, is that there are hedge funds that are scraping social media, like Twitter and even Facebook, and they are scraping CNBC and Bloomberg for keywords and sentiment. Then they will apply that to an automated trading system. That’s happening more and more. I was in Japan in June for a hedge fund conference, and I met a Tokyo University professor there who’s a financial engineer. He showed me how he and some other guys were starting up a hedge fund using this model that I just explained, and they thought they were the first to do this. And I said, “Actually, no, there are six or seven funds in the United States that I know of that have already been doing that in the last three or four years, and there are probably more than those six or seven.

Capitalism: Money, Morals and Markets
by John Plender
Published 27 Jul 2015

And despite the accumulation of company laws and financial regulations, it never seems to go away, leaving a nagging question about the moral character of capitalism. No doubt this reflects the tension explored earlier between conventional morality and the money motive. But it may be exacerbated because so much modern entrepreneurial activity is devoted to financial engineering and paper shuffling that is often devoid of perceptible social utility. That said, I would argue that the greatest entrepreneurs tend to be remote from the morbidity syndrome identified by Keynes. Greatness, in this context, means people who combine a phenomenal capacity for innovation with powerful business acumen, so that they make a marked difference to the lives of the population at large.

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Only a handful of big institutional investors acknowledge the stewardship role they are theoretically supposed to perform within the capitalist system by engaging with management on strategy and holding managers to account. The business models of many, probably most, fund management groups are not compatible with the stewardship agenda, which requires time and money. And a growing band of maverick shareholder activists is more concerned to ratchet up the share price of corporate targets through financial engineering – selling off subsidiaries, urging more share buybacks – than improving companies’ operating performance and productivity. So the dysfunctionality of a corporate sector that under-invests in plant and machinery is a reflection of dysfunctional corporate governance. Consider, now, the ethical concern that most exercised John Maynard Keynes, namely the central role of the money motive in capitalism – or, to put it more bluntly, greed.

Bitcoin Billionaires: A True Story of Genius, Betrayal, and Redemption
by Ben Mezrich
Published 20 May 2019

Not only was it a more familiar setting for them (they’d grown up just outside of the city), but their father had made his fortune building a consulting firm that counted many New York–based Fortune 500 companies as clients. To them, no matter where ideas came from or where companies built their fancy campuses, New York City was the financial engine of the world. Since everything they did these days seemed to make the news, when they leased office space in the Flatiron District—the center of New York’s burgeoning tech scene, colloquially referred to as Silicon Alley—for their venture firm Winklevoss Capital, the deal was splashed all over the real estate section of the New York Post.

…

.… Cameron knew it was ambitious, another big bet on a par with their original purchase of 1 percent of the new currency and their still unrealized ETF. He and Tyler had been assembling the Gemini team for more than a year. Their goal was simple: bring together the nation’s top security experts, technologists, and financial engineers to build a world-class cryptocurrency platform from the ground up with a security-first mentality. A fully regulated exchange in the heart of the old-world financial realm: New York. One that asked for permission, rather than forgiveness. They weren’t trying to hack their way around regulation; they were going to help build it.

Deep Value
by Tobias E. Carlisle
Published 19 Aug 2014

Deep Value The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our website at www.WileyFinance.com. Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. 

…

Until then, the booming stock market, low interest rates, and generally bountiful conditions for business had hidden many of the manager’s sins, and allowed them to “build [the] house from the roof down,” as one humorist described it.29 As the market turned 106 DEEP VALUE and interest rates climbed, the heavily cyclical businesses owned by the conglomerates returned to earth, putting the lie to the claim that diversification allowed them to ride out a downturn. Though they promoted themselves as new men with a “free-form” vision for the organization, the reality was that most were little more than paper-shuffling financial engineers riding a market boom. “The most damaging result of the conglomerate merger era,” wrote Fortune’s Lewis Berman, “was the false legitimacy it seemed to confer on the pursuit of profits from financial manipulation rather than by producing something of genuine economic value.”30 In the introduction to Security Analysis, Graham had written that it was “striking” how the financial scene in the 1920s—the boom that preceded the bust in 1929—was dominated by what he described as “purely psychological elements.”31 “In previous bull markets,” Graham wrote, “the rise in stock prices remained in fairly close relationship with the improvement in the business during the greater part of the cycle; it was only in its invariably short-lived culminating phase that quotations were forced to disproportionate heights by the unbridled optimism of the speculative contingent.”32 The “new-era” doctrine-that “good” stocks (or “blue chips”) were sound investments regardless of how high the price paid for them was at bottom only a means of rationalizing under the title of “investment” the well-nigh universal capitulation to the gambling fever.

A History of the World in Seven Cheap Things: A Guide to Capitalism, Nature, and the Future of the Planet
by Raj Patel and Jason W. Moore
Published 16 Oct 2017

From the fifteenth- and late sixteenth-century Genoese financier diaspora to the Amsterdam banking societies that reaped the rewards of Dutch colonialism to the British merchant banks that invested in exploitation at home and abroad to today’s global financial elite, the relationship among states, financiers, and other capitalists has led to the rise and fall of cycles of accumulation. CONTEMPORARY THREADS Armed with this world-ecological history of cheap money, we can place contemporary financial capitalism in a broader context. The ever-increasing sophistication of financial engineering emerges not as “the rise of the quants” but as the outcome of centuries of accumulation, each with its distinctive ways of organizing capital, power, and nature. Flash trading, and the ability to make millions from trading decisions that are executed in milliseconds, is an extension of the first Genoese accountant recording that a particular transaction happened in the morning rather than the afternoon.

…

A People’s History of the United States: 1492–Present. 3rd ed. London: Pearson/Longman. Zorrilla, Marcelo Gabriel. 2006. “El acta de requerimiento y la guerra justa.” Revista del Notariado 885: 247–55. Index Aboriginal Australians, 99, 200 accumulation: as capitalism’s driving force, 38, 87–88; and cheap food, 144; financial engineering and, 88–89; and remaking of nature, 26; wars and, 69 Afonso de Albuquerque, 17 Africa: cultural interventions in, 231n97; Europe, Supported by Africa and America (Blake), 112 fig. 1; extinction in, 213n7; Green Revolution, 150, 157–58 Africans: in domain of Nature, 109; expulsions of, 39; New World production system and, 46; social death for, 30; transatlantic enslavement of women, 129–130.

Design Patterns: Elements of Reusable Object-Oriented Software (Joanne Romanovich's Library)
by Erich Gamma , Richard Helm , Ralph Johnson and John Vlissides
Published 18 Jul 1995

[Arv91] James Arvo. Graphics Gems II. Academic Press, Boston, MA, 1991. [AS85] B. Adelson and E. Soloway. The role of domain experience in software design. IEEE Transactions on Software Engineering, 11(11):1351-1360, 1985. [BE93] Andreas Birrer and Thomas Eggenschwiler. Frameworks in the financial engineering domain: An experience report. In European Conference on Object-Oriented Programming, pages 21-35, Kaiserslautern, Germany, July 1993. Springer-Verlag. [BJ94] Kent Beck and Ralph Johnson. Patterns generate architectures. In European Conference on Object-Oriented Programming, pages 139-149, Bologna, Italy, July 1994.

…

[Ede92] D. R. Edelson. Smart pointers: They’re smart, but they’re not pointers. In Proceedings of the 1992 USENIX C++ Conference, pages 1-19, Portland, OR, August 1992. USENIX Association. [EG92] Thomas Eggenschwiler and Erich Gamma. The ET++SwapsManager: Using object technology in the financial engineering domain. In Object-Oriented Programming Systems, Languages, and Applications Conference Proceedings, pages 166-178, Vancouver, British Columbia, Canada, October 1992. ACM Press. [ES90] Margaret A. Ellis and Bjarne Stroustrup. The Annotated C++ Reference Manual. Addison-Wesley, Reading, MA, 1990.

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism
by Ha-Joon Chang
Published 26 Dec 2007

If privatization is going to help a country’s economic future, the public enterprises need to be sold to people who have the ability to improve their long-term productivity. Obvious as this may sound, it is often not done. Unless the government demands that the buyer has a proven track record in the industry (as some countries have done), the enterprise may be sold to those who are good at financial engineering rather than at managing the enterprise in question. More importantly, SOEs are often sold off corruptly to people who have no competence to run them well – massive state-owned assets were transferred in a corrupt way to the new ‘oligarchy’ in Russia after the fall of communism. In many developing countries, the very processes of privatization have also been riddled with corruption, with a large part of the potential proceeds ending up in the pockets of a few insiders, rather than in the state coffers.

…

As an economist, he advocated the use of paper money backed by a central bank.13 The idea that we can make worthless paper into money through government fiat was a radical notion then. At the time, most people believed that only things that have a value of their own, like gold and silver, could serve as money. John Law is today remembered mainly as the financial wheeler-dealer who created the Mississippi Bubble, but his understanding of economics went far beyond mere financial engineering. He understood the importance of technology in building a strong economy. While he was expanding his banking operation and building up the Mississippi Company, he also recruited hundreds of skilled workers from Britain in an attempt to upgrade France’s technology.14 At the time, getting skilled workers was the key to accessing advanced technologies.

The greatest trade ever: the behind-the-scenes story of how John Paulson defied Wall Street and made financial history
by Gregory Zuckerman
Published 3 Nov 2009

Investors were sold a set of securities with claims on all that flow of cash, each bearing a different degree of risk, like any securitization. The riskiest pieces of a CDO paid investors the highest returns but were first in line to suffer if the CDO received slimmer cash payments than it expected. Pieces with lower risk had lower returns but received the first income payments. By the middle of the 2000s, the financial engineers were convinced that securitizations had spread the risk of all those loans, all but eliminating the chance of any big economic disaster. So they went back to the laboratory and concocted something called mortgage CDOs, featuring claims on a hundred or so mortgage-backed bonds, each of which in turn was a claim on thousands of individual mortgages.

…

The moves led to an investigation in late 2008 by the New York Attorney General’'s office, even though the buyers all were sophisticated investors who should have known better and never were forced to open their wallets. Scathing letters were sent to reporters blaming Lippmann for wagering against risky mortgage debt even as his firm was creating more of it. One Web site posted Lippmann’'s picture, saying that Lippmann was “"a ‘'Number 1 Asshole’' in creating the ‘'Financial Engineering’' behind the debacle.”" As the financial problems grew in early 2009, Lippmann assumed a lower profile, refusing to talk with reporters, worried that he was being painted a scapegoat. Rather than defend himself publicly, Lippmann griped to friends that all he did was help create a product and show hedge funds how to use it to profit from a crisis he saw coming.

Brexit, No Exit: Why in the End Britain Won't Leave Europe
by Denis MacShane
Published 14 Jul 2017

PART THREE BREXIT IN THE CHANNEL: BRITAIN CUT OFF 14 BUSINESS HATES BREXIT BUT STAYS SILENT ‘I would rather see finance less proud and industry more content’, proclaimed Winston Churchill as chancellor of the exchequer in 1925, shortly before embarking on policies that all but destroyed British manufacturing and helped create conditions that led to the great depression in Britain by the end of the 1920s. That search for some equilibrium between the City and the North, between industrial engineering and financial engineering, has been greatly desired by many governments ever since. Yet the plain fact is that London, which overwhelms the rest of the UK, is in turn itself overwhelmed by its success as one of the world’s financial hubs, perhaps even more important than Wall Street in terms of international financing.

…

By 2016, a staggering US$120-trillion volume of business in just one financial area alone – the buying and selling of euros and other financial products linked to the euro, as well as clearing these sales (the process by which banks act as the guarantor for purchases and sales of a currency, taking a profit from each transaction) – was being done in London. Hedge funds proliferated and English-speaking London became the place where every new bit of financial engineering invented in America most swiftly transferred. To be sure, the excesses ended in the crash of 2007/9 and the deregulatory zeal of Washington and London is rightly criticised for the disastrous state of the Euro-Atlantic economy since 2009. But the money rolled in and the City in 2015 was paying more than £66 billion in taxes – £20 billion more than the UK’s defence budget and only £20 billion less than Britain’s education budget.

The New Science of Asset Allocation: Risk Management in a Multi-Asset World
by Thomas Schneeweis , Garry B. Crowder and Hossein Kazemi
Published 8 Mar 2010

With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more. For a list of available titles, visit our web site at www.WileyFinance.com. The New Science of Asset Allocation Risk Management in a Multi-Asset World THOMAS SCHNEEWEIS GARRY B. CROWDER HOSSEIN KAZEMI John Wiley & Sons, Inc. 

…

New forms of dynamic risk management, such as portfolio insurance, also came into existence. In the 1990s, new asset sectors such as mortgages, new approaches to asset management such as hedge funds, and a wider range of investment vehicles such as Collateralized Debt Obligations (CDOs) were developed. By 2000, financial engineers had come into their own, developing even more complex invest- xiv PREFACE ment instruments and vehicles, each designed to further cauterize and trade market risk. Unfortunately, few investors considered that each of these new investment forms or vehicles fundamentally changed the relationship between assets and how those assets would perform and respond in extreme economic environments.

Bad Samaritans: The Guilty Secrets of Rich Nations and the Threat to Global Prosperity
by Ha-Joon Chang
Published 4 Jul 2007

If privatization is going to help a country’s economic future, the public enterprises need to be sold to people who have the ability to improve their long-term productivity. Obvious as this may sound, it is often not done. Unless the government demands that the buyer has a proven track record in the industry (as some countries have done), the enterprise may be sold to those who are good at financial engineering rather than at managing the enterprise in question. More importantly, SOEs are often sold off corruptly to people who have no competence to run them well – massive state-owned assets were transferred in a corrupt way to the new ‘oligarchy’ in Russia after the fall of communism. In many developing countries, the very processes of privatization have also been riddled with corruption, with a large part of the potential proceeds ending up in the pockets of a few insiders, rather than in the state coffers.

…

As an economist, he advocated the use of paper money backed by a central bank.13 The idea that we can make worthless paper into money through government fiat was a radical notion then. At the time, most people believed that only things that have a value of their own, like gold and silver, could serve as money. John Law is today remembered mainly as the financial wheeler-dealer who created the Mississippi Bubble but his understanding of economics went far beyond mere financial engineering. He understood the importance of technology in building a strong economy. While he was expanding his banking operation and building up the Mississippi Company, he also recruited hundreds of skilled workers from Britain in an attempt to upgrade France’s technology.14 At the time, getting skilled workers was the key to accessing advanced technologies.

Only Humans Need Apply: Winners and Losers in the Age of Smart Machines
by Thomas H. Davenport and Julia Kirby
Published 23 May 2016

It has probably not yet occurred to your organization, therefore, to ask: How could we improve our business if we did have that ability? It should probably occur to you to ask that now. At Vanguard, the enabling technology behind Personal Advisor Services was on the firm’s radar screen because of its previous partnerships with technology vendors, including a company called Financial Engines, which pioneered a financial simulation that could show how likely a retiree was to run out of money under different conditions. There was no off-the-shelf cognitive software product to buy, but there were models out there in “robo-advisor” startups such as Wealthfront, which had already launched online advisory businesses.

…

Anders, 164, 166 Esterly, David, 159, 160 Estes, Tim, 185–87 Etsy, 119 Ex Machina (film), 34, 35–36, 58, 127 Fabiani, John, 159–60 Facebook, 206–7, 211 FaceFirst, 54 Falls, Kelly, 154 Fanuc (robot manufacturer), 56 Fast, Cheap, and Out of Control (film), 170 FedEx, 4 Felson, Ben, 17 Ferrara, Lou, 96–98, 103, 222 Ferren, Bran, 114 Ferrucci, David, 92 Feynman, Richard, 168, 171 Fidelity, 198 Financial Engines, 213 financial sector. See also Vanguard Group ATMs, 14 augmentation in, 86–88 automated decision-making (robo-advisors) and other automated jobs, 11–12, 18, 20, 22, 25, 29, 48, 86, 87, 88, 92, 100, 105, 156–57, 198–99, 213, 214 bank failure, 90 Cathcart and WaMu, 89–91 creating a balance between computer-based and human skills, 105 federal regulatory agencies and, 214 hedge funds, 6, 84, 92–93, 95, 111 “portfolio management” jobs, 92 risk management systems, 146 Stepping Narrowly, Carey and, 172–73 Stepping Up in, 92–93 Finland, 239 Flickr, 125–26 food and food preparation, 122–23, 128 Ford, Martin, 205 Ford Motor Company, 1, 213 Foxconn, 2 Frames of Mind: The Theory of Multiple Intelligences (Gardner), 113 Franks, Bill, 43 Freud, Sigmund, 242 Future of Life Institute, 243–44, 247 open letter by, 247–48 Gardner, Howard, 113 Garland, Alex, 127 Gartner, 4, 43, 196 Gates, Bill, 226 Geist, Edward Moore, 245 General Motors, 213 Georgetown University’s Center on Education and the Workforce, 23 Gervais, Ricky, 109–10 Gibbons, Grinling, 159 Gladwell, Malcolm, 108 Glaser, Robert, 163 Global Drucker Forum, 248 Goldman Sachs, 156, 172–73, 186 Goldsberry, Kirk, 164 Gongos, 62–63 Google, 181, 213 Googlers-to-Googlers (G2G), 233 Google Classroom, 141 Google Glass, 65 Google Translate, 43, 53, 56, 151 Gou, Terry, 2, 224 Granakis, Alfred, 1 Gray, Peter, 118 Great Depression, 238, 239 Green, David, 6 Gretzky, Wayne, 160 guaranteed basic income, 241–43, 246 GW Medical Faculty Associates, 181 Hafez, Alex, 132, 143–44, 145, 146 Hanover Insurance, 102–3, 134 Hanson, David, 123 Hanson Robot, 123–24 Harrington, Brian, 101–2 Hawking, Stephen, 225–26 HCL Technologies, 204 health care and medicine adding new sources of data, 197 anesthesiologists, 19 augmentation in cancer care, 209–10 automated diagnosis and treatment protocols, 46, 54, 55–56, 66, 209 automation in, 14–15, 16–18, 19, 157 cancer research, 46, 60–61, 212 cognitive technologies in, 4–5, 17, 41 computer-aided physician order entry, 66 cost of AI programs, 155–56 cost of U.S., 155–56 Dr.

The Rapture of the Nerds
by Cory Doctorow and Charles Stross
Published 3 Sep 2012

Huw remembers this gesture from “her” djinni, the meatspace cousin of this one, back in Tripoli—it’s hourglassing, timing out while it thinks. “Collection protocol,” he says. “639,219 is trying to foreclose on you. She argues that your debts are so huge, they put my whole sim into negative equity, which means that unless I turn you over, she owns my sim too. It looks like she’s bought into a financial engineering clade and laid a whole whack of side-bets on your repayment schedule, hedging the crap out of herself so she’ll come out ahead no matter what happens. Wonder where she found the sucker who’d take the other side of that contract?” He was muttering to himself now, all the while zipping around the tiny volume inside the lamp, chalking magic sigils over the doorways and scattering herbs and yarrow stalks in complex patterns.

…

The djinni winces, but Huw is disappointed: rather than exploding, 639,219 merely emits a small puff of smoke from each nostril and hiccups quietly. “Wow, some sober-up, sis. I didn’t know you had it in you.” “What—” Huw bites her tongue. 639,219 is shaking her head. “I thought you were dumb’s’a plank, and then you pulled the fanciest freakin’ financial engineering stunt I’ve ever heard of ... How’ya do it?” “Trade secret.” It’s the first thing that pops into her mind. “Seriously, you think I’d share with you before we’ve sorted out our differences?” “Huh. What differences? You’re in here now, same as me. A cloud-bunny, getting to learn to like the mutable life.

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe
by Gillian Tett
Published 11 May 2009

But in the mid-1990s it formulated ambitious plans for becoming a major player in the international investment banking world. It hired teams of derivatives and bond traders from Merrill Lynch, acquired the operations of Bankers Trust, which had been at the forefront of derivatives innovation in the 1980s and early 1990s, and set out to build a preeminent platform in financial engineering in both New York and London. Derivatives were a prime focus. While the American bond and equity markets were so dominated by giant Wall Street banks that Deutsche would have had trouble breaking into that turf, the derivatives business was so new that it offered plenty of opportunity for outsiders.

…

But even if not all of the blame that will come should be directed towards our industry, there is unfortunately plenty of blame to go around…. What our industry needs is to rebuild our reputation,” she added, “and the first step is to acknowledge accountability and to own the responsibility for rebuilding a more systemically sustainable business model. Financial engineering was taken to a level of complexity which was unsustainable…. But it is important to distinguish between tools and their users. We need to remember that innovation has created tools for managing risk.” She was keenly aware of the ultimate irony of the whole saga. “The events that have brought us here are a tragedy of unfolding proportions; it would be a greater tragedy if we failed to learn the lessons that they offer.”

Advances in Financial Machine Learning
by Marcos Lopez de Prado
Published 2 Feb 2018

Tibshirani (2013): An Introduction to Statistical Learning: with Applications in R, 1st ed. Springer. Geron, A. (2017): Hands-On Machine Learning with Scikit-Learn and TensorFlow: Concepts, Tools, and Techniques to Build Intelligent Systems, 1st ed. O'Reilly Media. Gyorfi, L., G. Ottucsak, and H. Walk (2012): Machine Learning for Financial Engineering, 1st ed. Imperial College Press. Hackeling, G. (2014): Mastering Machine Learning with Scikit-Learn, 1st ed. Packt Publishing. Hastie, T., R. Tibshirani, and J. Friedman (2016): The Elements of Statistical Learning, 2nd ed. Springer-Verlag. Hauck, T. (2014): Scikit-Learn Cookbook, 1st ed.

…

Kolanovic, M. and R. Krishnamachari (2017): “Big data and AI strategies: Machine learning and alternative data approach to investing.” White paper, JP Morgan, Quantitative and Derivatives Strategy. May 18. Lam, K. and H. Yam (1997): “CUSUM techniques for technical trading in financial markets.” Financial Engineering and the Japanese Markets, Vol. 4, pp. 257–274. López de Prado, M. and D. Leinweber (2012): “Advances in cointegration and subset correlation hedging methods.” Journal of Investment Strategies (Risk Journals), Vol. 1, No. 2 (Spring), pp. 67–115. Mandelbrot, B. and M. Taylor (1967): “On the distribution of stock price differences.”

Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud
by Ben McKenzie and Jacob Silverman
Published 17 Jul 2023

He was fluent in both languages, promoting progressive values and bemoaning social ills while worshiping at the altar of technology, with “innovation” as a magic societal cure-all. But the previous decade of Sam’s life had also been instructive. From his time at MIT and then at Jane Street, he had learned how to speak the language of complex financial engineering—the lingua franca of Wall Street. His ability to execute quantitative, bloodless arbitrage in a dysfunctional crypto market was one of his prime selling points to prospective investors. When I spoke to him, one thing was obvious: Sam wanted me to like him. He was desperate to find common ground.

…

—Bertolt Brecht “There are no rules in this business.” —Alex Mashinsky Growing up in Michigan, James Block developed an interest in fraud at an improbable early age. When he was in third grade, he dressed up for Halloween as Kenneth Lay, the CEO of Enron who became synonymous with illegal financial engineering around the turn of the millennium. “I was a weird kid,” James admitted, laughing, when we spoke to him in early 2022. The interest didn’t wane. Years later, when he and his future wife were dating, they developed a drinking game for American Greed, a CNBC show about corporate malfeasance. As a child, James would spend the day with his grandfather, an accountant, crashing public hearings to hector local politicians about failing to live up to their campaign promises.

The Physics of Wall Street: A Brief History of Predicting the Unpredictable
by James Owen Weatherall
Published 2 Jan 2013

Whereas in the years leading up to the crash the Black-Scholes model seemed to get options prices exactly right, in virtually all contexts and all markets, after the crash certain discrepancies began to appear. These discrepancies are often called the volatility smile because of their distinctive shape in certain graphs. The smile appeared suddenly and presented a major mystery for financial engineers in the early 1990s, when its prevalence was first recognized. Notably, Emanuel Derman came up with a way of modifying the Black-Scholes model to account for the volatility smile, though he never came up with a principled reason why the Black-Scholes model had stopped working. Mandelbrot’s work, however, offers a compelling explanation for the volatility smile.

…

The excesses of the 2000s that led to the recent crash were enabled by physicists and mathematicians who didn’t understand the real-world consequences of what they were doing, and by profit-hungry banks that let these quants run wild. There is much that is right in this criticism. The idea that derivatives, including options, are a manufactured “financial product” has proved extremely powerful — and profitable. Over the past forty years, financial engineers have come up with ever more creative, and often convoluted, derivatives, engineered to make money in a wide variety of different circumstances. Dynamic hedging — the idea behind the Black-Scholes model — is the basic tool used in this new kind of banking, since it allows banks to sell such products with apparent impunity.

Austerity: The History of a Dangerous Idea
by Mark Blyth
Published 24 Apr 2013

Viniar, what happened in 2008 was “comparable to winning the lottery 21 or 22 times in a row.”26 LTCM’s ten sigma in 1998 was, likewise, an event that should have occurred roughly three times in the life of the universe. That these two events happened a mere nine years apart shows us that such claims are nonsense. It also tells us why Nassim Taleb has a huge problem with the idea of risk management and financial engineering. Claims about sigmas typically refer to a “normal-distributed” probability distribution. The shape of the distribution is important. If the shape is “normal,” it conforms to what is called a Gaussian distribution, the classic bell curve, where most of the action is in the middle of the distribution, and less action is likely to occur the further you go out into the tails (see figure 1.1).

…

Which is a bit like saying those who want to hold public office are the most qualified to hold it. 36. As Andrew Haldane and Robert May have argued regarding this set of ideas, what they term “asset pricing theory” (APT) “is not a theory in the sense habitually used in the sciences, but rather a set of idealized assumptions on which financial engineering is based; that is, APT is part of the problem itself.” Haldane and May, “Systemic Risk in Banking Ecosystem,” Nature 469 (2011): 352. 37. In the end, the Lehman CDS contracts did clear, with the state standing behind every transaction. See “DTCC Completes Settlement of Lehman CDS Contracts Resulting in $5.2B in Net Fund Transfers,” October 22, 2008. streetinsider.com, http://www.streetinsider.com/Trader+Talk/DTCC+Completes+Settlement+of+Lehman+CDS+Contracts+Resulting+In+$5.2B+In+Net+Fund+Transfers/4087312.html. 38.

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution
by Gregory Zuckerman
Published 5 Nov 2019

“There is more to life than trading,” he told an interviewer at the time.5 Throughout the 1980s, applied mathematicians and ex-physicists were recruited to work on Wall Street and in the City of London. They usually were tasked with building models to place values on complicated derivatives and mortgage products, analyze risk, and hedge, or protect, investment positions, activities that became known as forms of financial engineering. It took a little while for the finance industry to come up with a nickname for those designing and implementing these mathematical models. At first, they were called rocket scientists by those who assumed rocketry was the most advanced branch of science, says Emanuel Derman, who received a PhD in theoretical physics at Columbia University before joining a Wall Street firm.

…

Hutton, 64 efficient market hypothesis, 111, 152, 179 Einhorn, David, 264, 309 Einstein, Albert, 27, 128 Elias, Peter, 90–91 email spam, 174 embeddings, 141 endowment effect, 152 Englander, Israel, 238, 252–54, 310 English, Chris, 298, 299 Enron, 226 Esquenazi, Edmundo, 17, 21, 38–39, 50 Euclidean Capital, 308 European Exchange Rate Mechanism, 165 European Union, 280–81 Evans, Robert, 128 Everything Must Go (movie), 270 Exxon, 132, 173 Facebook, 303–4, 318 facial dysplasia, 147 factor investing, 30, 132–33, 315 Farage, Nigel, 280–81 Farkas, Hershel, 34–35 Federalist Society, 290 Federal Reserve, 56–57, 59, 65, 151, 211 Fermat conjecture, 69–70 Ferrell, Will, 270 Fidelity Investments, 161–63 Fields Medal, 28 financial crisis of 2007–2008, 255–62, 263–64 financial engineering, 126 Financial Times, 229 First Amendment, 277 Fischbach, Gerald, 268 flash crash of 2010, 314 Food and Drug Administration, 206, 311 Fortran, 170 Fort Thomas Highlands High School, 88–89 fractals, 127 Franklin Electronic Publishers, 61 freediving, 239 Freedom Partners Action Fund, 278 Freifeld, Charlie, 38–39, 44, 67 Frey, Robert, 200, 240 at Kepler, 133, 157, 166–67, 180 Mercer and election of 2016, 302–3 at Morgan Stanley, 131, 132–33 statistical-arbitrage trading system, 131, 132–33, 157, 166–67, 186–90 Fried, Michael, 72 fundamental investing, 127–28, 161–63, 247, 310 game theory, 2, 88, 93 GAM Investments, 153–54 Gann, William D., 122–23 Gasthalter, Jonathan, 263 gender discrimination, 168, 168n, 176–77, 207 German deutsche marks, 52, 57–58, 110–11, 164–65 Geron Corporation, 310 ghosts, 111 gold, 3, 40, 57, 63–64, 116, 207 Goldman Sachs, 126, 133–34, 256 Goldsmith, Meredith, 176–77 Gone With the Wind (Mitchell), 88 Goodman, George, 124–25 Google, 48, 272–73 Gore, Al, 212 Graham, Benjamin, 127 Granade, Matthew, 312 Greenspan, Alan, 59 Griffin, Ken, 256, 310–11 Gross, Bill, 3, 163–64, 309 Grumman Aerospace Corporation, 56, 78 Gulfstream G450, 257, 267, 325 Hamburg, Margaret, 206 Hanes, 162 Harpel, Jim, 13–14, 283 Harrington, Dan, 297 Harvard University, 15, 17, 21–22, 23, 46–48, 173, 176, 185, 272 head and shoulders pattern, 123–24 Heritage at Trump Place, 278 Heritage Foundation, 278 Hewitt, Jennifer Love, 270 high-frequency trading, 107, 222–23, 271 Hitler, Adolph, 165, 282 holonomy, 20 Homma, Munehisa, 122 housing market, 224–25, 255, 261, 309 Hullender, Greg, 53–59, 74 human longevity, 276 IBM, 33, 37, 169, 171–79, 311 Icahn, Carl, 282 illegal immigrants, 290–91 information advantage, 105–6 information theory, 90–91 insider trading, 310 Institute for Defense Analyses (IDA), 23–26, 28–29, 30–32, 35, 46–49, 93–94 Institutional Investor, 218, 223 interest rates, 163–64, 224–25, 272–73 Internal Revenue Service (IRS), 227 Iraq, invasion of Kuwait, 116, 117 Israel, 184–85, 262 iStar, 26 Japanese yen, 49–50, 52–53, 54–55, 65 Jean-Jacques, J.

file:///C:/Documents%20and%...
by vpavan

This site is aimed at employers interested in offering retirement plans, but also has useful background information for workers. • mPower, an Internet-based investment advisory service, offers its mPower Cafe 401(k) page at www.mpower.com. • Financial Engines, a site cofounded by 1990 Nobel Prize-winning economist William F. Sharp, helps you set goals and track progress of retirement savings, at www.financialengines.com. Financial Engines is offering its advisory service on employer retirement plans, including 401(k) plans, free to Vanguard clients. • The all-purpose financial site www.quicken.com includes a retirement section. • Mutual fund company T.

Blood and Oil: Mohammed Bin Salman's Ruthless Quest for Global Power
by Bradley Hope and Justin Scheck
Published 14 Sep 2020

Mohammed bin Salman had decided to sell a chunk of the company to the public in the biggest stock offering in financial history. “A shudder of silence” swept through the executive suite, one employee recalls. High-ranking officials at Aramco had been advising Mohammed on plans to diversify the Saudi economy, but they’d never considered selling part of the kingdom’s financial engine. It was the kind of idea cooked up in a room full of people without any knowledge of just how difficult such a task would be. About a dozen members of Aramco’s public relations team convened with top executives to quickly devise a statement that made it seem like management had been consulted and was part of the discussions.

…

One of their first ideas was tapping hidden pockets of money, especially in the Middle East, for a series of investment funds. In canvassing for partners, Nizar and his colleagues began talking to another old Deutsche Bank hand, the chain-vaping head of strategic finance at Japanese tech conglomerate SoftBank Corp., Rajeev Misra. An arrogant financial engineer with a taste for debt and risk, Rajeev was a senior Deutsche Bank banker during the financial crisis, overseeing a team that eventually profited from betting against the housing market. He left soon after, making brief stops at UBS and Fortress Investment Group before landing at SoftBank. Rajeev had reconnected with Masayoshi Son, SoftBank’s technology-obsessed founder, at a wedding in Italy a few months earlier and subsequently accepted a job trying to help Masayoshi develop complex debt structures to fund his ambitions.

More Money Than God: Hedge Funds and the Making of a New Elite
by Sebastian Mallaby
Published 9 Jun 2010

In this way, Soros managed to communicate with both halves of the hedge-fund house, reminding each that there was wisdom in the other.60 Within a few years, commodity people like Paul Tudor Jones and equity people like Stan Druckenmiller were regarded simply as “macro” investors.61 FOR YEARS AFTER THE CRASH, THE EVENTS OF BLACK Monday were picked over for some deeper meaning. Modern financial engineering, which later blurred with hedge funds in the public mind, was blamed for the debacle. The engineers had created a destabilizing feedback loop: A fall in the market triggered insurance-based selling, which in turn triggered a further fall in the market and another insurance-based sell-off. Mark Rubinstein, a Berkeley economics professor and coinventor of portfolio insurance, descended into what he would later recognize as a clinical depression.

…

But thanks to that same leverage, the new financial palaces were thin sided and hollow. An unexpected sideways blow could topple them. For anyone who knew the two Bank of China buildings, the celebration that took place in September 1997 was ironically located. A confident young hedge fund called Long-Term Capital Management—the epitome of the new financial engineering that Pei’s structure evoked—picked the art gallery at the squat old premises to throw a party. To the south and the west lay Indonesia and Thailand, which were struggling with currency crises; ensconced in a hotel suite not far away, Malaysia’s prime minister was waging his campaign against speculators.

…

By boosting its borrowing, it could maintain its towering portfolio on a thinner foundation. It could be ambitious and slender, like an I. M. Pei creation.2 Long-Term Capital Management’s founder, John Meriwether, had been one of the first executives on Wall Street to see the potential in financial engineering. As a rising star at Salomon Brothers in the mid-1980s, he had set out to transform the small trading group he managed into “a quasi-university environment.”3 Meriwether’s plan was to hire young stars from PhD programs and encourage them to stay in touch with cutting-edge research; they would visit finance faculties and go out on the academic conference circuit.

Stress Test: Reflections on Financial Crises
by Timothy F. Geithner
Published 11 May 2014

I then describe my time as a financial regulator at the New York Fed before the boom went bust, discussing what I saw, what I did, and what I missed. I made mistakes during that period, though they weren’t the mistakes most people think I made. The heart of the story will be my perspective on the most harrowing crisis since the Great Depression, from its outbreak in 2007 through its resolution in 2009—not only the intense financial engineering that began during my time at the New York Fed, but our debates over the stimulus, the housing market, and the larger economy in the Obama era. By the end of 2009, the worst of the crisis was over in the United States, but I still had a few challenges ahead of me. We were deep in the fight for Wall Street reform, our effort to set financial rules of the road that could make crises less frequent and less damaging in the future.

…

It was an informational memo, letting him know exactly what we were doing, marinating him in our unpleasant choices, giving him a chance to object if he wanted a different approach. He didn’t object. He asked smart questions, and subjected my recommendations to no-holds-barred debate with my colleagues. But he hadn’t run for president to be a financial engineer. He relied on us to figure out what needed to be done, and he gave me a lot of deference on the substance. After all, he had a lot on his plate. He was suddenly commander in chief, waging wars in Iraq and Afghanistan. He had a government to run, which posed enormous staffing challenges; his nominee to run health care reform, Tom Daschle, had just withdrawn because of tax issues.

…

But the President, Rahm, and I all leaned on him to stay, and he relented. We still needed all hands on deck. We were relieved that the financial fires were receding, that the financial markets were recovering, that Americans whose savings had been vaporized during the crisis were recouping some of their losses. But the primary goal of our financial engineering had always been to revive the broader economy, and times were still very tough on Main Street. We could see early signs of economic growth in the data, but people weren’t feeling it on the ground. THE ECONOMY shed about three hundred thousand jobs a month from May through August 2009, which was horrible.

Big Debt Crises
by Ray Dalio
Published 9 Sep 2018

Banks lever up and new types of lending institutions that are largely unregulated develop (these non-bank lending institutions are referred to collectively as a “shadow banking” system). These shadow banking institutions are typically less under the blanket of government protections. At these times, new types of lending vehicles are frequently invented and a lot of financial engineering takes place. The lenders and the speculators make a lot of fast, easy money, which reinforces the bubble by increasing the speculators’ equity, giving them the collateral they need to secure new loans. At the time, most people don’t think that is a problem; to the contrary, they think that what is happening is a reflection and confirmation of the boom.

…

It did not provide adequate regulatory visibility into the shadow banks and markets, nor did it provide the authorities with the powers they needed to curb their excesses, though, as is typical, that wasn’t apparent at first. Banks and shadow banks at the time were inadequately capitalized and over-leveraged. This meant they didn’t have much cushion and would be exposed to solvency problems in a downturn. In the 1990s and early 2000s era of financial liberalization and financial engineering, regulators were more concerned about the US financial industry staying competitive with London, which discouraged them from pulling in the reins. If the debt boom had been financed largely by the banking system, it would have been dramatically easier to manage and the run easier to contain.

…

As Paulson couldn’t ask for unlimited authority to inject capital into the two GSEs, he decided to ask for “unspecified” authority. However, when the Treasury finally got the “unspecified” authority, it was temporary, i.e., it expired in October 2009. This presented a challenge, because Fannie and Freddie had long-term debt and insured long term mortgages. So it took some creative financial engineering to turn this expansive authority, which Congress had intended to be only temporary, into what was for all intents and purposes a long-term guarantee. To do this, policy makers used their ability to immediately issue long-term preferred stock. Then they used these preferred shares to backstop Fannie and Freddie and absorb any potential losses.

Fortunes of Change: The Rise of the Liberal Rich and the Remaking of America
by David Callahan
Published 9 Aug 2010

Things changed as c01.indd 24 5/11/10 6:17:19 AM educated, rich, and liberal 25 finance became more complicated—as “quants” found new ways to make money using statistical techniques and algorithms, as automated trading systems came online, and as new financial products for managing risk or structuring debt, such as derivatives, came into being. Top universities spat out PhDs in fields such as mathematical finance and computational finance. Newly created master’s programs sprang up in financial engineering. MBA programs bolstered their quantitative offerings. More lawyers went into finance, applying their legal skills to the ever more complex deals that were going on. If finance had long been a haven for jocks, it has increasingly come to rely on geeks. There are a lot of “pretty high-achieving characters on Wall Street,” said Raj Date, who was a senior vice president at Capital One before becoming a managing director at Deutsche Bank Securities.

…

In a 2009 interview with the New York Times, John Bogle, the founder of the mutual fund colossus Vanguard Group, said about Schumer, “He is serving the parochial interest of a very small group of financial people, bankers, investment bankers, fund managers, private equity firms, rather than serving the general public.”3 Thanks to friends like Schumer, Wall Street was allowed to blow itself up— and take the economy with it—after an era of risky and unrestrained financial engineering. Schumer also fought reforms that might have prevented the frauds that exploded at Enron and WorldCom. Only in 2010, as Schumer eyed a bid for senate majority leader, did he cease defending Wall Street.4 Other Democrats, such as Chris Dodd, have also shilled for financial interests, and there is little question that Wall Street money has led Democrats to be less aggressive on regulation.

The Great Escape: Health, Wealth, and the Origins of Inequality
by Angus Deaton
Published 15 Mar 2013

But there is widespread suspicion that some highly profitable financial activities are of little benefit to the population as a whole, and may even threaten the stability of the financial system—what investor and businessman Warren Buffett has called financial weapons of mass destruction. If so, the very high payments that come with them are both unjust and inefficient. The heavy recruitment of the best minds into financial engineering is a loss to the rest of the economy, likely reducing innovation and growth elsewhere. What is much less controversial is that the implicit guarantee that the government would bail out the largest and most highly interconnected institutions led to excessive risk taking that was highly rewarded, even though it led to collapse and to misery for the millions who lost their jobs, faced reductions in incomes, or were left with debts that they could not hope to repay.

…

The countries in the OECD that have seen the largest increases in shares of income at the very top are the countries that have seen the largest cuts in taxes on top income.34 Studies of congressional voting by the political scientists Larry Bartels and Martin Gilens have documented how votes in Congress from both sides of the aisle are sensitive to the wishes of rich constituents and not at all to the wishes of poor constituents.35 And just as the diversion of talent to socially questionable financial engineering is a loss to the economy, so is the diversion of talent to lobbying. It has long been understood that these “directly unproductive profit-seeking activities” have been a serious obstacle to economic growth in many developing countries—India before the 1990s, with its famous License Raj, is a classic example—and the immense payoffs and relatively low costs of lobbying activity attract talent away from the production and innovation on which economic growth depends.36 The expense of government and the escalating costs of elections is a frequent topic of comment, but even the costs of recent presidential elections are dwarfed, for example, by the annual advertising budgets of car manufacturers.

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory
by Kariappa Bheemaiah
Published 26 Feb 2017

Since 2008, as bank lending declined in most advanced economies, most of the credit for non-financial firms has come from non-bank channels in the form of corporate bonds, securitization, and lending from non-bank institutions. As these financial intermediaries offered credit intermediation outside the regular banking system, they lacked a formal safety net (IMF, 2014). In spite of being cognizant of this risk, prior to the crisis, financial institutions increased their financial engineering activities. The reason banks participated in such high risk activities was the same reason they had issued credit easily prior to the crisis. It was profitable. As banks continued to grow, as they had for the previous forty years, they aimed to get bigger. The drive for growth and profitability thus encouraged them to take on more risk.

…

Coupled with the 1999 Gramm-Leach-Bliley Financial Modernization Act , it led to the rise of JP Morgan Chase, Citigroup, Bank of America, and Wells Fargo, among others (Maxfield, 2013). As a result of the structural changes over the past 40 years and the accompanying financialization of business and society, today’s markets are composed of large, complex, and highly leveraged companies, immersed in a sector where securities are financially engineered and linked to derivative instruments . This interconnected lattice is often touted to represent the adaptive and innovative nature of finance as it keeps pace with main street entrepreneurial innovations. For instance, proponents of big banks state that large banks encourage the widespread adoption of new financial innovations, as they have a large customer base.

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America
by Danielle Dimartino Booth
Published 14 Feb 2017

The unintended consequences of unconventional monetary policy run amok: pension systems at risk, unaffordable housing, malinvestment, rampant financial engineering by America’s top companies, stagnant wages, millions who have dropped out of the labor force, the stealth growth of the safety net financed by record low interest rates. And of course, more asset price bubbles than ever before. “Such environments raise the not-so-fine art of financial engineering to a ‘botox state,’” Art Cashin said. “It’s no secret that companies have been gorging themselves on share buybacks and mergers and acquisitions, non-productive but highly lucrative endeavors.

Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens
by Nicholas Shaxson
Published 11 Apr 2011

Give it to your sons, daughters, families, favorite legislators, and anyone else needing stimulation of their thought buds. This masterpiece illuminates the dark places and shows the visible hand of governments, corporations, banks, accountants, lawyers, and other pirates in creating fictitious offshore transactions and structures and picking our pockets. This financial engineering has enabled companies and the wealthy elites to dodge taxes. The result is poverty, erosion of social infrastructure and hard-won welfare rights, and higher taxes for ordinary people. Tax will be the decisive battleground of the twenty-first century as no democracy can function without it or provide people with adequate educations, healthcare, security, housing, transport, or pensions.

…

“Experience is accumulating,” he said, “that remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.” His words seem more apt than ever in a world where credit derivatives, asset-backed securities, and other products of financial engineering have placed ingenious but impenetrable barriers between investors and the assets they own, becoming great financial tinsel that is repackaged and resold down chains of investors across the planet, at each step being distanced further from the people and businesses who populate the real world.

Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy
by Iain Martin
Published 11 Sep 2013

For some time accountancy had been growing steadily more sophisticated, as the big firms moved beyond straightforward auditing of a client’s books so they complied with company law. Now they were also advisers and consultants aiding companies, and banks, who wanted to do a deal, or needed help with the financial engineering involved in expansion. In school and at university Fred had been anonymous and barely worthy of note. Here he was a star performer. After qualifying as a Scottish chartered accountant in 1983, he worked between 1985 and 1987 as part of the team at Touche Ross sent in by the government to Rosyth Dockyard, near Gordon Brown’s constituency in Fife.

…

Look at what Enron had been doing. They had taken contracts, parcelled them up and traded them on in such a complicated way that the whole business became entirely disconnected from any notion of worth or underlying value: ‘The roots of what happened later with sub-prime mortgages were there in an extreme form in the financial engineering in Enron, and we didn’t see it.’ Goodwin’s concentration though was on growth. If it was unfair at that stage to call him a ‘deal junkie’, someone obsessed with the thrill of doing the next big transaction, he did revel in the process of making a purchase and then applying his project-management skills to incorporate it into the group of Royal Bank businesses.

The Social Life of Money
by Nigel Dodd
Published 14 May 2014

In theoretical terms, this is the contradiction between capital in its money form and capital in its commodity form (Harvey 2006: 296). This contradiction expresses the underlying antagonism between the concept of money as a measure of the value of social labor and the notion of money as an instrument of financial engineering and credit. Both the demand and supply for money as capital as well are shaped by a configuration of conditions that virtually guarantees that interest rates remain unstable. These rates are determined by a struggle of interests between financiers and industrialists that is comparable to that between capital and labor.

…

Credit ratings helped to sustain an illusion of safety about mortgage-backed securities, reassuring many economic actors (both sophisticated investors and those at the other end of the securitization chain) that they were not being reckless. This analysis suggests that banks were playing a nontraditional intermediary role by taking assets and, with the help of financial engineering and credit rating agencies, effectively “de-risking” them. The risk attached to subprime loans was borne by risk takers as links within the shadow banking chain (Brender and Pisani 2010: 120–21). Just as Minsky’s hypothesis would predict, when this chain broke down, governments stepped in, taking on both liquidity and credit risks (Brender and Pisani 2010: 162–63).

…

See state fiat money fiction, and economic expectations, 16; and language, 36; and the free market, 338; and money, 6, 235, 317; and monetary policy, 110; in Simmel, 317; and truth, 36 fictitious capital, 55, 56, 58, 62, 65, 68–69, 70, 83, 194, 243; Marx’s definition of, 57n16; in Ricardo, 59n finance, etymology, 201; versus money, 61–62, 66, 125; social study of, 295 finance capital, 60, 64, 68, 74, 232, 249 financial engineering, 124 financial expropriation, 79 financial innovation, 121 financial instability hypothesis, 117, 124 financial repression, 69 financial system, 3; and crisis formation, 69; expansion of, 114; relationship to GDP, 114. See also capitalism; Wall Street system financialization, 10, 36, 61n22, 66–67, 391; and banking, 114; and the Eurozone crisis, 79; of money, 245, 298; as privatized Keynesianism, 76 First World War, 50, 59, 103, 225, 245, 256, 356, 362 fiscal cliff, 90, 386 fiscus, 261–62 Fisher, Irving, 120n41, 314; on the paradox of thrift, 347; on stamp scrip, 314, 349 Fisher, Mark, 193 floating money, 191, 244 flow, 227, 232, 233–34, 244; and financial markets, 233n Fond-des-Nègres marketplace, 302 Foster, William, 347 Foucault, Michel, 25, 238, 239, 391; death of “man,” 389–90; desire, 229; on homo economicus, 390; on Nietzsche, 389–90, 391; The Order of Things, 228 Fourcade, Marion, 91 Fourier, Charles, 324 fractional reserve lending, 95, 111, 113, 116, 199n26 Frank, Thomas, 315 Frankfurt School, 322, 326–27 Franklin, Benjamin, 176 fraud, 113, 117n, 120, 132, 137, 199, 313, 368 Freddie Mac, 123 free credit, 352 free labor, 98 free market money, 360, 362 free money, 348 free trade 281 Freicoin, 348n, 349n, 370–71 French Revolution, 84, 355 Freud, Sigmund, 150, 228, 332, 334; Civilization and Its Discontents, 152; on money and saving, 151, 336 Friedman, Milton, 131, 330–31 Frisby, David, on Nietzsche, 136–37, 141–42; on Simmel, 137 Fromm, Erich, 14, 85n45, 345, 356, 372, 382; on economic democracy, 338–39; Escape from Freedom, 331; on having versus being, 315, 331–38; on hoarding, 336, 340–41, 350–51; on the humanistic utopia, 315, 333–34, 338–39, 374; on language, 332; Man for Himself, 331, 341; on Marx, 339; “Medicine and the Ethical Problem of Modern Man,” 340; on Messianic time, 335, 338; on money, 334, 339–40, 341, 346; on the Shabbat, 334–35, 338; on spiritual poverty, 334; To Have or To Be?

The Concepts and Practice of Mathematical Finance
by Mark S. Joshi
Published 24 Dec 2003

Whilst the discipline of financial mathematics has advanced greatly in six years, the basics that an incomer to the field needs to know have not changed hugely. The main difference is that banks have much higher expectations of entry-level candidates. In 1999, demonstration of strong mathematics skills and the ability to derive the Black-Scholes equation was enough to get a job; now many candidates have Masters in Financial Engineering, sometimes as well as PhDs in other fields. Yet the material covered here plus programming skills is still sufficient to land that first job. For that reason, in this edition, there has been a conscious decision not to include new topics. Instead, the emphasis has been placed on clarifying old topics, introducing extra references to new material and books, and on the exercises.

…

Wu, Pricing American options: a comparison of Monte Carlo simulation approaches, Journal of Computational Finance 4(3), 2001, 39-88. [57] J.K. Galbraith, The Great Crash, Houghton Mifflin, 1997. [58] J. Gatheral, The Volatility Surface: A Practitioner's Guide, Wiley, 2006. [59] P. Glasserman, Monte Carlo Methods in Financial Engineering, Springer Verlag, 2003. [60] P. Glasserman, S.G. Kou, The term structure of simple forward rates with jump risk, Mathematical Finance, July 2003, 383-410. [61] P. Glasserman, N. Merener, Cap and swaption approximations in LIBOR market models with jumps, Journal of Computational Finance 7, 2003, 1-36. [62] P.

…

Financial and Quantitative Analysis 26, 377-389, 1991. [137] J. Walmsley, New Financial Instruments, Wiley, 1998. [138] J. Walsh, The rate of convergence of the binomial tree scheme, Finance and Stochastics 7, 2003, 337-61. References 532 [139] P. Wilmott, Derivatives: the Theory and Practice of Financial Engineering, Wiley, 1999. [140] P. Wilmott, S. Howison, J. Dewynne, The Mathematics of Financial Derivatives, Cambridge University Press, 1995. [141] C. Zhou, Path-dependent option valuation when the underlying path is discontinuous, working paper, Federal Reserve Board, 1997. [142] C. Zuhlsdorff, Extended Libor market models with affine and quadratic volatility, Department of Statistics, University of Bonn, 2000. [143] P.L.

The Power Law: Venture Capital and the Making of the New Future
by Sebastian Mallaby
Published 1 Feb 2022

Without the perseverance in China and India—without the grit Sequoia demonstrated in pursuing growth funds, its hedge fund, and then Heritage—Sequoia would have been excellent but not extraordinary. Sequoia’s success was emblematic of a wider shift in finance in this period: from the East Coast to the West Coast, from public capital markets to private ones, from financial engineering to technology. In the wake of the 2008 financial crisis, regulators forced the famous banks on Wall Street to take less risk; their lucrative proprietary trading desks were more or less shuttered. The Fed’s policy of quantitative easing added to the banks’ woes: their core business of borrowing cheap short-term money and lending it out long term ceased to earn much of a “spread,” because long-term interest rates were held down by central bankers.

…

But unlike the subprime wagers, tech bets had a chance of generating durable profits. Fortuitously, the financial crisis coincided with the advent of smartphones, cloud computing, and the mobile internet, setting up an opportunity to build brilliant businesses atop the new platforms: it was the perfect moment to switch capital from financial engineering to technology. The average venture fund launched in 2011 outperformed the S&P 500 index by 7 percent per year, and, as we have seen with Sequoia, the top venture funds outperformed by much more than that.[83] The longer the Fed persisted with its policy of low interest rates, the more the search for technology-driven yield gathered momentum.

…

The assorted tech novices—banks, mutual-fund houses, PE firms, and hedge funds—had little interest in allocating $10 million to a startup. Rather, they wanted to write $100 million checks that might move the needle on their multibillion-dollar portfolios. Inexperienced money therefore crowded into big-ticket late-stage rounds, driving valuations skyward. The second problem had to do with financial engineering. The non-Valley investors frequently insisted on protection clauses, which further distorted unicorns’ headline valuations. For example, the investors might demand a “liquidation preference”: in the event of the company’s liquidation, they would be entitled to a specified payoff before other shareholders got anything.

The Cable
by Gillian Cookson
Published 19 Sep 2012

Field continued to visit London throughout the war, combining his political work with lobbying for the cable. In March 1862, he attended a ‘telegraphic soirée’ at the home of Samuel Gurney, the Quaker banker, MP and director of the Atlantic Telegraph Co., attended by aristocrats, politicians, financiers, engineers and many other influential members of the pacifist Society of Friends. Wires from four different land and submarine telegraph companies were extended to Gurney’s house near Hyde Park, and messages recorded in Morse code on continuous strips. ‘Here, for the first time, a gentleman’s library was brought into instantaneous communication with all the capitals of Europe, Malta, Alexandria and the East.’

Market Risk Analysis, Quantitative Methods in Finance
by Carol Alexander
Published 2 Jan 2007

Numerical methods that have been applied to many other disciplines are now finding applications to pricing and hedging the ever more complex products being sold in today’s financial markets. But it is financial engineering rather than financial risk management that is the goal of computational finance. This chapter, which has merely provided a taster on the subject, only aims to equip a market risk manager with sufficient insight into the programs being developed by financial engineers and quants. I.6 Introduction to Portfolio Theory I.6.1 INTRODUCTION This chapter examines the decisions made by investors, asset managers, risk managers and senior managers about their daily business.

The End of Wall Street
by Roger Lowenstein
Published 15 Jan 2010

What exacerbated the problem was that the SIVs had funded themselves by selling short-term IOUs (“commercial paper,” in the parlance of Wall Street), often to money market funds. Money funds, regarded as the least risky of investments, were owned by millions of ordinary savers. In other words, financial engineers had contrived to connect safety-minded moms and pops to the mad cow of the financial world—exactly the stuff of which systemic crises are made. As the value of SIV paper plunged, the money market funds themselves became imperiled. Roughly a dozen of them were on the verge of “breaking the buck”—that is, the net asset value of these funds was about to fall below the par value of $1 that investors had come to assume was guaranteed.

…

Russo was apoplectic, but Lehman’s stock, now down to the midteens, held its own through August. Equally distressing to the banks, Wall Street had constructed an alternative way of speculating against troubled corporations, via derivatives, and this wholly unregulated market doubled back on its Wall Street creators with a vengeance. Credit default swaps had been invented by financial engineers at Bankers Trust as a form of insurance on corporate defaults.af The initial purpose was supposedly as a hedging vehicle. A bank that had lent money to General Motors could hedge its risk by purchasing a credit default swap from another party who believed that the loan would be repaid. Thus, if GM defaulted on the loan, the bank would recoup its investment via the swap.

Samuelson Friedman: The Battle Over the Free Market
by Nicholas Wapshott
Published 2 Aug 2021

That’s different from Rand and [Arthur] Burns—both despicable human beings,” Greenspan had displayed recklessness when, “after 1996 [and] clear signs of a stock bubble he (rashly?) refused to engage in any preventative against-the-winds policies. … He had no reason to believe that after the bubble burst he could effectively take corrective action. No surprise then that as Enron and new financial-engineering monsters were clearly bubbling-bubbling, he took no notice or action. When he left office, his successors were left holding a fretting baby.”36 The George W. Bush administration was to prove Friedman’s last plausible chance to make a lasting change to the way the money supply in the United States was managed.

…

Samuelson considered the continuing turmoil at Fannie and Freddie an omen, telling his nephew, Larry Summers—at the time president of Harvard, but before long to join the Obama administration as director of the National Economic Council—that, after accepting an emergency loan of $25 billion from the Treasury on July 22, 2008, the two great mortgage lenders were effectively owned by the government and that both were “toast.” He could not resist a sideswipe at Friedman’s heirs, the “inflation targetters,” writing to Summers: You correctly doubt that the many hidden and admitted losses that resulted from a burst real estate bubble impinging on the new dynamite of Frankenstein financial engineering can heal themselves by private initiative. Before we are out of the mess, the Federal purse—the Treasury and the Federal Reserve Board—is going to lose amounts that dwarf previous real estate failures and anything that happened after 1939. Accordingly, I thought your stance, approving the Bear Stearns caper but worrying that Freddie and Fannie executives and shareholders were left to revert to their bad old ways or bad new ways, was strange.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition)
by Burton G. Malkiel
Published 5 Jan 2015

To make matters even more complicated, there was not just one bond issued against a package of mortgages. The mortgage-backed securities were sliced into different “tranches,” each tranche with different claim priority against payments from the underlying mortgages and each with a different bond rating. It was called “financial engineering.” Even if the underlying mortgage loans were of low quality, the bond-rating agencies were happy to bestow an AAA rating on the bond tranches with the first claims on the payments of interest and principal from the underlying mortgages. The system should more accurately be called “financial alchemy,” and the alchemy was employed not only with mortgages but with all sorts of underlying instruments, such as credit card loans and automobile loans.

…

N., 151–52 Elliot wave theory, 151–52 Ellis, Charles, 252 emerging markets, 204–8, 387–88, 397–98 Enron, 94–95, 165, 166, 171, 256, 363 Enterprise Fund, 66 estate taxes, 305 exchange-traded index funds (ETFs), 185, 326, 390–92, 408, 415, 416, 417–18, 419, 420 “growth” versus “value,” 275 “smart beta” and, 264, 266, 268, 271, 273, 274, 275, 276, 278, 280, 281, 282–83, 421 expected rate of return, 198 illustration of concept, 191–92 risk as dispersion of, 191–96 expense ratios, 401 Extraordinary Popular Delusions and the Madness of Crowds (Mackay), 39 Exxon, 384 ezboard.com, 85 F**kedcompany.com, 85 Falwell, Jerry, 74 Fama, Eugene, 219–20, 225–26, 264, 265, 274 Fastow, Andrew, 94 FBI (Federal Bureau of Investigation), 75 FDA (Food and Drug Administration), 72 Federal Deposit Insurance Corporation (FDIC), 299 Federal Housing Administration, 101 Federal Reserve, 54, 285, 337 Federal Reserve Board of Governors, 371 Federal Trade Commission (FTC), 65 Fidelity Funds, 370 Figgie, Mr., 63 Figgie International, 63 filter system, 141–42 “financial alchemy,” 99 Financial Analysts Journal, 184 “financial engineering,” 99 financial market returns, eras of, 334–48 Age of Angst, 337–41 Age of Comfort, 335–37 Age of Disenchantment, 331, 344 Age of Exuberance, 341–43 financial system: international, 98, 100, 204, 207 “originate and distribute” model in, 99 “originate and hold” model in, 98–99 Financial Times, 260, 284 Fine Art Acquisitions Ltd., 70 firm foundation of value, see intrinsic value of stocks firm-foundation theory, 30–33, 56–57, 118–28, 189, 408 four rules of, 119–26 fundamental analysis and, 110–11, 119 future expectations as source of inaccuracy in, 126–27 testing rules of, 121–23 undetermined data as source of inaccuracy in, 126–27 Fisher, Irving, 31, 52, 54 “529” college saving accounts, 304–5 Flash Boys (Lewis), 184 flipping of houses, 101 Flooz, 84 Food and Drug Administration (FDA), 72 Forbes, 175, 235, 393 Forbes, Steve, 235 Ford Motor Company, 224, 384 Fortune, 89, 94, 97, 153, 393 401(k) savings plans, 246–47, 304, 357, 370, 378 403(b) savings plans, 304 4 percent rule, 376 framing, 243, 244–45, 247 fraud, 25, 49–51 bubbles and, 41–47, 93–95 in concept stocks, 68 Madoff and, 258–59 in new-issue craze, 57–59 free enterprise, 29 French, Kenneth, 219–20, 225–26, 264, 265, 274 friends, 253 FTC (Federal Trade Commission), 65 fundamental analysis, 26, 110–33, 160–85, 408 defined, 110 firm-foundation theory and, 110, 119 random-walk theory and, 182–84 technical analysis used with, 130–33 technical analysis vs., 110–11, 118–19 technique of, 118–26 gambling, patterns and, 156 Garber, Peter, 40 Garzarelli, Elaine, 152–53 GDP, 225 Genentech, 71 General Electric (GE), 48, 53, 99–100, 387 General Motors (GM), 362–63 General Theory of Employment, Interest and Money, The (Keynes), 33 Geophysics Corporation of America, 58 gift taxes, 304–5 Gilbert, W.

Cable Cowboy
by Mark Robichaux
Published 19 Oct 2002

Malone gave the company a $25.5 million note for the rest of the stock. He later paid off part of the debt to Liberty in TCI stock. By the end of the maneuvers, Malone owned 20 percent of Liberty’s class B supervoting stock, giving him roughly 40 percent of the shareholder votes at Liberty. Over the next two years he did more financial engineering, splitting Liberty’s stock multiple times—first, 20 for 1, then 4 for 1, and then 2 for 1. His aim: to increase the number of shares available for use as currency in acquisitions and to lower the stock price he had initially, intentionally kept high so more individual investors could afford to buy in.

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TCI excelled not because it was a great cable operator and friendly corporate citizen. Those were promises Malone never felt compelled to make or keep. True, it was the largest cable operator in the country, but Malone never pretended to be the best cable operator. TCI built wealth and made its shareholders wealthy by investments and complex financial engineering. A week later, the merger moved three steps closer to completion. As Mike Armstrong talked to owners of the most widely held stock in America on a giant videoscreen at a meeting in Secaucus, New Jersey, 99 percent of AT&T’s shareholders approved the merger. The same day in Washington, the FCC gave its unanimous blessing.

The Left Case Against the EU
by Costas Lapavitsas
Published 17 Dec 2018

More than 40% of aggregate debt was public, the highest proportion among peripheral countries, and two-thirds of the state’s debt was owed abroad.14 However, the fastest growing component of aggregate debt in the 2000s was private debt, especially by financial corporations and households. The growth of debt occurred as nominal and real interest rates declined rapidly in the periphery of the EMU after the adoption of the euro. Greek banks expanded their lending activities, but also relied heavily on domestic deposits and kept well away from derivatives and other forms of financial engineering. There was no credit bubble in Greece in the 2000s comparable to Spain or Ireland.15 Greece, similarly to other peripheral countries, borrowed heavily from abroad during the 2000s, and that has proved its downfall in the 2010s. The flows were spurred by Greek borrowers, primarily the state and the banks, and effectively financed the huge deficit in Greece’s current account, also reflecting the country’s negative saving.

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market
by Steven Drobny
Published 31 Mar 2006

It’s incredibly difficult to spot a good macro trader. To be a good macro trader, you have to see future value, as opposed to present value. A lot of today’s traders know the price of everything but the value of nothing. They grew up in a world of derivatives and financial engineering as opposed to trading.There are nine ways to skin a cat when it comes to financial engineering, but there’s no silver bullet when it comes to investing. At what point in your career did you know you were good at trading? Pretty much the first week I started. I just had a knack for it. It’s like golf— either you get it or you don’t. In golf, when you’re in the deep rough 250 yards out from the green and pull out a bloody 3-iron, you ain’t playing the game properly.

How Markets Fail: The Logic of Economic Calamities
by John Cassidy
Published 10 Nov 2009

As explained earlier, many Wall Street firms that issued RMBSs and CDOs ended up keeping slices of these deals on their own books, which they were keen to hedge. On the other side of the market, many hedge funds and institutional investors were eager to take a long or short position in subprime. To help out both sides, financial engineers created new variants of credit default swaps: some were linked to particular securitizations, others to broad subprime credit indexes, such as the ABX index. By the end of 2005, virtually every big firm on Wall Street was heavily involved in the credit insurance market. So were big commercial banks, such as Citigroup and Bank of America, and some top insurance companies, particularly AIG.

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By imposing leverage limits on traders, and demanding adequate collateral for exposed positions, the clearinghouse could eliminate a lot of counterparty credit risk. Unfortunately, the administration’s proposal applies only to “standardized” derivatives. Firms such as Goldman Sachs and Morgan Stanley would still be allowed to trade “customized” derivatives without public disclosure or central clearing. Given the creativity of the Wall Street financial engineers, it wouldn’t take them long to exploit this loophole. In another sop to Wall Street, the remit of the Consumer Financial Protection Agency won’t extend to complex securities that financial firms trade among themselves. Evidently, the White House has swallowed the Wall Street line that precertification of derivatives and other financial products would stifle innovation.

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
by David Carey
Published 7 Feb 2012

Blackstone and the coinvestors had now collected $700 million in profit on their $612 million investment, and they still owned most of Celanese. By the time they sold the last of their Celanese shares in May 2007, Blackstone and the coinvestors raked in a $2.9 billion profit on Celanese—almost five times their money and by far the biggest single gain Blackstone has ever booked. Celanese was a tour de force of financial engineering. By Chu’s reckoning, the cyclical upswing of the industry and the higher multiple the stock commanded in the United States accounted for roughly two-thirds of the Celanese profit. The remaining third traced to the operational changes, such as pruning costs, selling the money-losing operations, and adding Acetex and Vinamul.

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(The study didn’t attempt to break out what portion of the gains in sales, cash flows, and profit margins stemmed from the business cycle—i.e., from buying at the bottom of the market and selling after a rebound.) The truth is that private equity’s profits arise from a mixture of all these factors—leverage and other types of financial engineering, good timing, new corporate strategies, mergers and divestitures, and operational fine-tuning—some of which create more fundamental economic wealth than others. Big private equity has grown not only because debt was plentiful for most of the last twenty-five years, but also because these firms have been adaptable, squeezing profits out by pushing up leverage in good times to pay for dividends, wading in to perform nuts-and-bolts overhauls of underperforming businesses at other points, and when the economy was down, trading the debt of troubled companies and gaining control of others through the bankruptcy process.

The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion
by Eliot Brown and Maureen Farrell
Published 19 Jul 2021

He wanted WeWork to co-develop 2 World Trade Center, the final tower to be built on the World Trade Center site, and struck a tentative deal with the owner, Silverstein Properties. It later fizzled. While Neumann loved the idea of owning real estate, others at WeWork saw potential in ARK for other reasons. Berrent and Minson saw the fund as an opportunity for financial engineering. The two executives—both still quite bullish on WeWork—recognized that its losses couldn’t keep growing forever. One way for WeWork to turn toward profitability would be to find someone else to pay for the costs of renovating and constructing their offices—one of WeWork’s biggest expenses.

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The idea was that ARK—using funds raised from real estate investors around the globe—would treat WeWork more like a hotel operator, like Marriott, which generally doesn’t own or lease any of its hotels. Instead, hotel landlords spend the money building out hotels and then pay a hotel company like Marriott to manage the building. It was their plan to become “asset light.” Neumann had financial engineering plans of his own. In addition to the benefits he saw in the business, ARK offered a way for him to get an even more lucrative remuneration package. He had staff devise a plan that would give him a personal ownership stake in the fund—one that came on top of the billions in paper gains he planned to see indirectly, as WeWork’s largest shareholder.

Principles of Corporate Finance
by Richard A. Brealey , Stewart C. Myers and Franklin Allen
Published 15 Feb 2014

In other words, you can create any position diagram—with as many ups and downs or peaks and valleys as your imagination allows—by buying or selling the right combinations of puts and calls with different exercise prices.11 Finance pros often talk about financial engineering, which is the practice of packaging different investments to create new tailor-made instruments. Perhaps a German company would like to set a minimum and maximum cost at which it can buy dollars in six-months’ time. Or perhaps an oil company would like to pay a lower rate of interest on its debt if the price of oil falls. Options provide the building blocks that financial engineers use to create these interesting payoff structures. 20-3 What Determines Option Values? So far we have said nothing about how the market value of an option is determined.

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Yun, “Commercial Paper, Lines of Credit, and the Real Effects of the Financial Crisis of 2008: Firm-Level Evidence from the Manufacturing Industry,” working paper, University of Notre Dame, 2010. 56Occasionally, an MTN registration may be used to issue much longer term bonds. For example, Disney has even used its MTN program to issue a 100-year bond. 57Rupert Thorndike’s shares would go to a charitable foundation formed to advance the study of financial engineering and its crucial role in world peace and progress. The managers of the foundation’s endowment were not expected to oppose the takeover. 58WAPDA entered into a take-or-pay agreement with Hubco; if it did not take the electricity, it still had to pay for it. In the case of pipeline projects the contract with the customer is often in the form of a throughput agreement, whereby the customer agrees to make a minimum use of the pipeline.

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Smith, Jr., “Tax Incentives to Hedge,” Journal of Finance 54 (December 1999), pp. 2241–2262. 5Amateur speculation is doubly dangerous when the manager’s initial trades are losers. At that point the manager is already in deep trouble and has nothing more to lose by going for broke. 6International Swap Dealers Association (ISDA), “2009 Derivatives Usage Survey,” www.isda.org. 7See P. Tufano, “The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry,” Journal of Finance 53 (June 1998), pp. 1014–1052; and G. D. Haushalter, “Financing Policy, Basis Risk and Corporate Hedging,” Journal of Finance 55 (February 2000), pp. 107–152. 8If the premium is paid at the beginning of the year and the claim is not settled until the end, then the zero-NPV premium equals the discounted value of the expected claim or $100,000/(1 + r). 9For a discussion of Cat bonds and other techniques to spread insurance risk, see N.

The Little Book of Hedge Funds
by Anthony Scaramucci
Published 30 Apr 2012

They had achieved irrefutable performance. Who would have thought that the financial improvisation performed by a man who studied Marxist theory, drank with Dorothy Parker and Ernest Hemingway, and fought in a civil war would serve as a model for hedge funds. Oh, and did I mention that he didn’t have an MBA or a PhD in financial engineering?3 Now, although I told you that there was not a universal definition of a hedge fund, each and every single hedge fund manager operates by Jones’ basic tenets. So, take out those notebooks again, as it’s time to summarize Jones’ main contributions to the world of hedge funds. Performance Fee Not only did Jones develop the idea of an investment strategy designed to do well no matter what happened in the stock market, he also developed and implemented a closely tied payment and incentive structure.

Start It Up: Why Running Your Own Business Is Easier Than You Think
by Luke Johnson
Published 31 Aug 2011

Of course value is also destroyed in this violent process of reordering – but without such a threat, which institution would ever undertake the painful restructuring that is a part of staying relevant and competitive? So many industries I know – media, retailing, financial services, leisure – have to adapt to a rapidly evolving market. Banks are learning that financial engineering tricks are not enough. Shopkeepers, publishers and broadcasters realize that the online threat is very real indeed. There is a palpable sense of urgency which would be absent if the pressure were not real. The relentless march of technology and globalization is forcing the pace. This is how things get done; this is how institutions and societies progress and improve.

Moon Rush: The New Space Race
by Leonard David
Published 6 May 2019

To assure freedom of enterprise beyond Earth orbit, U.S. industry needs a regulatory framework that meets our obligations under the UN Outer Space Treaty but still provides a structure with maximum certainty and minimal regulatory burden. Making the Moon a for-profit place of business raises many questions now piquing the interest of outer space lawyers. To what extent can private firms establish an economically viable operation? What laws hamper or promote turning the Moon into a financial engine? * * * SOME LUNAR EXPERTS raise cautionary flags about how lunar resource harvesting is unfolding. As we enter this new era, they say, we must figure out the best way that these resources might best improve life on Earth, not just fall back on century-old clichés about one economic system dominating another.

Britannia Unchained: Global Lessons for Growth and Prosperity
by Kwasi Kwarteng , Priti Patel , Dominic Raab , Chris Skidmore and Elizabeth Truss
Published 12 Sep 2012

High value services, such as research and programming, are increasingly a global market, with Indian graduates able to compete against those in the UK and the US in their delivery.34 If you are in the top few per cent the world is open to you. You can earn hundreds of thousands as a ‘quant’ or programmer, the new ‘Master of the Universe’. That market attracts countries ‘on the way up’. When Berkeley offered its first Masters in Financial Engineering course, nearly a quarter of the students came from China.35 The absolute brightest in Britain and the US can and do compete in the international geek contest. Yet a British student who is middling-to-good is presented with very different choices. The domestic jobs market in Britain often values all degrees equally (or at least ones from the same institution).

Is Everyone Hanging Out Without Me? (And Other Concerns)
by Mindy Kaling
Published 1 Nov 2011

.* This time when I was on script, I stopped by my favorite cupcake place, which I will call Sunshine Cupcakes. (Sunshine Cupcakes, while a ridiculous name, is actually a restrained parody of cupcake bakery names. You have no idea. In Los Angeles, cupcake bakeries are as pervasive as Starbucks. They are the product of a city with an abundance of trophy wives, because trophy wives are the financial engines of cutesy commerce that makes Los Angeles like no other American city: toe jewelry, doorknob cozies, vegan dog food, you get it. If I am sounding mean, I should tell you how envious and admiring I am of these trophy wives. I’d marry a partner at William Morris Endeavor and start a cat pedicure parlor m’self if I were so lucky.)

The Tyranny of Metrics
by Jerry Z. Muller
Published 23 Jan 2018

Since they had no long-term interest in the viability of the mortgage loans they issued, mortgage originators increasingly offered “low-doc” or “no-doc” loans, meaning that borrowers were asked to provide almost no proof that they would actually be able to repay the loans. But the bank did not hold onto them either. It created a “mortgage backed security,” an interest-bearing bond, secured by the loans, and sold these to investors. With advice from the ratings agencies (such as Moody’s), financial engineers mixed good-quality mortgages, from borrowers likely to pay, with more dubious ones, so as to squeeze the most profit out of these mortgage-backed securities,18 which they carved into “tranches” bearing different degrees of risk in return for varying rates of interest. Behind all of this was a belief in the financial sector that such diversification was a substitute for due diligence on each asset.

Big Mistakes: The Best Investors and Their Worst Investments
by Michael Batnick
Published 21 May 2018

For example, Ackman took a 10% stake in Wendy's, one of his first targets at Pershing, and they agreed to spin off Tim Hortons.6 From April 2005 to March 2006, Wendy's stock appreciated by 55%.7 In 2005, Ackman targeted McDonald's, proposing they spin‐off their low‐margin business. He bought 62 million shares and options that, if exercised, would value his stake at $2 billion, one of the largest ever for a hedge fund up until that time.8 McDonald's had other ideas, saying, “The proposal is an exercise in financial engineering and does not take into account McDonald's unique business model.” Ackman said, “Our intention is to change their intention.” Ackman is not one to take no for an answer. “I'm the most persistent person you will ever meet.”9 Other companies that landed in Ackman's crosshairs were MBIA Inc., Target, Sears, Valeant, and J.

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
by Morgan Housel
Published 7 Sep 2020

Scientific discoveries have replaced doctors’ old ideas about how the human body works, and virtually everyone is healthier because of it. The money industry—investing, personal finance, business planning—is another story. Finance has scooped up the smartest minds coming from top universities over the last two decades. Financial Engineering was the most popular major in Princeton’s School of Engineering a decade ago. Is there any evidence it has made us better investors? I have seen none. Through collective trial and error over the years we learned how to become better farmers, skilled plumbers, and advanced chemists. But has trial and error taught us to become better with our personal finances?

The Price of Tomorrow: Why Deflation Is the Key to an Abundant Future
by Jeff Booth
Published 14 Jan 2020

These developments, he went on, could cripple or destroy hedge funds, investment banks, and other major financial institutions like Fannie Mae and Freddie Mac.5 To be fair, Roubini had missed recession calls in the past. But he was right about this one. Years of loose credit coupled with financial engineering wizardry created an unprecedented bubble in housing in the United States. When housing started to unwind, the interconnections that caused the run-up unwound as well. Those interconnections were global in nature and risked taking down the entire economic system. It wasn’t housing itself that caused the 2008 bubble.

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge
by Faisal Islam
Published 28 Aug 2013

The average Spanish household’s stock of private debt rose from 53 per cent of disposable income in 1997 to a peak of 132 per cent in 2007. Given their lack of capital, and the broadly fixed amount of savings from the pueblos of Spain, how did the cajas provide this tsunami of funding? Meet the cédula (pronounced thed-u-la) – also known as a covered bond. This amazing piece of financial engineering, known in German as the Pfandbrief, was invented in 1769 by Frederick the Great of Prussia as a way to fund rebuilding after the Seven Years War. In its long history, this type of bond has not seen a single default. The key innovation was that the loan was secured or ‘covered’ by assets, normally property, and so offered cheap wholesale funding to financial institutions.

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In private, Germany’s leaders would invite Europeans in a job to consider the question: ‘at what wage would a Chinese person do your job?’ Germany had something of a special relationship with China: Berlin understood Beijing’s need for real investments in the Eurozone – such as in Greek ports or Portuguese utilities – rather than grandiose French plans for transcontinental financial engineering. To gain the approval of Germany’s parliament, the Bundestag, for the expansion to €440 billion, various assurances were made that the fund would not be artificially increased into the trillions. The Bundestag did give the existing size and powers of the EFSF overwhelming backing, but the message from Chancellor Merkel’s own government benches was that Germany was reaching the limits of its tolerance.

Dealers of Lightning
by Michael A. Hiltzik
Published 27 Apr 2000

The 1970s, a period of conspicuous creativity at PARC, would be better remembered at headquarters as an era of shriveling market share, financial stagnation, and unceasing litigation over patent and antitrust claims. Presaging the coming storm, the company had missed its revenue and profit targets for November and December 1970. The panicked Stamford headquarters, no longer under the control of the engineers and sales executives of Joe Wilson’s era but of accountants and financial engineers, moved rapidly to rein in spending. The danger to PARC in this period was even graver than a simple hold on new hiring. Few of its tiny staff ever knew how close the research center came to being exterminated before it even reached puberty. For among the cost-cutting steps the finance-minded executives proposed to the board of directors was the closure or sale of the new Palo Alto facility.

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But they were trying to squeeze the last drops of blood from the same tired copiers by applying snazzy new management theories and pinching pennies. Had the crisis been rooted solely in Xerox’s complacency or a bad economy, their reorganizations and cost-cutting strategies might have borne fruit. But the affliction ran much deeper. Perhaps the best illustration of the conflict between the new technologists and the financial engineers was the short, bitter career of Myron Tribus, who was hired on Goldman’s recommendation as senior vice president for research and engineering in 1972 and got driven out by O’Neill before the close of 1974. Crusty and temperamental, Tribus was a former Commerce Department official and dean of engineering at Dartmouth.

Company: A Short History of a Revolutionary Idea
by John Micklethwait and Adrian Wooldridge
Published 4 Mar 2003

Enron was a darling of the 1990s—a new form of energy company that did not rely on drilling and gas stations but on teams of financial traders. A Harvard Business School case study was approvingly titled “Enron’s Transformation: From Gas Pipelines to New Economy Powerhouse.” Unfortunately, the energy trading company took its penchant for innovation just a little too far. Its managers used highly complicated financial engineering—convoluted partnerships, off-the-books debt, and exotic hedging techniques—to hide huge losses. And when those losses emerged, they sold millions in company stock while their employees were prohibited from doing likewise. All the corporate overseers who were employed to monitor Enron on behalf of its shareholders—the outside directors, auditors, regulators, and stockbroking analysts—were found wanting.

Quantitative Trading: How to Build Your Own Algorithmic Trading Business
by Ernie Chan
Published 17 Nov 2008

In a nutshell, decimalization reduces frictions in the price discovery process, while statistical arbitrageurs mostly act as market makers and derive their profits from frictions and inefficiencies in this process. (This is the explanation given by Dr. Andrew Sterge in a Columbia University financial engineering seminar titled “Where Have All the Stat Arb Profits Gone?” in January 2008. Other industry practitioners have made the same point to me in private conversations.) Hence, we can expect backtest performance of statistical arbitrage strategies prior to 2001 to be far superior to their present-day performance.

Numbers Rule Your World: The Hidden Influence of Probability and Statistics on Everything You Do
by Kaiser Fung
Published 25 Jan 2010

Freakonomics is a notable exception, covering the applied research of the economics professor Steven Levitt. Two books in the finance area also fit the bill: in The Black Swan, Nassim Taleb harangues theoreticians of financial mathematics (and other related fields) on their failure in statistical thinking, while in My Life as a Quant, Emanuel Derman offers many valuable lessons for financial engineers, the most important of which is that modelers in the social sciences—unlike physicists—should not seek the truth. Daniel Kahneman summarized his Nobel-prize-winning research on the psychology of judgment, including the distinction between intuition and reasoning, in “Maps of Bounded Rationality: Psychology for Behavioral Economics,” published in American Economic Review.

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa
by Dambisa Moyo
Published 17 Mar 2009

By essentially becoming a fully fledged, all-service financial supermarket (providing all elements of banking – venture capital, standard commercial banking, investment banking, merchant banking, etc.), Scottish banks could customize the cash and liquidity needs of a whole range of businesses and individual entrepreneurs. Banking and finance are about risk – risk assessment, risk mitigation and risk estimation. Scottish financial engineers had figured it out. Even if a potential borrower did not meet a bank’s standard, prescribed risk profile (that is, had no collateral, no guarantees, no obvious ability to repay), rather than turn them away the bank would tailor a lending instrument to meet the risk profile of the borrower. Certainly, it might have meant infinite permutations to get the right structure, but there was never any doubt that a financing structure could be found.

Think Twice: Harnessing the Power of Counterintuition
by Michael J. Mauboussin
Published 6 Nov 2012

But if the stocks become correlated—they both go up or down at the same time for whatever reason—you’ll be exposed to more risk than you thought. The promise of Li’s equation was that it could, with a single number, measure the likelihood that two or more assets within a portfolio would default at the same time. This opened the floodgates for new products, as financial engineers had a method for quantifying the safety or riskiness of a security that bundled lots of assets. For example, an investment bank could bundle corporate bonds into a pool, known as a collateralized debt obligation, and summarize the default correlation with Li’s equation rather than worry about the details of how each corporate bond within the pool would behave.

The People's Republic of Walmart: How the World's Biggest Corporations Are Laying the Foundation for Socialism
by Leigh Phillips and Michal Rozworski
Published 5 Mar 2019

The notion reemerged with left-wing economist Doug Henwood’s Wall Street, which dissects the US financial system and its role in organizing economic activity. Published in 1997, at the height of the Clinton-era boom in the United States, the book is remarkably prescient, foreshadowing today’s toxic mix of rising inequality, stagnant incomes for the working class and crises driven by speculation, much of it based in financial engineering—not a rosy picture of finance eating itself, but rather one of it slowly digesting the rest of us. While in terms of mechanics, it may be easier to transfer into common ownership a real estate income trust that owns the title to hundreds of homes than it is to seize hundreds of homes outright—or to take over a single index fund that owns millions of shares than it is to take over hundreds of factories—politically, the task is no less difficult.

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America
by Greg Farrell
Published 2 Nov 2010

His vision for Merrill Lynch was less focused on Charlie Merrill’s initiative to bring Wall Street to Main Street. Instead, O’Neal wanted Merrill Lynch to be a lean and mean profit-oriented bank, along the lines of Goldman Sachs. The “cabal” to install O’Neal as boss had succeeded. Tom Patrick and Arshad Zakaria, a brilliant young financial engineer, expected to reap the benefits of their efforts on the new CEO’s behalf, but Zakaria overplayed his hand. In 2003, he pushed O’Neal to give him the title of president, but O’Neal refused, and fired him instead. Patrick tried to rescue his protégé, arguing at a board meeting that Zakaria had made a mistake, and urging the directors to prevail on O’Neal to reverse the decision.

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Thain, on the other hand, had no problem with the Archipelago founder and had even convinced Goldman Sachs to invest in the company a few years earlier. When the deal closed, in early 2006, it proved to be transformational for the exchange, as well as for its CEO. At Goldman Sachs, Thain had been largely invisible to the outside world, an industrious but unheralded financial engineer. At the NYSE, he was suddenly a public figure. Shortly after accepting the job, people he didn’t know would recognize him on the street or in the subway and say something, often wishing him luck in his efforts to turn around the embattled institution. Thain also became a regular commentator on TV, especially on CNBC, the business news channel.

Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right
by Jane Mayer
Published 19 Jan 2016

The staggeringly lopsided situation made 2012 the starkest test yet of Louis Brandeis’s dictum that the country could have either “democracy, or we may have wealth concentrated in the hands of a few,” but not both. The Kochs’ growing clout was evident in a confidential internal Romney campaign memo dated October 4, 2011. Romney, like virtually every ambitious Republican in the country, was angling for David Koch’s support. The memo described him plainly as “the financial engine of the Tea Party,” although it noted that he “denies being directly involved.” Romney, it revealed, had hoped to woo Koch in a private tête-à-tête at the billionaire’s beachfront mansion in Southampton, New York, over the summer. But to the campaign’s dismay, Hurricane Irene had washed the meeting out.

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See Gold, “Koch-Backed Network, Built to Shield Donors, Raised $400 Million in 2012 Elections,” Washington Post, Jan. 5, 2014. Politico’s Kenneth Vogel: See Vogel, Big Money, 19. No previous year: For statistics on the increasing concentration of donations, see Lee Drutman, “The Political 1% of the 1% in 2012,” Sunlight Foundation, June 24, 2013. “the financial engine”: Hayley Peterson, “Internal Memo: Romney Courting Kochs, Tea Party,” Washington Examiner, Nov. 2, 2011. There he delivered a keynote: For details of Romney’s budget speech, see Donovan Slack, “Romney Proposes Wide Cuts to Budget,” Boston Globe, Nov. 5, 2011. “They’re the ones that suffer”: “Quotes from Charles Koch,” Wichita Eagle, Oct. 13, 2012.

Oil: Money, Politics, and Power in the 21st Century
by Tom Bower
Published 1 Jan 2009

Ever since the breakup of Standard Oil, the suspicion had lingered that Mobil and Exxon had forged “a conspiracy or a common understanding” to fix prices. The discovery that after the 1950s the two companies had secretly funneled profits to Saudi Arabia through the American tax system reinforced the conspiracy theorists’ beliefs. Regardless of the past, Exxon, blessed by a high market multiple, was a financial engineer whose shares could be recommended by Mobil’s directors. In June 1998 Noto was speaking on the telephone with Lee Raymond. The FTC had recently allowed a merger between Shell’s and Texaco’s downstream operations in America. The combined company controlled 15 percent of the market, demolishing the previous limit of 7 percent.

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Surprised by the modesty of Britannic House, they had become suspicious of Browne, and suspected that BP had underestimated the strength of Amoco’s natural gas reserves. Mindful of Browne’s scorn for engineers, some recalled Shell’s complaint that BP had appeared uninterested in the quality of engineering when the two companies had collaborated on the Mars rig in the Gulf of Mexico. Financial engineering seemed to be Browne’s priority. Privately, Browne was grateful that the hiatus around the merger concealed BP’s vulnerability to the unexpected fall of oil prices. The company’s profits fell by 23 percent in the first quarter of 1998, from £755 million to £582 million, and they would also drop in the second quarter.

Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures
by Frank J. Fabozzi
Published 25 Feb 2008

Fabozzi is Professor in the Practice of Finance in the School of Management and Becton Fellow at Yale university and an Affiliated Professor at the university of Karlsruhe’s Institute of Statistics, Econometrics and Mathematical Finance. Prior to joining the Yale faculty, he was a Visiting Professor of Finance in the Sloan School at MIT. Professor Fabozzi is a Fellow of the International Center for Finance at Yale university and on the Advisory Council for the Department of Operations Research and Financial Engineering at Princeton university. He is the editor of the Journal of Portfolio Management and an associate editor of Quantitative Finance. He is a trustee for the BlackRock family of closed-end funds. In 2002, he was inducted into the Fixed Income Analysts Society’s Hall of Fame and is the 2007 recipient of the C.

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“Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of u.K. Inflation.”Econometrica 50: 987-1008. Fabozzi, Frank J. 2008. Bond Markets, Analysis and Strategies. Hoboken, N.J.: John Wiley & Sons. Fan, Jianqing. 2004. “An Introduction to Financial Econometrics.” unpublished paper, Department of Operations Research and Financial Engineering, Princeton university. Humpage, Owen F. 1998. “The Federal Reserve as an Informed Foreign Exchange Trader.” Federal Reserve Bank of Cleveland, Working Paper 9815, September. Jacod, Jean, and Phillip E. Protter. 2000. Probability Essentials. New York: Springer. Mandelbrot, Benoit B. 1963.

Why Stock Markets Crash: Critical Events in Complex Financial Systems
by Didier Sornette
Published 18 Nov 2002

In this highly competitive artificial world, a trader-gene taking some “vacation” loses his “shirt” when returning back in the stock market arena, because he is no longer adapted to the new structures that were developed by the market in his absence! Farmer [123] has simplified this approach using the analogy between financial markets and an ecology of strategies. In a variety of examples, he shows how diversity emerges automatically as new strategies exploit the inefficiencies of old strategies. The Laboratory for Financial Engineering at the Massachusetts Institute of Technology [251, 341] is another noteworthy example of such pursuits. The artificial market project in particular focuses on the dynamics arising from interactions between human and artificial agents in a stochastic market environment in which agents learn from their interactions, using recently developed techniques in large-scale simulations, approximate dynamic programming, computational learning, and tapping insights in and resources from mathematics, statistics, physics, psychology, and computer science.

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A monetary fable, The Independent, E-print at http://web.mit. edu/krugman/www/coyle.html. 249. Krugman, P. (1999, January 20). Japan heads for the edge, Financial Times, available at http://web.mit.edu/krugman/www.sakikab.html. 250. Krugman, P. (2001). Reckonings, The New York Times, March 4. 251. Laboratory for Financial Engineering at the Massachusetts Institute of Technology, http://cyber-exchange.mit.edu/. 252. L’vov, V. S., Pomyalov, A., and Procaccia, I. (2001). Outliers, Extreme Events and Multiscaling, Physical Review E 6305, 6118, U158–U166. 253. Laherrère, J. and Sornette, D. (1998). Stretched exponential distributions in Nature and Economy: “Fat tails” with characteristic scales, European Physical Journal B 2, 525–539. 254.

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World
by Ruchir Sharma
Published 5 Jun 2016

The hope was that this infusion of capital would promote a strong recovery and job growth. Instead, the United States experienced its weakest recovery of the postwar era, coupled with an unprecedented period of financial speculation. Much of the Fed’s easy money was diverted into purchases of stocks, luxury homes, and other financial assets, as well as into financial engineering (like share buybacks) designed to further increase the price of those assets. Everyone who owned stocks or bonds got richer, but since the wealthiest people own the lion’s share of these assets, they got richer the fastest. When other central banks matched the Fed’s easy money policies, they helped to feed the growing wealth gap in their own countries, too.

…

But the government has been increasing its debts, and so have some other private companies, particularly those involved in the shale energy industry. Outside of the financial firms, U.S. corporate debt has been rising as a share of GDP over the last five years. Though the pace of growth is not in itself too alarming, a disconcerting share of that borrowing has gone to financial engineering schemes like share buybacks to boost stock prices, rather than to productive investments. This decay in the quality of loans is another warning sign under the debt rule. One of the big wildcards for the United States is the rise of angry populism, a bad sign according to the circle of life rule.

A Generation of Sociopaths: How the Baby Boomers Betrayed America
by Bruce Cannon Gibney
Published 7 Mar 2017

Any improvement is small consolation: If you were a General Electric shareholder and the auditors said GE’s accounting department was out of its depth but slightly less so than before, GE would not be a stock you’d want to hold. Government accountants are at least trying to be straightforward about OBS and other accounting. The private sector quickly discovered that for those of less noble mien, OBS was a financial septic tank. Nominally an energy firm, Enron was in reality a financial engineering company whose three most senior and culpable leaders were eventually convicted of fraud (all were Boomers), whose parallel sets of books, OBS accounts, and subsidiaries digested any financial inconveniences. Fortune named Enron America’s “most innovative company” six times between 1996 and 2001.

…

.* The S&Ls, which had just a few years earlier begged for relief from government oppression, were forced to go back to DC and plead for bailouts. The government obliged, and if Boomers did not learn any lessons about undue risk, they deeply appreciated the government’s potential to serve as a backstop to speculation. Even as the S&L disaster unfolded, Boomers began taking over Wall Street, and in financial engineering they found a vocation in which they could exceed their parents, however dismally. The Boomers pioneered new and riskier ways of doing business, whose consequences would make the S&L crisis seem positively demure. The previously modest market for junk bonds exploded, substantially the creation of Boomer Michael Milken of Drexel Burnham.

American Gun: The True Story of the AR-15
by Cameron McWhirter and Zusha Elinson
Published 25 Sep 2023

Zumbo’s downfall showed that the AR-15: The term “Zumboed” is now used to describe individuals ostracized in the gun world. “The industry, all the organizations”: Author interview with Randy Luth. Cerberus closed the deal: See Jesse Barron, “How America’s Oldest Gun Maker Went Bankrupt: A Financial Engineering Mystery,” The New York Times Magazine, May 1, 2019, https://www.nytimes.com/interactive/2019/05/01/magazine/remington-guns-jobs-huntsville.html?mtrref=www.nytimes.com&assetType=REGIWALL. See also Thomas Ryan, “Remington Sold to Cerberus for $370 Million,” SGBMedia, April 9, 2007, https://sgbonline.com/remington-sold-to-cerberus-for-370-million.

…

The NRA promoted Smith & Wesson’s little .22 caliber gun: Drema Mann, “4 Things You Need to Know When Picking a Kid’s First Rifle,” NRA Family, May 22, 2017, https://www.nrafamily.org/articles/2017/5/22/4-things-you-need-to-know-when-picking-a-kids-first-rifle. But sales stalled: The Wall Street measure of profitability, EBITDA, fell from $119.8 million to $33.6 million. Remington struggled to pay off: See Jesse Barron, “How America’s Oldest Gun Maker Went Bankrupt: A Financial Engineering Mystery,” The New York Times Magazine, May 1, 2019, https://www.nytimes.com/interactive/2019/05/01/magazine/remington-guns-jobs-huntsville.html?mtrref=www.nytimes.com&assetType=REGIWALL. “The shine is coming off the nickel”: Zusha Elinson and Cameron McWhirter, “The ‘Trump Slump’: With a Friend in the White House, Gun Sales Sag,” The Wall Street Journal, August 30, 2018, 1. 27.

Freedom Without Borders
by Hoyt L. Barber
Published 23 Feb 2012

Then we’ll get into the idea of geopolitical investment diversification, which will further enhance your desire to build that offshore 6 Freedom Without Borders financial fortress and ensure your personal sovereignty and personal and financial freedom. Operating business location: This may be your financial engine, and it may be located in a high-tax jurisdiction because this might make sense for commercial reasons. But if the business can be relocated offshore, preferably to a low- or no-tax haven, of course, that’s preferable. And, if you’re planning to start a new business, try to work it out so that you can launch and operate it offshore to begin with.

Electronic and Algorithmic Trading Technology: The Complete Guide
by Kendall Kim
Published 31 May 2007

Market developments along with tougher regulations have made equity trading more complicated and less profitable. Automation and new technologies have changed the trading game dramatically in the past five years or so. The speed of financial information is outpacing anyone’s forecast. Higher networking speeds through financial engineering are altering the way traders and market participants address the demand for lower commissions and enabling the creation of automated model-based trading. The increase in competition for lower transaction costs has been forcing firms to invest significantly in their trading and processing infrastructure.

Data-Ism: The Revolution Transforming Decision Making, Consumer Behavior, and Almost Everything Else
by Steve Lohr
Published 10 Mar 2015

After coming to Wall Street in 1985, Derman soon came to believe that physics models could be successfully applied to finance and economics—a belief he later abandoned. “In physics,” he writes, “you’re playing against God, and He doesn’t change His laws very often. In finance you’re playing with God’s creatures, agents who value assets based on their ephemeral opinions.” Modeling in finance, according to Derman, the director of the financial engineering program at Columbia, is by no means a waste of time. But, he cautions, “You have to understand what models are best used for, and then be very careful not to discard your common sense.” Big mainstream companies, like Macy’s, that are embracing data science are mostly doing so step-by-step.

In Pursuit of the Traveling Salesman: Mathematics at the Limits of Computation
by William J. Cook
Published 1 Jan 2011

Eric Morales, Randall Munroe, Yuichi Nagata, Denis Naddef, Jaroslav Nešetřil, Manfred Padberg, Elias Pampalk, Rochelle Pluth, Ina Prinz, William Pulleyblank, Gerhard Reinelt, Giovanni Rinaldi, Ron Schreck, Éva Tardos, Mukund Thapa, Michael Trick, Marc Uetz, Yushi Uno, Günter Wallner, Jan Wiener, and Uwe Zimmermann. I thank them all for their kindness. This book was written in the great environments of the H. Milton Stewart School of Industrial and Systems Engineering at Georgia Tech and the Department of Operations Research and Financial Engineering at Princeton University. My work on the traveling salesman problem is funded by grants from the National Science Foundation (CMMI-0726370) and the Office of Naval Research (N00014-09-1-0048), and by a generous endowment from A. Russel Chandler III. I am grateful for their continued support.

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk
by William J. Bernstein
Published 12 Oct 2000

(These are available as monthly index values. To obtain the monthly index return, download the “gross return” indexes and then divide that month’s return index by the previous month’s return index.) Bloomberg (http://www.bloomberg.com): Probably the best way to keep up with the global marketplace, minute by minute. Financial Engines (http://www.financialengines.com): Nobelist Bill Sharpe’s asset allocation service. You can see the future, but does it work? Also see his excellent homepage. Journal of Finance (http://www.afajof.org): If it’s important, it’s likely to be published here first. Unfortunately, it’s not always in plain English. 180 The Intelligent Asset Allocator Mutual fund companies: Almost every fund family has a nearly worthless promotional site, and in general I’d stay away.

Defending the Free Market: The Moral Case for a Free Economy
by Robert A. Sirico
Published 20 May 2012

We absolutely do have a duty to future generations, but that duty is more easily fulfilled by a system of rationing driven by price signals in a free economy than by bureaucratic edicts. The United States overbuilt houses in the previous decade, and China is now in the middle of a massive overbuilding campaign. Both resource-wasting housing booms were driven not by price signals in a capitalist economy but government financial engineering aimed at “stimulating the economy” and, in the process, disrupting and distorting the information built into prices in a free economy. Political and economic freedom leads to an ownership society, as opposed to a rental society—and also as opposed to the kind of pseudo-ownership society created by the “liar loans” and other abuses that emerged during the government-inspired housing bubble.

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality
by Brink Lindsey
Published 12 Oct 2017

Private-label securitization collapsed when the bubble burst and never recovered, but Fannie, Freddie, and Ginnie Mae have kept on buying up and pooling mortgages and issuing government-guaranteed securities as if the crisis never happened. As a result, up to 80 percent of all new home mortgages are being securitized and backed by these state-owned enterprises as of 2016.15 II WE’RE FOREVER BLOWING BUBBLES For all the arcane jargon and hyper-sophisticated financial engineering associated with it, at the bottom of the subprime fiasco was a very old and familiar phenomenon: an asset bubble. Going back to tulip mania in the 1630s, asset bubbles have always been a feature of capitalism. Prices for some investment good start rising for whatever reason, which attracts other investors who want in on the action.

Kings of Crypto: One Startup's Quest to Take Cryptocurrency Out of Silicon Valley and Onto Wall Street
by Jeff John Roberts
Published 15 Dec 2020

You get pump-and-dumps. You get bribery, phishing, and SIM-swapping. And the scale of it was staggering. The trade publication CoinDesk reported that ICOs had pulled in $729 million in token sales in the second quarter of 2017 alone. That was more than triple the amount venture capitalists—the traditional financial engine of the startup word—had invested during the same period. And the ICO craze showed no sign of slowing. In late July, the SEC broke its silence and issued a report concerning the DAO project—the autonomous investment service that had launched in 2016 and famously got hacked, triggering a rollback of the Ethereum blockchain.

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance
by Eswar S. Prasad
Published 27 Sep 2021

They would take full advantage of the new financial instruments, taking on only as much risk as they were comfortable with and finding ways to insure themselves against the rest. Underlying these innovations was the hubristic notion that sophisticated modeling could banish risk and that value could be created by sheer financial engineering. New channels through which money could flow within and across national borders were going to allow financial capital to be allocated to the most profitable projects in the most productive places. Thus, the dream of a global market for capital would be realized—enabling savers to maximize returns on their portfolios while managing risk through international diversification.

…

Multiple users pooling their stablecoins could even build a savings game on top of that structure—all of the interest earned on the pooled stablecoins is awarded to a lucky winner, with everyone else getting their initial deposits back. This is not just a theoretical example—it already exists. Such unfettered financial engineering should make regulators nervous. The DeFi community has an answer for that. DeFi instruments are transparent, auditable, and have well-defined behaviors, which should make their regulation easier. Computer science tools can, for instance, perform rigorous economic risk assessments of DeFi smart contracts.

Slouching Towards Utopia: An Economic History of the Twentieth Century
by J. Bradford Delong
Published 6 Apr 2020

To some degree this worked: corporate investment did rise. But it had unintended and severe consequences: lower interest rates generated a mortgage and a financial engineering boom, which generated a housing boom, which returned the United States and the other global-north economies to full employment.16 Home prices, however, rose much more than they should have, given how low mortgage rates were. To understand why, we need to understand the drastic changes made to mortgage financing and financial engineering during the 2000s. By now the litany is familiar: the old model of banking, in which banks held on to the loans they made, was replaced by the practice of originate and distribute.

I.O.U.: Why Everyone Owes Everyone and No One Can Pay
by John Lanchester
Published 14 Dec 2009

The cash is pouring in, and everybody wins: the neighbors get their loft money, you get your stream of repayment fees paid to your offshore company, the Joneses get their stream of insurance payments, and the beauty of it is that there’s no risk for you, because you’ve insured it away. You can stop caring about whether or not your neighbors actually can pay you back. If they can’t, so what? The Joneses will pick up the tab. The beauties of this, from a financial engineering point of view, are almost too numerous. The new CDS instruments are a magnificently efficient way of spreading, and therefore minimizing, risk—at least they are if used as their initial inventors intended. Financial crashes and implosions are often linked to overconcentration of risk: placing too big bets in one place.

Getting a Job in Hedge Funds: An Inside Look at How Funds Hire
by Adam Zoia and Aaron Finkel
Published 8 Feb 2008

If you are at all interested in this role, our first piece of advice would be to make sure you possess basic quantitative skills such as knowledge of Excel and computer languages such as Structured Query Language (SQL) and Visual Basic for Applications (VBA). You should also have a basic understanding of finance and familiarity with products such as derivatives, options, swaps, and various structured products. The more senior-level risk professionals all have postgraduate degrees. These can be in financial engineering, computational mathematics, econometrics, or others. If you aren’t already, you will eventually have to become familiar with the Greeks, as options traders often refer to the delta, gamma, vega, and theta of their positions. These give traders a way to measure the sensitivity of an option’s price to quantifiable factors and can help better understand the risk and potential reward of an option position.

The Great Reset: How the Post-Crash Economy Will Change the Way We Live and Work
by Richard Florida
Published 22 Apr 2010

Perhaps they will fall back again today, although the billion dollars in Goldman Sachs bonuses in 2009 might give pause to that thought. “As a society, do we want to put a third of our best brains in the financial sector?” Philippon rhetorically quipped to the New York Times.7 New York University economist Nouriel Roubini echoed a similar concern: “When you have more financial engineers than computer engineers, you know that the brightest minds have gone into something where, probably, the margin was excessive,” he told the New Republic. “Maybe some of these bright people are going to do something entrepreneurial, more creative, or go into government. I think that’s actually a good change.”8 Me, too.

A World of Three Zeros: The New Economics of Zero Poverty, Zero Unemployment, and Zero Carbon Emissions
by Muhammad Yunus
Published 25 Sep 2017

In return for these services, bankers and other lenders earned a reasonable profit. Everyone benefited. In the twenty-first century, however, the credit markets were distorted by a relative handful of individuals and companies with a different goal in mind—to earn unrealistically high rates of return through clever feats of financial engineering. They repackaged mortgages and other loans into sophisticated instruments whose risk level and other characteristics were hidden or disguised. Then they sold and resold these instruments, earning a slice of profit on every transaction. All the while, investors eagerly bid up the prices, scrambling for unsustainable growth and gambling that the underlying weakness of the system would never come to light.

Does Capitalism Have a Future?
by Immanuel Wallerstein , Randall Collins , Michael Mann , Georgi Derluguian , Craig Calhoun , Stephen Hoye and Audible Studios
Published 15 Nov 2013

This often added to economic imbalance and produced other distortions, but crucially it knit real estate and construction, the personal savings of homeowners and the once-prudent operations of local banks into a gigantic international system. It was this linkage that generated the systemic risk that led to crisis in 2008–2009. This systemic risk was enhanced by new techniques in financial engineering and investment. Hedge funds and derivatives took on central economic roles, aided by failures of regulation. Basically this meant developing a host of new financial instruments, many of them knitting different economic actors together in a web of mutual obligations like debt and insurance, and attracting unprecedented amounts of money to those new sorts of investments while deploying this money in trades largely hidden from public view.

The Nature of Technology
by W. Brian Arthur
Published 6 Aug 2009

Large-scale trading of derivative products took off as a result. In fact, even more than this happened. What banking and computation together created in their mutual encounter was more than a new set of activities and products, it was a new set of “programming” possibilities for finance—a new domain of engineering possibilities. In due course financial engineers began to put together combinations of options, swaps (contracts to exchange one cash flow for another), futures, and other basic derivatives for particular purposes such as hedging against future commodities price changes or against foreign exchange fluctuations. A new set of activities had emerged.

Execution: The Discipline of Getting Things Done
by Larry Bossidy
Published 10 Nov 2009

But in the future such changes, whether rebalancing inventories, readjusting prices, or reformulating advertising and marketing plans, may occur several times in a year and the operating plan must be able to adopt by rapidly moving resources from one place to another. In the late 1990s PepsiCo spun off its bottling operations based largely on a financial engineering plan whose logic ultimately failed. Then in 2009 PepsiCo chairwoman Indra Nooyi reversed course and offered to buy back the bottling operations to provide the necessary operating flexibility and regain control of operating and distribution costs. Strategy no longer is set in stone. A good strategy will be under constant review or revision depending on what is happening in the business environment.

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors
by Wesley R. Gray and Tobias E. Carlisle
Published 29 Nov 2012

With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our website at www.WileyFinance.com. Cover design: John Wiley & Sons Copyright © 2013 by Wesley R. Gray and Tobias E. Carlisle. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

The Secret World of Oil
by Ken Silverstein
Published 30 Apr 2014

Glencore’s effective global tax rate for 2010 was just 9.3 percent, in large part because nearly half its forty-six subsidiaries are incorporated in “secrecy jurisdictions,” opaque financial havens like the Netherlands, according to a report by the nongovernmental organization (NGO) Publish What You Pay. Glencore’s Rotterdam-registered Finges Investment is worth $18 billion, but doesn’t have a single employee, according to corporate records filed in the Netherlands. Finges, a Dutch financial expert told me, is “nothing more than a piece of financial engineering.” When it comes to the media, oil traders consciously seek to stay out of the public spotlight. Sylvain Besson of Le Temps, a major daily newspaper in Geneva, describes a “culture of discretion” that prevails across the industry. “It’s a hard world to penetrate,” he said. “Banks will take very public stands, but not traders.

Borrow: The American Way of Debt
by Louis Hyman
Published 24 Jan 2012

Turning mortgages into CMOs offered a model for financiers to turn any asset into an array of securities. Wall Street innovation accelerated, inaugurating an era of financial wizardry unseen since the 1920s. As before, financiers believed that their inventions could not fail and even considered their magic an applied science, naming it “financial engineering.” The CMO acted as a prototype for other kinds of consumer debt, not just credit cards and mortgages. Bankers’ faith in securitization cannot be overstated. Securitization, by the late 1990s, embraced ever more exotic assets—tobacco company settlements! David Bowie record sales!—enabling borrowing without risking the capital of those directly involved.12 Securitization offered a nearly magical way for banks to evade the constraints of deposits, capital ratios, and the spirit of government regulations.

How to Run the World: Charting a Course to the Next Renaissance
by Parag Khanna
Published 11 Jan 2011

Kyoto took so long to negotiate that China and India, which were effectively given a pass in the treaty, have quickly risen to be among the world’s top emitters, and its Byzantine complexity involving buying and selling credits and emissions-trading mechanisms has come to look like the environmental equivalent of financial engineering. Offering countries the option to buy “pollution allowances” is hardly evidence of moral courage.2 Poor countries love the “polluter pays” principle, whose “you broke it, you fix it” logic requires rich countries to accept responsibility for climate change proportionate to the damage they’ve done over the course of history.

The (Honest) Truth About Dishonesty: How We Lie to Everyone, Especially Ourselves
by Dan Ariely
Published 27 Jun 2012

Moreover, you aren’t dealing with real cash; you are only playing with numbers that are many steps removed from cash. Their abstractness allows you to view your actions more as a game, and not as something that actually affects people’s homes, livelihoods, and retirement accounts. You are also not alone. You realize that the smart financial engineers in the offices next to yours are behaving more or less the same way as you and when you compare your evaluations to theirs, you realize that a few of your coworkers have chosen even more extreme values than yours. Believing that you are a rational creature, and believing that the market is always correct, you are even more inclined to accept what you’re doing—and what everyone else is doing (we’ll learn more about this in chapter 8)—as the right way to go.

Unhappy Union: How the Euro Crisis - and Europe - Can Be Fixed
by John Peet , Anton La Guardia and The Economist
Published 15 Feb 2014

It is easier for politicians to have the central bank put up the money than ask for it from taxpayers. Moreover, governments could not make up their minds about markets. They denounced speculators for plotting to destroy the euro, yet set out to borrow hundreds of billions from the same financiers to save the single currency. They blamed ratings agencies for ignoring the dangers of dodgy financial engineering, then excoriated them for exaggerating the threat of sovereign default. But the events in May established one principle: faced with catastrophe, governments would act. The ECB would act too, though only if governments moved first. Yet delay raised the price of resolving the crisis, and also fed doubts about whether the euro could survive.

Who's Your City?: How the Creative Economy Is Making Where to Live the Most Important Decision of Your Life
by Richard Florida
Published 28 Jun 2009

Increasingly, the most talented and ambitious people need to live in the means metros in order to realize their full economic potential. The proximity of talented, highly educated people has a powerful effect on innovation and economic growth, as shown in Chapter 4. Places that bring together diverse talent accelerate the local rate of economic evolution. When large numbers of entrepreneurs, financiers, engineers, designers, and other smart, creative people are constantly bumping into one another inside and outside of work, business ideas are formed, sharpened, executed, and—if successful—expanded. As the number of smart people increases and the connections among them grow more dense, the faster it all goes.

Prediction Machines: The Simple Economics of Artificial Intelligence
by Ajay Agrawal , Joshua Gans and Avi Goldfarb
Published 16 Apr 2018

Prodromidis, “Credit Card Fraud Detection Using Meta-Learning: Issues and Initial Results,” AAAI Technical Report, WS-97-07, 1997, http://www.aaai.org/Papers/Workshops/1997/WS-97-07/WS97-07-015.pdf, with a false positive rate around 15 percent to 20 percent. Another example is E. Aleskerov, B. Freisleben, and B. Rao, “CARDWATCH: A Neural Network Based Database Mining System for Credit Card Fraud Detection,” Computational Intelligence for Financial Engineering, 1997, http://ieeexplore.ieee.org/stamp/stamp.jsp?arnumber=618940. Note that these comparisons are not entirely equal, because they use different training data sets. Still, the broad point on accuracy holds. 6. Abhinav Srivastava, Amlan Kundu, Shamik Sural, and Arun Majumdar, “Credit Card Fraud Detection Using Hidden Markov Model,” IEEE Transactions on Dependable and Secure Computing 5, no. 1 (January–March 2008): 37–48, http://ieeexplore.ieee.org/stamp/stamp.jsp?

The War on Normal People: The Truth About America's Disappearing Jobs and Why Universal Basic Income Is Our Future
by Andrew Yang
Published 2 Apr 2018

Financial deregulation started under Ronald Reagan in 1980 and culminated in the Financial Services Modernization Act of 1999 under Bill Clinton that really set the banks loose. The securities industry grew 500 percent as a share of GDP between 1980 and the 2000s while ordinary bank deposits shrank from 70 percent to 50 percent. Financial products multiplied as even Main Street companies were driven to pursue financial engineering to manage their affairs. GE, my dad’s old company and once a beacon of manufacturing, became the fifth biggest financial institution in the country by 2007. With improved technology and new access to global markets, American companies realized they could outsource manufacturing, information technology, and customer service to Chinese and Mexican factories and Indian programmers and call centers.

The Growth Delusion: Wealth, Poverty, and the Well-Being of Nations
by David Pilling
Published 30 Jan 2018

People like Alan Greenspan, chairman of the Federal Reserve, said everything was going swimmingly and that the markets should be left alone to create ever more wealth. In fact, our standard measures had told us little about how growth was being created: that it was built on a foundation of exploding household debt and ever cleverer (for which read “ever more stupid”) financial engineering by bonus-crazed bankers. Advanced economies had supposedly reached a new nirvana known as the Great Moderation, in which booms and busts had been consigned to history by clever technocrats and in which the market, if left to its own devices, always reverted to a happy state of equilibrium.

The System: Who Owns the Internet, and How It Owns Us
by James Ball
Published 19 Aug 2020

There was lots of cheap money, loans were easy to come by – even for people with low incomes, or no regular salary to speak of – and markets were booming. And none of us asked the awkward questions as to why this was happening, and why house prices were going up far faster than salaries. There was some talk of, and coverage of, complex financial engineering – but this was dismissed as complicated and uninteresting. Who cares what a collateralised debt obligation or a synthetic position is anyway? The people who do the maths know how this stuff works, there are smart people running the banks, and the regulators seem happy enough with what’s going on – and everyone’s better off.

GDP: The World’s Most Powerful Formula and Why It Must Now Change
by Ehsan Masood
Published 4 Mar 2021

The real language of science—hypothesis, experimentation, testing—was not so much the objective as was scientific notation. And as we know, such use of specious mathematical notation has contributed to some of the most dangerous ideas in recent decades. One of these is the infamous Gaussian copula, a financial engineering formula widely used by banks and their regulators to predict the level of mortgage default. The formula was popular among finance professionals, as they believed it would enable them to predict a borrower’s creditworthiness without having to use actual financials. But until the crash of 2008, no one questioned the soundness or otherwise of the underlying data on which it was based.1 In the pre-Gaussian days a bank trying to establish whether a mortgage applicant was creditworthy would look at the applicant’s financial history.

When More Is Not Better: Overcoming America's Obsession With Economic Efficiency
by Roger L. Martin
Published 28 Sep 2020

Tobin’s initial suggestion was for a rate of 0.5 percent on the value of the transaction, which, if applied to stock trades, would—on the current trading level—yield almost $200 billion per year in taxes, though the complex adaptive system would surely adjust quickly to find ways around the tax. Another way to measure the magnitude of the US stock markets is by the market capitalization of the companies listed, which for the biggest exchange, the New York Stock Exchange, is about $29 trillion.21 It is no wonder that tens of thousands of financial engineers work in trading departments across Wall Street and beyond, figuring out how to game stock markets for their narrow benefit. In addition to the size of the prize, gamers are attracted by the duration of the payoffs: that is, the number of years the gaming effort will be effective before the system adapts again to eliminate it.

How Boards Work: And How They Can Work Better in a Chaotic World
by Dambisa Moyo
Published 3 May 2021

Furthermore, the board agreed with SABMiller management that a merger would be unappealing as the business models of the two companies were polar opposites. While SABMiller was focused on organic growth and building the brands in its existing portfolio, AB InBev had been pursuing financial returns through cost cutting and financial engineering. When the SABMiller board received a bid for the company from AB InBev, it was forced to make a life-or-death decision: Should the company remain independent? Clearly AB InBev was willing to pay a substantial price and meet the challenge of financing the takeover by issuing the largest corporate bond at that time, around $40 billion.

Abolish Silicon Valley: How to Liberate Technology From Capitalism
by Wendy Liu
Published 22 Mar 2020

Technology might be initially funded by states, but it’s always rolled out through commercial means. Corporations are just leaner, more efficient, better — especially those headquartered in the developed world. By the end of the millennium, capital is effervescent, sloshing around the system thanks to a friendly regulatory environment, the rise of financial engineering, an intensification of natural resource extraction, and wage concessions exacted from a defeated labour movement. It then floods into the tech sector, buoying up valuations beyond what can be sustained even by a market this irrational. When the bubble bursts in the form of the dot-com crash, leaving behind job losses and half-baked promises in its wake, the money simply sidles over to more promising ventures, like inflating real estate assets.3 And when that collapses in the form of the subprime mortgage crisis, the money slowly trickles back into tech, in thrall to a collective amnesia about the causes of the last bubble.

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal
by Ludwig B. Chincarini
Published 29 Jul 2012

The bet can be a simple one, based on a belief that the volatility will be higher in the future than the market believes, or that it will be lower in the future than the market believes. It could also combine views about relative volatilities. Appropriate trade construction often involves sophisticated financial engineering to remove unwanted bets. In the late 1990s, financial products that bet solely on long-term volatility didn’t yet exist. Instead, LTCM traders constructed deals that took a net view on volatility while eliminating other risks. In order to understand LTCM’s volatility trades, some option theory review is helpful.

…

“Testimony to Financial Crisis Inquiry Commission.” FCIC Document, June 2, 2010. Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack. “Large-Scale Asset Purchases by the Federal Reserve: Did They Work?” Federal Reserve Bank of New York Staff Report No. 441, March 2010. Galitz, Lawrence C. Financial Engineering. Irwin Publishing, 1995. Gaspari, Al. “Uncommon Interview with Mark Carhart.” The Chicago Maroon, April 23, 2010. Gerth, Jeff. “Cause of Ginnie Mae Losses Said to Be Lax Supervision.” New York Times, July 17, 1989. Gibson, Brett G. and Arun N. Kumar. “American International Group: Valuations Look Attractive, but Company has Miles to Go; Downgrading to Neutral.”

When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A)
by Scott McCleskey
Published 10 Mar 2011

In the U.S. market, the idea of stifling innovation is akin to censorship in the arts—by limiting creativity you limit genius and progress. The notion that financial innovation is at the heart of economic growth is so deep-seated among free marketers that it has become nearly unchallengeable. And it is true, up to a point. But while the logic of expanding the frontier of financial engineering is compelling on the surface, the financial crisis has challenged the underlying assumption that all innovation is good. Without a doubt, innovation has increased choice, efficiency, and the management of risk in the markets for as long as there have been economies. The recent crisis aside, the beneficiaries of innovation have not only been the big financial firms: We have all benefited directly or indirectly from 41 C05 06/16/2010 11:17:40 42 & Page 42 Should Regulation Stifle Innovation?

Extreme Teams: Why Pixar, Netflix, AirBnB, and Other Cutting-Edge Companies Succeed Where Most Fail
by Robert Bruce Shaw , James Foster and Brilliance Audio
Published 14 Oct 2017

In some cases, core cultural values go back decades and are linked to the beliefs and behavior of a firm’s founders. For example, a firm that thrived as a result of aggressive financial management will have difficulty changing that belief and its associated practices, even when its market share is eroding due to inferior products or poor customer service. Financial engineering produced success at an early point in its growth cycle and is part of the firm’s DNA. Culture, viewed in this light, is not an irrational set of beliefs and emotions but instead the embodiment of practices that become institutionalized as a result of past success. Cultures reflect what produced positive results and even when those practices are outdated, people are resistant to leave them behind.

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions
by Joshua Rosenbaum , Joshua Pearl and Joseph R. Perella
Published 18 May 2009

With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more. For a list of available titles, please visit our Web site at www.WileyFinance.com. Copyright © 2009 by Joshua Rosenbaum and Joshua Pearl. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

How to Speak Money: What the Money People Say--And What It Really Means
by John Lanchester
Published 5 Oct 2014

Rent is the extra money that somebody makes compared with what he would make if there were genuine competition. Economists dislike rent, because it’s economically inefficient and unproductive. Much of the profitable activity in the banking and financial sector is a form of rent. This is true for big companies engaged in takeovers and mergers and share offerings and other large-scale financial engineering, which have to deal with the big investment banks; it’s also true for the rest of us, who have nowhere else to go except the banks when it comes to taking our deposits, lending us money for mortgages, and so on. In the opinion of some observers, one of the reasons why the current growing gap between the rich and the poor is especially dangerous is that it is being accompanied by a growth in “rent seeking” behavior.

Buying Time: The Delayed Crisis of Democratic Capitalism
by Wolfgang Streeck
Published 1 Jan 2013

In any case, central banks and some state-owned banks seem to have had enough time before the event to buy most of the Greek government securities from private banks and other loan merchants on terms acceptable to their owners, so that most of the damage was inflicted on the public purse, and the same is true for a second bailout that will probably soon be necessary. 2) Ailing banks should not be nationalized but rescued with public funds, as discreetly as possible to avoid angering the national population. The task of financial engineers in the machine room of the consolidation state is to organize the necessary transactions in such a way that they do not appear in the government accounts. A comparatively transparent example of this was one of Mario Draghi’s first official acts as head of the ECB, when he handed out a total of 1,000 billion euros to the banks at an interest rate of 1 per cent, later of 0.75 per cent, over three years.

Flash Crash: A Trading Savant, a Global Manhunt, and the Most Mysterious Market Crash in History
by Liam Vaughan
Published 11 May 2020

He simply needed someone to help him realize his vision. The language Nav used to describe the program was somewhat idiosyncratic, which made sense; he was an autodidact. Everything he knew, he’d learned by sitting and watching the ladder. With no friends at any HFT firms to guide him and no master’s degree in financial engineering, he’d gotten to a point where he was able to reverse-engineer the strategies of the “nerds” he renounced and create his own system to beat them. Questions of legality aside, it was a remarkable feat. “I would have employed him in a heartbeat,” says the owner of one HFT firm. Thakkar took Nav’s plans and instructed his developers to build a prototype that he sent back on November 11, 2011.

The Comedy Film Nerds Guide to Movies
by Graham Elwood and Chris Mancini
Published 31 May 2012

I recently sat with some execs from a couple of the studios, and being the “creative” in the circle, I asked, “What’s everyone looking for these days to fill their tent pole summers schedules?” “We’re looking for PL’s—Product Locomotives,” one replied. “What’s that?” I asked. En masse they said, “These are scripts that can become major financial engines that can cross-pollinate to other areas of revenue, including but not limited to books, theme parks, video games, TV, apps, etc. It doesn’t matter as long as the sequels keep giving and they in turn promote the other products available–the front engine to the rest of the boxcars loaded with crap that you will also want to buy because you so enjoyed the PL in the first place.”

Listen, Liberal: Or, What Ever Happened to the Party of the People?
by Thomas Frank
Published 15 Mar 2016

As with trade issues, which always seem to come down to a clash between the educated against the ignorant, the administration’s policymaking professionals regarded the demand for breaking up too-big-to-fail banks as hopelessly unsophisticated—even when the argument was made by no less an authority than former Fed Chairman Paul Volcker. Jonathan Alter captures this feeling exactly when he writes, “To the policy mandarins, who believed from the beginning of their academic training in the merits of financial engineering, Volcker’s argument wasn’t serious.”9 And seriousness is the coin of the realm in Washington, a city that finds Wall Street’s simulation of professional solemnity to be highly convincing, what with its impenetrable technical dialect and its advanced financial instruments. So complex are the latter, one deputy U.S. attorney general complained in 2014, that when examining them, “we are dealing with financial rocket science.”10 The economic expertise of Wall Street’s analysts, strategists, and traders is taken for granted in Washington.

The Greed Merchants: How the Investment Banks Exploited the System
by Philip Augar
Published 20 Apr 2005

Many industries – airlines, trucking, utilities, energy, banking, telecommunications in the Telecommunications Act of 1996 – were transformed as governments stood back and exposed them to market forces.13 In parallel, following the work of Professor Alfred Rappaport at the North Western University Business School, creating ‘shareholder value’ was elevated above other goals for management. The movement was given added bite by the increasing use of share options to incentivize top executives and they turned to the investment banks to help them grow earnings per share through financial engineering and mergers and acquisitions.14 The combination of a strong economy, deregulation and shareholder value created a mountain of corporate finance work for the investment banks as companies merged, demerged and refinanced themselves. Now capital was needed to meet the requirement for corporate finance and a new source unexpectedly appeared in 1980 with amendment 401K of the US tax code.

Smarter Investing
by Tim Hale
Published 2 Sep 2014

The results vary depending upon which private equity database is used and which public equity benchmark is used (buyouts tend to be smaller companies than those in the S&P 500). According to this study, venture capital funds outperformed in the 1990s but underperformed in the 2000s. Leverage has in the past accounted for more than 50% of returns (Acharya et al., 2011). But in the face of the ongoing deleveraging of financial institutions, the opportunity for financial engineering has diminished and true improvement of the operating businesses will be a prerequisite for strong returns. Not all private equity managers have these skills. Fallacious arguments are sometimes put forward that private equity has a low correlation to public equities. This is most likely attributable to the naïve use of performance numbers that are masked by stale pricing of privately held assets.

Brave New Work: Are You Ready to Reinvent Your Organization?
by Aaron Dignan
Published 1 Feb 2019

And this is exacerbated by the fact that companies are getting worse and worse at generating profits using the assets they already have. Corporate return on assets—the ratio of a company’s profits to what it owns and owes—is one of the best holistic measures of performance. While return on equity or returns to shareholders are more common, they are too vulnerable to financial engineering. Assets are harder to game. Unfortunately for U.S. firms, economy-wide ROA has been trending downward for decades. It is now roughly one-quarter of what it was fifty years ago. Even the top quartile of companies have seen ROA decline from 12.9 percent in 1965 to 8.3 percent in 2015. Corporations might be getting bigger, but they’re not getting better at generating value from their assets.

Ten Lessons for a Post-Pandemic World
by Fareed Zakaria
Published 5 Oct 2020

The West and its values were sweeping the planet, but it turned out that not everyone was happy about this. The backlash was that of a disgruntled minority—after all, terrorism is the weapon of the weak—but still it took the world by surprise. The 2008 crash was the outgrowth of an economy in which finance had run wild, so much so that financial engineering was routinely more profitable than actual engineering. Wall Street invented more and more esoteric products, derivatives piled on derivatives, encouraging people to take more and more risks for smaller rewards. Add to this the relentless focus on home ownership, which led the government and private firms to lure more and more people to buy bigger houses and take on more debt.

Uncomfortably Off: Why the Top 10% of Earners Should Care About Inequality
by Marcos González Hernando and Gerry Mitchell
Published 23 May 2023

However, the lack of exposure to different income groups by those working in the corporate and financial sectors is a significant barrier to their understanding of the lives of those well below them, affecting their beliefs on the extent of inequality and the role of redistribution and welfare. Even before the 2008 crisis, Toynbee and Walker had found an increasing disconnect between the financial engine of the country in the City of London and the lives of the majority.38 Considering the economic and political tendencies that followed, it is unlikely that this distance has been bridged. Others, especially Brahmins working in the public sector, disagree. With jobs in healthcare, law and education, they were more likely to vote Labour, more likely to mention the negative effects of austerity such as the surge in food bank use, and more passionate about the need for public services.

The Bogleheads' Guide to Investing
by Taylor Larimore , Michael Leboeuf and Mel Lindauer
Published 1 Jan 2006

Chandan Sengupta, author of The Only Proven Road to Investment Success: "You should switch all your investments in stocks to index funds as soon as possible, after giving proper consideration to any tax consequences." William F. Sharpe, Nobel Laureate, STANCO 25 Professor of Finance, Emeritus, Stanford University Graduate School of Business and Chairman, Financial Engines, Inc.: "I love index funds." Rex Sinquefield, co-chairman of Dimensional Fund Advisors: "The only consistent superior performer is the market itself, and the only way to capture that superior consistency is to invest in a properly diversified portfolio of index funds." Larry E. Swedroe, author of The Successful Investor Today: "Despite the superior returns generated by passively managed funds, financial publications are dominated by forecasts from so-called gurus and the latest hot fund managers.

Capitalism Without Capital: The Rise of the Intangible Economy
by Jonathan Haskel and Stian Westlake
Published 7 Nov 2017

Financialization is the growing importance of norms, metrics, and incentives from the financial sector to the wider economy. Some of the concerns expressed are that, for example, managers are increasingly awarded stock options to align their incentives with those of shareholders; companies are often explicitly managed to increase short-term shareholder value; and financial engineering, such as share buybacks and earnings management, has become a more important part of senior managers’ jobs. The end result is that rather than finance serving business, business serves finance: the tail wags the dog. What John Kay described as “obliquity,” the idea that making money was a consequence of, or a second-order benefit of, serving one’s customers and building good businesses, is driven out (Kay 2010).

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction
by Richard Bookstaber
Published 1 May 2017

The film based on Michael Lewis’s book The Big Short—which nails the ins and outs of the financial crisis, albeit with personalities that are amplified a few notches—gets these human effects. After dealing with the banks, the rating agencies, the mortgage brokers, the hedge fund honchos, and the complexity cooked up by the financial engineers, the movie’s final scene shows a van at a gas station. The driver, a rugged man, now homeless, stands beside the vehicle. His two children crawl up into the clothes and furniture packed into the back. He hugs his wife reassuringly, and gazes past her with an expression that conveys the defeat and uncertainty of their world gone wrong.

The Fractalist
by Benoit Mandelbrot
Published 30 Oct 2012

Water mills came long before the applied science of fluid mechanics; heat engines came before the applied science of heat. Stock exchanges arose before any theory, and no theory existed to which my work on finance could be “applied.” My ambition was more realistic—that is, more limited—yet essential. I wanted to provide a consistently more faithful description of known facts—and hence help financial engineering out of its dismal and harmful state. The same goes for the developments that will be described in this chapter: no existing body of science could assist them. What I have just said explains why I did not fear moving into a variety of problems of engineering. To master many applied sciences would be an idle dream—especially for an outsider like me—and is a process that would be unwise to rush.

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio
by Sal Arnuk and Joseph Saluzzi
Published 21 May 2012

Volumes are often dominated by just a small subset of their highest volume clients. For-profit exchanges have sacrificed their long-standing goals to help companies raise capital and investor protection so that they can increase their own bottom line. In a New York Times interview, Andrew Lo, director of the Laboratory for Financial Engineering at M.I.T., noted that regulators were “caught unaware of how quickly the technology has evolved. Sometimes, too much technology without the [cap]ability to manage it effectively can yield some unintended consequences....It is the Wild, Wild West in trading.”25 Endnotes 1. Rob Iati, “The Real Story of Trading Software Espionage” (July 10, 2009), Advanced Trading website, http://www.advancedtrading.com/algorithms/218401501. 2.

The Wealth of Humans: Work, Power, and Status in the Twenty-First Century
by Ryan Avent
Published 20 Sep 2016

From the 1980s on, rich economies devised cleverer and cleverer strategies for getting loans into the hands of households keen to borrow. In the early 1980s, total household debt in America came to less than 50 per cent of GDP. It then commenced a steady rise, to just under 70 per cent of GDP by the end of the 1990s. In the 2000s it skyrocketed, to close to 100 per cent of GDP on the eve of the financial crisis.4 Financial engineering facilitated the shift of money from those who had it to those keen to spend it. Banks came up with clever ways to package dodgy loans into securities that looked reasonably safe, but which promised a healthy return. The world’s big savers, from China to the very rich, gobbled them up. Yet governments also encouraged the transfer of purchasing power through massive lending.

The 100-Year Life: Living and Working in an Age of Longevity
by Lynda Gratton and Andrew Scott
Published 1 Jun 2016

The young have strong analytic functioning but limited experience of financial products; the old have much experience but declining analytic functioning. This is why financial decision-making in general peaks in the 40s and 50s when people’s experience and analytic ability are at a joint maximum. Therefore it makes sense to financial plan in midlife, rather than relying on a much older version of yourself to do the financial engineering needed to solve any under-saving issues. Inheritances In our calculations of how much you should save, we have focused on financing pensions and transitions and have also made mention of mortgages, student loans and healthcare. Another common motivation for savings is the desire to leave an inheritance.

The Big Short: Inside the Doomsday Machine
by Michael Lewis
Published 1 Nov 2009

The market was paying Goldman Sachs bond traders to make the market less efficient. With stagnant wages and booming consumption, the cash-strapped American masses had a virtually unlimited demand for loans but an uncertain ability to repay them. All they had going for them, from the point of view of Wall Street financial engineers, was that their financial fates could be misconstrued as uncorrelated. By assuming that one pile of subprime mortgage loans wasn't exposed to the same forces as another--that a subprime mortgage bond with loans heavily concentrated in Florida wasn't very much like a subprime mortgage bond more concentrated in California--the engineers created the illusion of security.

The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance)
by Feng Gu
Published 26 Jun 2016

The End of Accounting and The Path Forward for Investors and Managers The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our website at www.WileyFinance.com. Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. 

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett
by Jack (edited By) Guinan
Published 27 Jul 2009

Therefore, we believe that the need for financial education among young people applies not only to those who might fall prey to adjustable-rate mortgages or credit card debt xii The Investopedia Guide to Wall Speak but also to the Wall Street set who staked their futures on collateralized debt obligations (CDOs), mortgage-backed securities (MBSs), and other creations of financial engineering that have emerged over the last few decades. Similarly, there has been no shortage of talk about the world’s “credit binge,” but this discussion rarely addresses what we view as the root cause: lack of education. Just look at the credit crisis: A general lack of knowledge extended all the way down the line, from the homeowner who didn’t read the details of his or her mortgage document, to the investment bank that sold it, to the institutional investor who bought it, to the credit rating agency that rated it, and to the politician who failed to regulate it.

The Lost Decade: 2010–2020, and What Lies Ahead for Britain
by Polly Toynbee and David Walker
Published 3 Mar 2020

Doing battle against Sainsbury’s move to acquire Asda sounded like an attempt to keep capitalism honest. But where was any parallel effort to police the monopolistic internet giants from which consumers could not escape? Where, indeed, was the industrial policy for retail, the modern equivalent to coal and steel? No ‘industrial strategy’ encompassed the effect on jobs and the growth of financial engineering and market manipulation by private equity firms. Greybull Capital was outed as the malign owner behind the demise of British Steel at Scunthorpe, but that was only one example of what the Financial Times’ Jonathan Ford called ‘systems set up to guarantee fat fees and payments regardless of performance, channelled through tax suppressing structures … Private equity looks like an exploitative racket.’

Ludicrous: The Unvarnished Story of Tesla Motors
by Edward Niedermeyer
Published 14 Sep 2019

At the reveal of the Model S prototype, Elon Musk told Tesla investor and board member Steve Jurvetson that “we’ve got people, like, writing apps for the car,” but currently there’s no sign of a Tesla app store. Without independent developers coming up with unique software applications for Tesla’s cars, cars will never have the creative and financial engine that made the smartphone what it is today. Even for Tesla, the risks of opening up vehicle code to third parties is just too high. Making cars more like smartphones is one of those ideas that sounds appealing in theory, but it keeps running into the same inconvenient reality: cars are not smartphones.

Going Infinite: The Rise and Fall of a New Tycoon
by Michael Lewis
Published 2 Oct 2023

He had the ability to imagine what grown-­ups might think if, say, they found you in bed with the wrong person. It was Ramnik who intervened when Sam went all in on the idea of FTX being the first to list the token of a Taiwanese porn business called Swag. Swag would cut them a big check in exchange for FTX creating a market for Swag tokens; FTX would thus become the financial engine for a Taiwanese porn empire. “I had to talk him out of that,” said Ramnik. “In talking him out of it, I felt there was a fork in the road. There was no turning back. Sam was hell-­bent on doing this. And I’m like, No fucking way we’re doing it.” Inside of crypto world, none of Ramnik’s qualities made much of a difference and indeed they might have been a disadvantage.

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite
by Daniel Markovits
Published 14 Sep 2019

At the same time, rising top incomes produced excess savings in the new economic elite, which generated a ready supply of lending, even from rich people who were ideologically opposed to outright redistribution. Where stagnant incomes confront an imperative to sustain rising consumption without redistribution, debt follows inexorably—by an almost actuarial logic. In this way, rising economic inequality dramatically increased the demand for financial engineering, and the new demand (alongside other causes) made finance grow rapidly. Government actively supported both sides of this equation, in gross and in fine. Loose monetary policy, a tolerance for asset bubbles, and promises to protect investors when the bubbles burst all generally promoted debt-financed middle-class consumption.

…

In medicine, San Francisco’s proposed universal health care plan emphasizes nurse-practitioners rather than doctors, and clinics in Oregon and Wisconsin are even experimenting with deploying dentists to screen for health problems ordinarily diagnosed by doctors. In law, Washington State is experimenting with using mid-skilled special-purpose legal technicians rather than super-skilled JD lawyers to deliver routine legal services. In finance, regulations that limit exotic financial engineering and favor Main Street over Wall Street banks also shift finance jobs toward mid-skilled workers. And in management, governance regimes that rein in the market for corporate control, or that promote long-term employment over subcontracting, disperse the management function and its returns across a broad class of middle managers.

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
by Nassim Nicholas Taleb
Published 1 Jan 2001

Economics was the most likely candidate for such use of science; you can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment. Now, the spirit of such methods, called scientism by its detractors (like myself), continued past Marxism, into the discipline of finance as a few technicians thought that their mathematical knowledge could lead them to understand markets. The practice of “financial engineering” came along with massive doses of pseudoscience. Practitioners of these methods measure risks, using the tool of past history as an indication of the future. We will just say at this point that the mere possibility of the distributions not being stationary makes the entire concept seem like a costly (perhaps very costly) mistake.

Nudge: Improving Decisions About Health, Wealth, and Happiness
by Richard H. Thaler and Cass R. Sunstein
Published 7 Apr 2008

This is an ideal domain for nudging. In an environment in which people have to make only one decision per lifetime, we should surely try harder to help them get it right. * * * *There are good software products available from many mutual fund companies as well as from such independent firms as Financial Engines and Morningstar, but many Humans find using these programs both difficult and boring. *By the way, are you contributing the maximum to your retirement plan, or at least contributing enough to get the full match from your employer? Are your grown children doing so? If not, stop reading and get busy.

The Price of Everything: And the Hidden Logic of Value
by Eduardo Porter
Published 4 Jan 2011

Every time investors become enthusiastic about some new investment proposition, they assure us that this time will be different. During the dot-com bubble the surge of productivity enabled by information technology allowed us to believe that the historical moment was unique. During the housing boom, we were sure that high-tech financial engineering would protect us from financial risks, spreading them among investors who knew how to handle them. Each time the Pollyannas were wrong. WHAT RATIONALITY? Interestingly, there are economists—prominent ones—who believe bubbles don’t exist. Indeed, during the past four decades the prevailing view among many if not most economists was that prices could never be wrong.

Early Retirement Extreme
by Jacob Lund Fisker
Published 30 Sep 2010

Compare this to the businessman, who in many respects is similar except that loose feedbacks, which in the business world are known as inefficiencies (because time is money), are now tightly coupled feedbacks.40 A business is like a nuclear power plant, which is a complex and tightly coupled system. Here many failsafes (over a dozen for some parts) are in place to keep the system operating within its tolerance limits. If one failsafe breaks, another picks up. Another example is the financial system. Rather than focusing on stable operation like in nuclear power plants, financial engineering was used to leverage to maximize profit using relatively tiny differences between the strong opposing forces of assets and liabilities--that is, in the most general sense, by borrowing large amounts of money at a low interest rate and lending/sending it back out at a slightly higher rate. This tight coupling led to cascading failures, where failing parts caused other parts to fail, and so on, until a buffer was created by the taxpayers with the government as a proxy.

The Education of Millionaires: It's Not What You Think and It's Not Too Late
by Michael Ellsberg
Published 15 Jan 2011

This is the water we swim in. An analogy is useful here. The New York Times article makes this analogy explicitly: the housing bubble. Sure, the adults who took out ridiculous loans to buy ridiculous houses are responsible. Sure, lenders acted in a predatory way in many cases. Sure, the shenanigans of Wall Street financial engineers played their role. I’m not trying to disavow personal responsibility for any of the players in these messes. But at a certain point, all of these individual factors metastasized into one overarching culture of insanity that spread throughout the nation, in which average, otherwise sensible and sane people found it incredibly difficult to resist making financially disastrous decisions.

Messy: The Power of Disorder to Transform Our Lives
by Tim Harford
Published 3 Oct 2016

This was typical of the perversity of the Basel rules: they rewarded banks for making investments that had low risk on paper but high market return, which implied that the true risk was high. The Basel rules encouraged banks to seek out all the places where the rules seemed to be wrong—and to pour as much money as possible into those blind spots. This demand for safe-on-paper assets encouraged complex financial engineering, producing theoretically safe investments on the back of highly risky subprime mortgage lending. These investments had “black swan” properties—perhaps by accident or perhaps by design, they squeezed risk into the worst cases, meaning that the assets were usually safe, and had a track record of looking very stable, but had a modest chance of blowing up catastrophically.

The Seventh Sense: Power, Fortune, and Survival in the Age of Networks
by Joshua Cooper Ramo
Published 16 May 2016

Biological research so complex it once demanded billion-dollar labs now takes place on lab desktops (distribution) that quickly reference immense cloud-based genetic data sets (concentration). You can snap high-quality videos with your phone (distribution); and you share them with millions on a connected central stage such as Instagram. A financial engineer can design a new trading instrument (distribution), but hope for profit depends on instant connection to busy, price-setting markets (concentration). This pulling, taffy-like web of ties between small (your watch) and big (connected data systems) stretches constantly. It’s what you need to picture when you want an image of network power.

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World
by Sandra Navidi
Published 24 Jan 2017

The report asserts that “restoring trust in banking is a public trust and economic imperative, as it is the bedrock of a safe and effective financial system.”56 A study by economists at the University of Zürich suggests that the culture in the banking industry undermines honesty.57 The lines between what’s inappropriate, unethical, and illegal are also blurred by the fact that bankers have become increasingly more detached from their clients because of the complexity of their products and the corresponding greater division of labor. Financial engineers who created the computer models for collateralized debt obligations were, for the most part, unaware of the robo-signing of subprime mortgages that took place further down the production chain half a world away. The resulting moral inertia encouraged a “catch me if you can” culture in which everything not explicitly prohibited was allowed, and executives pushed the boundaries to see what they could get away with.

Value Investing: From Graham to Buffett and Beyond
by Bruce C. N. Greenwald , Judd Kahn , Paul D. Sonkin and Michael van Biema
Published 26 Jan 2004

The conservative managers were not interested in making risky loans. As a result, not long after they went public, many thrifts started to buy back their shares. Because they were still selling at below book value, each share the bank retired increased the book value of the shares still outstanding. This was pure financial engineering; the book value rose not because of retained earnings but simply through the repurchase of stock at a discount. With the financial sector in the midst of a substantial consolidation, the thrifts were all acquired within a few years at a premium to book value. Investors who paid $30 per share for a book value of $50 could sell out at $75, a gain of 150 percent.

Risk Management in Trading
by Davis Edwards
Published 10 Jul 2014

Risk Management in Trading The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our web site at www.WileyFinance.com. Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. 

The Truth Machine: The Blockchain and the Future of Everything
by Paul Vigna and Michael J. Casey
Published 27 Feb 2018

It’s a lofty goal: turning tiny little pieces of developing world assets into pools of wealth that Wall Street investment banks might wish to buy and sell. It’s like a more down-market but arguably more reliable and safer version of the mortgage-backed securities market through which Wall Street’s financial engineers created investment-grade bonds out of large pools of home loans. Might we one day unlock the same kind of financing revolution to fund the rollout of this vital, decentralized energy infrastructure around the world? Energy is the most important resource that any community has. If we can get fair-priced financing for marginalized people to build access to that resource in renewable form, might this be a way to both save the planet and give poor communities an economic development platform from which to build dynamic local businesses?

Why I Left Goldman Sachs: A Wall Street Story
by Greg Smith
Published 21 Oct 2012

The French, as you might expect from the Adventures of Fabulous Fab, were very different. Ostentation and braggadocio were the rule: French clients loved talking about how smart they were, how sophisticated and savvy. A case in point was the Soc Gen “campus” (Société Générale, one of the oldest banks in France) I once visited in Paris—it was like a massive monument to financial engineering: a beehive of quants, espresso sippers, and cigarette smokers. The French market was very “overbrokered,” as financial terminology has it: when clients had ten different banks calling them to get their business, they would split the business ten ways. Markets would quickly become saturated, with each bank getting a tiny slice of the pie.

The Tyranny of Merit: What’s Become of the Common Good?
by Michael J. Sandel
Published 9 Sep 2020

Its role is to facilitate economic activity by allocating capital to socially useful purposes—new businesses, factories, roads, airports, schools, hospitals, homes. But as finance has exploded as a share of the U.S. economy in recent decades, less and less of it has involved investing in the real economy. More and more has involved complex financial engineering that yields big profits for those engaged in it but does nothing to make the economy more productive. 58 As Adair Turner, chair of Britain’s Financial Services Authority, explained, “There is no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 to 30 years has driven increased growth or stability, and it is possible for financial activity to extract rents [unjustified windfalls] from the real economy rather than to deliver economic value.” 59 This measured judgment is a devastating verdict on the conventional wisdom that led the Clinton administration and its U.K. counterparts to deregulate the financial industry in the 1990s.

Israel: A Simple Guide to the Most Misunderstood Country on Earth
by Noa Tishby
Published 5 Apr 2021

I am unwilling to be dictated what to believe and who to talk to, not even by BDS…. I can now say BDS will think twice before targeting an Arab artist again.”15 The absurdity in demanding that Arabs living in Israel should also suffer cultural isolation is infuriating. Each one of these concerts is not just a music event but a financial engine and job-creating machine that BDS wants to eliminate. This would inflict more, not less, financial damage on the Palestinians. What hypocrisy from the keyboard activists enjoying their comfy lives abroad while riding their liberal high horses and damaging the lives and livelihoods of Palestinians in Israel!

The Alternative: How to Build a Just Economy
by Nick Romeo
Published 15 Jan 2024

An ESOP trust paid the departing founders an independently assessed value, which HOOPP and some smaller investors financed. The trust now owns all shares on behalf of workers; over time, as this loan is repaid (and as the valuation of the company rises), the value of workers’ shares rises. Through some clever financial engineering, all three parties benefit: the current owners have an attractive exit offer, the workers gain full ownership of the company, and the pension fund invests in a company with a secure business model and strong market position. Including the Tecate workers was a challenge. It required everything from consulting experts in Mexican tax law to providing additional security at the facility, since workers could be kidnapping targets if it were known they received an equity stake.

Powerhouse: The Untold Story of Hollywood's Creative Artists Agency
by James Andrew Miller
Published 8 Aug 2016

The new ownership culture for ICM was wildly praised internally, not only because there was a new level of incentivizing going on, but also because there was now cash available to make acquisitions the partners themselves wanted to make. They finally had control over their own destiny and no longer had to worry about cash being distributed or there being some financial engineering that they’d have to live with so that outside investors could boost their own returns. Or as a senior leader said, the agency had gone from mostly mercenaries to primarily patriots. CHRIS SILBERMANN, Agent: We may be smaller, but here at ICM, there’s nowhere to hide. Here everybody is close-knit, everybody works together, and if somebody’s not doing something they’re supposed to be doing for a client or a colleague, it’s pretty obvious.

…

We could have bought IMG for sports, but growing it with Howie and Vino is a much stronger base for the future. MIKE RUBEL: I think the IMG situation is really instructive around some of the differences that play themselves out between WME and CAA. So when Endeavor and William Morris merged, there was aggressive financial engineering: “Let’s lop off 30 percent of the less productive people.” When they go and acquire IMG for the number that they acquired it at, they say, “We need to cut $150 million of overhead and then all the numbers will make sense.” We’re probably less hardwired to be the place to cut 30 percent of old William Morris employees and send people out on the street, or to cut $150 million of overhead, because that’s mostly people.

Private Empire: ExxonMobil and American Power
by Steve Coll
Published 30 Apr 2012

By the end of the 1990s, more of British Petroleum’s assets were located in the United States than anywhere else; American public policy was critical to the company. John Browne, however, did not think about industry issues as Lee Raymond did. To ExxonMobil’s executives, he seemed to be more of a financial engineer than an operations man. Browne was also in tune with the transatlantic center-left politics of the late 1990s. He enjoyed a strong relationship with the newly elected British prime minister, Tony Blair. He had easy access to Bill Clinton’s White House; he was exactly the sort of big business leader Clinton-era Democratic politicians often seemed to value—a thoughtful globalist willing to endorse the principles, at least, of the mainstream environmental, human rights, and public health movements.

…

After timely acquisitions of Amoco and Atlantic Richfield, he cut the corporation’s combined costs by one fifth. “For us, it was clear that it [scale through merger] could permanently change the cost structure of the company. . . . It opens up opportunities to do new things because they’re cheaper.”16 His financial engineering turned the corporation’s profitability around and vaulted BP to the top of the global oil tables, positioning the company to compete anywhere. Browne also oversaw a successful push into the Gulf of Mexico. In 1999, with Exxon as a minority partner, BP discovered a billion-barrel offshore Gulf field called Thunder Horse, which would pump, after costly delays, 250,000 barrels of oil a day by 2009, or almost 5 percent of all American production.

The Metropolitan Revolution: How Cities and Metros Are Fixing Our Broken Politics and Fragile Economy
by Bruce Katz and Jennifer Bradley
Published 10 Jun 2013

For example, Jeffrey Immelt, the chairman 02-2151-2 ch2.indd 19 5/20/13 6:48 PM 20 NYC: INNOVATION AND THE NEXT ECONOMY and CEO of General Electric, told an audience in Detroit in June 2009 that the United States should have three priorities: “become a country that is good at manufacturing and exports,” “win where it counts in clean energy,” and “invest in new technology.”6 Lawrence Summers, the director of the National Economic Council, said one month later, “The rebuilt American Economy must be more export-oriented and less consumption-oriented, more environmentally-oriented and less fossilenergy-oriented, more bio- and software-engineering-oriented and less financial-engineering-oriented.”7 In its meetings with business, civic, and academic leaders, the NYCEDC gleaned more than 100 ideas about how to move the city’s economy forward, covering everything from generating electricity from subway turnstiles to immigration reform to better waterfront access. One of the themes that emerged consistently was that the city and the region needed more—much more—science and technology talent to drive its future.

Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market
by Scott Patterson
Published 11 Jun 2012

Bodek had personally designed the algos using a branch of artificial intelligence called expert systems. The approach boiled down the knowledge gained by experts in market analysis and crunched incoming market data in order to make incredibly accurate predictions. It combined various models that financial engineers had used over the years to price options—contracts that give the holder the “option” to buy or sell a stock at a particular price within a certain time frame—with new twists on strategies that savvy traders had once used to haggle over prices in the pits. But many of those old-school strategies, geared with cutting-edge AI upgrades that permitted them to compete head-to-head in the electronic crowd, were nearly unrecognizable now.

Adapt: Why Success Always Starts With Failure
by Tim Harford
Published 1 Jun 2011

The alternative is to try to simplify and to decouple these high-risk systems as much as is feasible, to encourage whistleblowers to identify latent errors waiting to strike, and – sadly – to stand prepared for the worst. These are lessons that some engineers – both petroleum engineers and financial engineers – seem to have to learn again and again. Seven The adapti ve organisation ‘One doesn’t have to be a Marxist to be awed by the scale and success of early-20th-century efforts to transform strong-willed human beings into docile employees.’ – Gary Hamel ‘Your first try will be wrong.

Is the Internet Changing the Way You Think?: The Net's Impact on Our Minds and Future
by John Brockman
Published 18 Jan 2011

Which brings me to the armed truce—an attempt to appreciate the positives and accept the negatives, to set personal boundaries and refuse to let them be breached. Of course, maybe it is just this dogmatic approach that prevents the Internet from changing the way I think. More Efficient, but to What End? Emanuel Derman Professor of financial engineering, Columbia University; principal, Prisma Capital Partners; former head, Quantitative Strategies Group, Equities Division, Goldman Sachs and Co.; author, My Life as a Quant: Reflections on Physics and Finance An engineer, a physicist, and a computer scientist go for a drive. Near the crest of a hill, the engine sputters and stops running.

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
by William Poundstone
Published 18 Sep 2006

Blown-up traders are Wall Street’s undead. They have failed at the most important judgment a trader can make, namely how much money to commit to a risky trade. LTCM’s people were well aware that multiplying profits through leverage also multiplies risk of ruin. They told investors that they had risk under control through their financial engineering. LTCM used a sophisticated form of the industry standard risk reporting system, VaR or “Value at Risk.” After the Black Monday crash of 1987, investment bank J. P. Morgan became concerned with getting a handle on risk. Derivatives, interest rate swaps, and repurchase agreements had changed the financial landscape so much that it was no longer a simple thing for a bank executive (much less a client) to understand what risks the people in the firm were taking.

Postcapitalism: A Guide to Our Future
by Paul Mason
Published 29 Jul 2015

The first Basel Accord, in 1988, set the reserves needed against $100 of loans to $8. By the time of Basel II in 2004, both deposits and loans had become too complex to balance with a single percentage figure. So they changed the rules: you had to ‘weight’ your capital according to its quality – and that quality was to be decided by a ratings agency. You had to reveal the financial engineering used to calculate your risks. And you had to take account of ‘market risk’: in other words, what is going on outside the walls of the bank. Basel II was an open invitation to game the system – and that’s what the bankers and their lawyers did. The ratings agencies misvalued the assets; the law firms designed complex vehicles to get around the transparency rules.

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry
by Helaine Olen
Published 27 Dec 2012

According to a survey of retirement plan providers in 2011, even as more and more 401(k) plans were offering their investors opportunities for professional advice, very few were inclined to take them up on it, with only 25 percent of those offered the service actually using it. “People don’t have the time for it or the inclination,” Christopher Jones, chief investment officer at Financial Engines, a company specializing in just that sort of advice, told the Wall Street Journal. None of this should come as a surprise. There’s never been an age when Americans possessed the knowledge needed for them to be deemed financially literate. If we seem more ignorant than in the past, it’s likely a mirage caused by the fact we needed to know less back when.

How the Post Office Created America: A History
by Winifred Gallagher
Published 7 Jan 2016

This exercise in bald-faced political patronage was all the more audacious for ignoring the department’s tradition, only recently reaffirmed by Postmaster General McLean, of protecting competent employees’ jobs from political shifts. President Jefferson may have technically invented the spoils system when he replaced 10 percent of federal workers with his supporters, but Jackson took it to a new level by institutionalizing postal patronage and making it the financial engine of America’s two-party system. For nearly a century and a half, the government would effectively underwrite much of the country’s politics by enabling the camp that won the White House to reward tens of thousands of its supporters with postal jobs (although, as Lincoln would later observe, there were always too many pigs for the tits).

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems
by Irene Aldridge
Published 1 Dec 2009

She is also a founder of AbleMarkets.com, an online resource making the latest high-frequency research accessible to institutional and retail investors. Prior to ABLE Alpha, Aldridge worked for various institutions on Wall Street and in Toronto, including Goldman Sachs and CIBC. She also taught finance at the University of Toronto. She holds an MBA from INSEAD, MS in financial engineering from Columbia University, and a BE in electric engineering from the Cooper Union in New York. Aldridge is a frequent speaker at top industry events and a contributor to academic and practitioner publications, including the Journal of Trading, Journal of Alternative Investments, E-Forex, HedgeWorld, FXWeek, FINalternatives, Wealth Manager and Dealing With Technology.

A Pelican Introduction Economics: A User's Guide
by Ha-Joon Chang
Published 26 May 2014

It broke through the 900 per cent mark by the early 2000s.12 The New Financial System and Its Consequences The new financial system was to be more efficient and safer All this meant that a new financial system has emerged in the last three decades. We have seen the proliferation of new and complex financial instruments through financial innovation, or financial engineering, as some people prefer to call it. This process was enormously facilitated by financial deregulation – the abolition or the dilution of existing regulations on financial activities, as I shall discuss later. This new financial system was supposed to be more efficient and safer than the old one, which was dominated by slow-witted commercial banks dealing in a limited range of financial instruments, unable to meet increasingly diverse demands for financial risk.

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity
by Joseph E. Stiglitz
Published 28 Jan 2020

The choice is not between Germany paying all Greece’s bills and Germany doing nothing. We have more to say about this subject in Chapter 2. The former German finance minister, Wolfgang Schäuble, took a parting shot at the notion of shared responsibility for government debt in the Eurozone by calling it “complex and expensive financial engineering.”13 But it is essential to understand a crucial point: Eurozone members have already, in the critical moment of the bailout, taken some mutual responsibility for debts accrued by their weaker members, and they did this as much to save German and French taxpayers as to help Greece. If Europe had not helped Greece, there would have been severe consequences for the French and German banking systems.

Frenemies: The Epic Disruption of the Ad Business
by Ken Auletta
Published 4 Jun 2018

.* Saatchi’s first major acquisition came in 1975, when they partnered with the London office of Garland-Communications, whose clients included Procter & Gamble and who owned a piece of Compton Communications, which was much larger than Saatchi. The maneuver, which was a reverse takeover, would over the next decade help propel Saatchi to eclipse IPG as the world’s largest ad agency. Sorrell was the financial engineer. “That was the cornerstone deal,” Sorrell says. “The brilliant deal we did”—he invokes the word brilliant three times in a single sentence to describe the deal—“was when we squeezed Compton advertising,” becoming the controlling owner. Under the terms of the deal, Compton would own 20 percent of Saatchi.

Deaths of Despair and the Future of Capitalism
by Anne Case and Angus Deaton
Published 17 Mar 2020

Again, we emphasize that while the questions involved in designing and financing an alternative scheme are challenging, the problem is not one of finding a large amount of new money to fund a new entitlement program. The money that is already being spent is more than enough. The problem is in part one of technical and financial engineering, of finding ways to reallocate money, and in part a political one, of doing the engineering in a way that buys off the opposition of those who are currently benefiting, while recouping this buy-off over time. The Labour Party minister of health, Nye Bevan, when he opened the British National Health Service in 1946, was asked how he dealt with the doctors’ lobby, which had compared him to a Nazi medical führer.

The Dealmaker: Lessons From a Life in Private Equity
by Guy Hands
Published 4 Nov 2021

Such wealth catapulted me into the ranks of Britain’s richest people, according to the Guardian, alongside Pink Floyd’s Nick Mason and Queen’s Brian May. Every paper followed up on the story in the following days. In the media’s eyes, I was the ultimate city slicker. I was the Square Mile golden boy who had ‘patented’ a new form of financial engineering. I was the person responsible for moving securitisation from the back pages of the financial journals to the front pages of the tabloids. What still hurts is that the provocative but accurate number was almost certainly leaked to the newspapers by someone close to me at Nomura. That all the ups and downs of my career over the following years would be picked over by the UK press can be traced back to this single article.

The Human City: Urbanism for the Rest of Us
by Joel Kotkin
Published 11 Apr 2016

The presence of distinct restaurants redefines the context, even for people who do not eat in them. They are part of the local market basket of amenities that vary from place to place.86 THE NEW GEOGRAPHY OF INEQUALITY In this new consumer city, the role that priests and aristocrats played in imperial cities has been assumed by the global wealthy, financial engineers, media moguls, and other top business executives and service providers. One thing the new consumer city does share with its historic counterpart is a limited role for an expanding middle class. Some of this stems from the structure of the successful transactional city. In recent decades, these cities have grown two ends of their economies: an affluent, well-educated, tech-savvy base and an ever-expanding poor service class.

Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World
by Tom Wright and Bradley Hope
Published 17 Sep 2018

It was nothing but a facade: There was no cash there, only fund units, supposedly the profits from selling a stake in two almost-worthless oil drill ships. On paper, however, 1MDB could claim it had made a profit, and Low conspired to get it past auditors. Pressed by accountants at KPMG, Yeo gave the impression the Bridge Global fund units were backed by cash. The financial engineering had helped disguise the truth, and KPMG carried on with its audit. But the problem hadn’t gone away, and the firm’s accountants would not prove that easy to con the following year. Yeo must have known what BSI was doing was ropy, and so he set up a scheme with his boss, Kevin Swampillai, to profit himself.

Pure Invention: How Japan's Pop Culture Conquered the World
by Matt Alt
Published 14 Apr 2020

By September of 1990, Sanrio had lost eighteen billion yen—roughly seventy-five million dollars at the contemporary exchange rate. “Stock-Crazed Rogue CEO Drives Sanrio Deep into Red,” trumpeted one magazine headline—a shocking comeuppance. It turned out that Tsuji had been engaging in a popular form of financial speculation the Japanese called zaiteku, a bubble buzzword among the executive class meaning “financial engineering.” As many a Japanese CEO had, Tsuji plowed his firm’s cash reserves into stocks, real estate trusts, and other high-risk, high-return corporate investment schemes. During the bubble this risky strategy had paid off handsomely; for a time, Tsuji’s profits from trading exceeded Sanrio’s income from its products and licenses.

The Crux
by Richard Rumelt
Published 27 Apr 2022

But, over time, I came to realize that all of this analysis, while useful, did not really produce a strategy—a way forward that would improve things. Trying to learn from corporate leaders, I observed many who saw their jobs as pushing people to “make their numbers.” Others were well spoken, but really had little idea about the guts of the business they had somehow come to lead. There were some who saw strategy as planning or financial engineering or as long lists of “things to do.” Some were insightful but lacked the courage to act. Luckily, I was able to watch and learn something from leaders who were skilled strategists: • like Pierre Wack, the legendary head of strategy at Shell, who taught me to see the correlations among the elements of a situation and to be alert for whipsaws as trends overshoot and rebound • like Steve Jobs of Apple, whose brutal honesty let him cut through layers of baloney and grab the crux of a situation (and annoy many people around him) • like Andy Marshall (Office of Net Assessment/Department of Defense) who had a fine instinct for defining the competition at just the right level to change the conversation for the better (his paper on redefining the Cold War situation as a long-term competition between the United States and the Soviet Union was pivotal in moving US policy makers away from an armaments view to one that encompassed economic and social dimensions) • like Andy Bryant, the board chair of Intel who understood how size and complexity can compete with having the technological edge • like Simon Galbraith of Redgate Software, whose natural talent for diagnosis led him to a canvas larger than a single business These general managers, and others, did things differently, and, over time, I began to get a feel for the broad outlines of that difference.

Palo Alto: A History of California, Capitalism, and the World
by Malcolm Harris
Published 14 Feb 2023

Bankers from New York, Paris, Frankfurt, and especially London wanted the high, quick returns that California represented, but they weren’t about to move to the frontier.i They needed a way to set their money to work in the West without having to follow it themselves. The world’s capital was increasingly liquid, searching out opportunities far from home. New forms of financial engineering allowed the Associates to feather a nest for capitalists, providing a space for them to “work on the railroad” from the comfort of their studies. Bond financing was the simple way: The railroad issues promissory notes backed by the government land grants, then capitalists buy the bonds and enjoy a solid rate of return as the West is won.

…

But as they do in the aftermath of every bubble, the winners bought up the losers: Bank of America took Merrill Lynch, and JPMorgan Chase got Bear Stearns. And then, housing prices kept stepping back up. Anyone who crafted an Aristotelian tragic narrative out of the 2008 crisis would have seen it as a correction for 10 years or so of financial-engineering shenanigans and irrational exuberance. But it was the investors who never read any Greek, the ones who were ready to roll the dice on the newly cheap housing stock, who made the right call. Some of the most extravagant financial instruments were done for, but housing prices rebounded nearly as fast as they fell.

What's Next?: Unconventional Wisdom on the Future of the World Economy
by David Hale and Lyric Hughes Hale
Published 23 May 2011

When the reserve currency country has excess consumption, its central bank should be running tighter monetary policy, but in a world of free capital flows, the efficacy of monetary policy is weakened. The trouble is that when all four reserve currency central banks (Federal Reserve Bank, European Central Bank, Bank of England, and Bank of Japan) are faced with rising fiscal deficits and hidden leverage that was pumped into the system by massive financial engineering, the systemically important countries collectively generate a global credit bubble that can only be financed by lower and lower interest rates. The reality is that we now have a global economy without a corresponding global monetary policy, global financial regulation, or global fiscal system.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing
by Burton G. Malkiel
Published 10 Jan 2011

To make matters even more complicated, there was not just one bond issued against a package of mortgages. The mortgage-backed securities were sliced into different “tranches,” each tranche with different claim priority against payments from the underlying mortgages and each with a different bond rating. It was called “financial engineering.” Even if the underlying mortgage loans were of low quality, the bond-rating agencies were happy to bestow an AAA rating on the bond tranches with the first claims on the payments of interest and principal from the underlying mortgages. The system should more accurately be called “financial alchemy,” and the alchemy was employed not only with mortgages but with all sorts of underlying instruments, such as credit card loans and automobile loans.

The Four Pillars of Investing: Lessons for Building a Winning Portfolio
by William J. Bernstein
Published 26 Apr 2002

By the late seventeenth century, these coffeehouses became the most active and advanced exchanges in the world. The average “stock jobber,” as brokers were known, would have little trouble understanding the action on the floors of the New York Stock Exchange or Chicago Mercantile, although ordering a proper brew at Starbucks might strike them as overly complex. This revolution in financial engineering quickly found its way into the era’s emerging technologies. In 1687, William Phipps, a New England sea captain, docked in England with 32 tons of silver raised from a Spanish pirate ship, enriching himself, his crew, and his backers beyond their wildest dreams. This captured the imagination of the investing public and before long, numerous patents were granted for various types of “diving engines,” followed soon after by the flotation of even more numerous diving company stock issues.

Poisoned Wells: The Dirty Politics of African Oil
by Nicholas Shaxson
Published 20 Mar 2007

The national airline collapsed down to little more than a vehicle for collecting air transit fees from foreign airlines; private firms have armlocks on port and shipping facilities, telecommunications, and banks, breaking laws freely or having parliament rubber-stamp new ones in their favor. 64 As state institutions give way to private interests, Congo’s government stands increasingly on just three remaining pillars: first, the internationally recognized sovereignty that legitimizes the oil and banking contracts; second, the state oil company and the oil and finance ministries that manage the financial engineering; and, finally the armed forces that protect the system. Even ongoing low-level conflict is tolerated, as long as it does not threaten the sovereign, extractive core. “Not only do these state institutions survive, but the state begins to hang off these institutions as if nothing else existed,” said Ricardo Soares de Oliveira, a U.K.

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism
by Kevin Phillips
Published 31 Mar 2008

Few Americans were willing to credit these parallels, but Tett quoted Timothy Ryan, vice chairman at JPMorgan, as saying “Former U.S. bank regulators like me feel a bit responsible because we used risk-adjusted capital rules to push riskier assets off balance sheet—but we never expected that it would lead to the creation of things such as the SIVs and complex leveraged CDOs. . . . This was financial engineering that went too far.”35 Moreover, the U.S. housing market was not the only one at risk; a report by the International Monetary Fund also saw overvaluation in Britain and Ireland, two other countries with vulnerable bubbles.36 Be that as it may, the precedents seem most foreboding for the United States.

Startup CEO: A Field Guide to Scaling Up Your Business, + Website
by Matt Blumberg
Published 13 Aug 2013

I try not thinking much about exits as they pertain to Return Path but I couldn’t help formulating a few best practices in case it ever comes up: Optimize the value of the transaction. Always have multiple bidders (see my comments about a BATNA in Part Three). You can literally double or triple the deal price that way. If there is ever a time for financial engineering, it’s now. I’ve seen deals with collars and no caps—brilliant. Find the company a good home. It’s your baby. You do want to find a good home for it. This could be in conflict with optimizing the value of the transaction, so be prepared to factor that in—up to some level. Balance authenticity and transparency with being smart about internal communications.

The Boom: How Fracking Ignited the American Energy Revolution and Changed the World
by Russell Gold
Published 7 Apr 2014

Once engineers demonstrated that shale rocks could be fracked and exploited, a race among energy companies began. It would be led by executives with a talent for promoting their companies and raising enormous sums to keep drilling. In this, McClendon was without peer. To understand the rise of fracking, it is necessary to understand how McClendon, a financial engineer, came to dominate an industry once led by petroleum engineers. Aubrey Kerr McClendon was born in Oklahoma City in 1959. His middle name marked his family ties to the oil business and to politics. His grandfather’s brother, Robert Kerr, helped found Kerr-McGee, the pioneering oil and gas company that drilled the first offshore well in the Gulf of Mexico.

The Global Money Markets
by Frank J. Fabozzi , Steven V. Mann and Moorad Choudhry
Published 14 Jul 2002

Although the reference rate for most floaters is an interest rate or an interest rate index, numerous kinds of reference rates appear in coupon formulas. This is especially true for structured notes. Potential reference rates include movements in foreign exchange rates, the price of a commodity (e.g., gold), movements in an equity index (e.g., the Standard & Poor’s 500 Index), or an inflation index (e.g., CPI). Financial engineers are capable of structuring floaters with almost any reference rate. For example, Merrill Lynch issued in April 1983 Stock Market Reset Term Notes which matured in December 1999. These notes delivered semiannual coupon payments using a formula of 0.65 multiplied by the annual return of the Standard & Poor’s MidCap 400 during the calendar year.

Breakout Nations: In Pursuit of the Next Economic Miracles
by Ruchir Sharma
Published 8 Apr 2012

Low U.S. interest rates and rising debt increasingly became the bedrock of American growth, and the increases in total U.S. debt started to dwarf the increases in total U.S. GDP: in the 1970s it took $1.00 of debt to generate $1.00 of U.S. GDP growth, in the 1980s and 1990s it took $3.00, and by the last decade it took $5.00. American borrowing was getting less and less productive, focused more on financial engineering and conspicuous consumption. U.S. debt became the increasingly shaky pillar of the global boom. Low interest rates were driving growth in the United States, pressuring central banks around the world to lower their rates as well, while fueling an explosion in U.S. consumer spending that drove up emerging-market exports.

System Error: Where Big Tech Went Wrong and How We Can Reboot
by Rob Reich , Mehran Sahami and Jeremy M. Weinstein
Published 6 Sep 2021

And the leaders of the booming Wall Street banks, private equity firms, and hedge funds that rose to prominence in the last quarter of the century all had a background in economics. What economics and finance were to the twentieth century, engineering and computer science are to the twenty-first. Computer hardware, processing power, big data, algorithms, artificial intelligence (AI), and network power are the most important currencies of our age. The quants and financial engineers have invaded the big banks, and it is the venture capitalists of Palo Alto, not fund managers on Wall Street, who finance disruptive innovation. Yet the worldview of the technologist is sometimes poorly understood by those outside the tech industry. Unlike economists in the twentieth century, engineers are generally not entering politics as advisers and decision makers.

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems
by Linda Yueh
Published 4 Jun 2018

Riskier mortgages could be repackaged with others into mortgage-backed securities (MBS) and given the highest (AAA) credit ratings for the creditworthiness of the debt, while still offering a higher rate of return than other safe assets such as Treasury bills. Credit default swaps (CDS) could be purchased to provide insurance against any losses should there be a default. Bankers created funds, such as special purpose vehicles (SPVs) and structured investment vehicles (SIVs), to hoover up these financially engineered securities offering better returns than safe assets like government debt, and sell the SPVs and SIVs to clients. These special funds often borrowed heavily in the money markets and, being based offshore, avoided the capital requirements and regulatory oversight of other financial institutions.

Moneyland: Why Thieves and Crooks Now Rule the World and How to Take It Back
by Oliver Bullough
Published 5 Sep 2018

The shoreline below the palace was adorned with a yacht harbour and a bar shaped like a galleon. In their haste to leave, the president’s aides had dumped 200 folders’-worth of financial records into the harbour, hoping they’d sink. But they didn’t. Protesters fished the papers out, and dried them in a sauna. They provided a glimpse into the heart of the financial engineering that had allowed Yanukovich to fleece the country. It wasn’t just Yanukovich’s shooting lodge that was owned overseas, his palace was, too. So were his coal mining companies in the Donbas and his palaces in Crimea, which were eventually owned in the Caribbean. And he wasn’t the only insider to use these offshore schemes: the medicine racket was run out of Cyprus; the illegal arms trade traced back to Scotland; the biggest market selling knock-off designer goods was legally owned in the Seychelles.

Faster, Higher, Farther: How One of the World's Largest Automakers Committed a Massive and Stunning Fraud
by Jack Ewing
Published 22 May 2017

Pretax profit, at €8.6 billion ($11.6 billion), actually exceeded sales, an unheard-of occurrence. The reason was simple: Porsche was making more money from the options it bought on Volkswagen shares than from the sale of cars. But it was already clear that conditions in financial markets were becoming much less favorable for that kind of financial engineering. In March 2008, the collapse of Bear, Stearns had provided a forewarning of the risks lurking in the market for subprime mortgages, a form of asset the investment bank had helped pioneer. Porsche pushed ahead with plans to acquire a majority in Volkswagen, but buying the additional shares became more difficult and took time.

The Great Economists: How Their Ideas Can Help Us Today
by Linda Yueh
Published 15 Mar 2018

Riskier mortgages could be repackaged with others into mortgage-backed securities (MBS) and given the highest (AAA) credit ratings for the creditworthiness of the debt, while still offering a higher rate of return than other safe assets such as Treasury bills. Credit default swaps (CDS) could be purchased to provide insurance against any losses should there be a default. Bankers created funds, such as special purpose vehicles (SPVs) and structured investment vehicles (SIVs), to hoover up these financially engineered securities offering better returns than safe assets like government debt, and sell the SPVs and SIVs to clients. These special funds often borrowed heavily in the money markets and, being based offshore, avoided the capital requirements and regulatory oversight of other financial institutions.

The Millionaire Fastlane: Crack the Code to Wealth and Live Rich for a Lifetime
by Mj Demarco
Published 8 Nov 2010

Living on the Sidewalk can literally end in living on the sidewalk. If you ask any derailed Sidewalker what spun his financial life out of control, he will quickly blame some external factor: I was laid off! My car broke down! I had no health insurance when I broke my foot! The judge ordered a 20% increase in alimony! When you rev your financial engine at the redline you're guaranteed to burnout. And then, ironically, your pleasant todays turn into horrible tomorrows: more work, more debt, and more stress. I don't know your age, but let's be honest and ask the uncomfortable question: Can you seriously expect to retire on $13,000 in net worth?

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms
by Russell Napier
Published 18 Jan 2016

The 1920s bull market is often associated with the performance of the auto sector or Radio Corporation of America (RCA) stock, but the real stars were chemicals and electrical equipment. The electrification of American households and businesses accelerated during the decade, creating boom conditions for the electrical equipment manufacturers. The electrification business also boosted the performance of utility stocks, assisted by some dubious financial engineering in the sector. In the bust that followed, many of the utility holding companies failed and their CEOs - the likes of William Foshay, head of a Minneapolis based holding company, and Samuel Insull, head of Middle West Utilities - ended up on criminal charges. FIGURE 46. KEY SECTOR PERFORMANCE – JUNE 1926 TO SEPTEMBER 1929 Source: Kenneth R.

Chokepoint Capitalism
by Rebecca Giblin and Cory Doctorow
Published 26 Sep 2022

They were also affected by the same lax merger scrutiny we’ve repeatedly lamented. Heavy consolidation in retail meant there were fewer and fewer buyers for those full-page display ads that had previously advertised a range of local grocery, department, and sporting goods stores. Left vulnerable, the US news sector became an early pioneer of dirty financial engineering, debt-funded takeovers, and questionable business decisions. Early in the neoliberal era, newspapers were targeted for leveraged buyouts, where a Wall Street fund convinces a bank to lend it money to buy a business while using the business they’re buying as collateral. It’s like buying out your neighbor’s house by taking a mortgage out against it—without your neighbor’s permission.

The Snowball: Warren Buffett and the Business of Life
by Alice Schroeder
Published 1 Sep 2008

He thought it no shame to have a business that could be run by a ham sandwich; he wanted to get Berkshire Hathaway to the point that it could be run by a ham sandwich too—though not until after he was gone. But by 1997, Coca-Cola had started to set goals for itself that were so ambitious that it took—not a ham sandwich, not even Goizueta—but a lot of financial engineering to achieve them. Coke owned forty percent of CCE and tended to act as though it owned a hundred percent. The creation of CCE by rolling up a group of bottlers had been part of a larger strategy of buying and selling bottlers in order to time the profits and boost Coca-Cola’s earnings. This was neither illegal nor technically deceitful, but it was nonetheless an illusion, and Warren, who was on the board of Coke, was always aware of the potential for misrepresentation.

…

Since Goizueta had been engineering the company’s earnings before he died, and Ivester was the engineer and reaped the rewards for doing so, why should he behave any differently now that he was CEO? As one board member put it, “The finance committee was the center of everything,” which was odd for a marketing company like Coca-Cola. In the end, the mistake was not Ivester’s. The board had deferred to Goizueta even after his death, when it followed his wishes and made the head of the financial engineering department the new CEO of Coke. Still, Buffett was pretty sure that the problem so obvious to him was not so obvious to the whole board. As he ticked off marks against Ivester, Buffett spent the whole fall in a wrung-out state of anxiety. By Thanksgiving, the paralyzing limitations of his role as a board member, given the travails of Coca-Cola, had almost reached a breaking point.30 Then Fortune magazine, which had labeled Ivester “the 21st-century CEO” not two years earlier, published a highly critical piece blaming him for the company’s problems.31 That was a bad sign.

…

Debt was the blood coursing through the veins of mobile-home makers; without it they were dead. And lenders were already shying away from the business. Why would they lend to a company whose ability to repay them had just been gutted? The Cerberus people obviously knew this; they had delivered a proposal that was the best that financial engineering could do. The Claytons called Cerberus to discuss it and, without any rancor, they agreed to go their separate ways. But CNBC and the financial press were now portraying Buffett as a ruthless financier who had connived with the Claytons to buy the company cheap. The way that the Clayton deal was playing out in the media, and the manner in which Buffett’s reputation had compounded to the point where it worked against him, represented a dramatic reversal of the image of the wise, grandfatherly man who attracted legions of would-be coattail-riders.

Portfolio Design: A Modern Approach to Asset Allocation
by R. Marston
Published 29 Mar 2011

With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com. ii P1: TIX/b FM P2: c/d QC: e/f JWBT412-Marston T1: g January 6, 2011 10:37 Printer: Courier Westford Portfolio Design A Modern Approach to Asset Allocation RICHARD C.

The Ascent of Money: A Financial History of the World
by Niall Ferguson
Published 13 Nov 2007

But the American crisis of 2007 has increased the frequency of such language. US Assistant Secretary of the Treasury Anthony W. Ryan was not the only person to talk in terms of a wave of financial extinctions in the second half of 2007. Andrew Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering, is in the vanguard of an effort to re-conceptualize markets as adaptive systems.19 A long-run historical analysis of the development of financial services also suggests that evolutionary forces are present in the financial world as much as they are in the natural world.20 The notion that Darwinian processes may be at work in the economy is not new, of course.

Brazillionaires: The Godfathers of Modern Brazil
by Alex Cuadros
Published 1 Jun 2016

When journalists asked Eike how he did it, he cited something he called 360-Degree Vision, which basically involved considering all aspects of a business venture before diving in. There was a diagram of the Vision in his book. It looked a bit like your high school textbook depiction of an atom, with oblong loops connecting dots labeled “financial engineering,” “engineering of communication,” “engineering of engineering,” and so on, surrounded by a wider circle of themes like “stop loss” and “perseverance” and “meritocracy” and even “humility.” The 360-Degree Vision, he wrote, “allows you to see the soul of a business.” In the middle was an Incan sun meant to conjure supernatural powers.

The Investment Checklist: The Art of In-Depth Research
by Michael Shearn
Published 8 Nov 2011

Young served as President and Chief Operating Officer of Pepsi-Cola General Bottlers, Inc. and Executive Vice President of Corporate Affairs at PepsiAmericas, Inc. By building a chronology of the career of a manager, you will understand how the manager came up through the ranks of the companies he or she worked for, and you can better determine whether the manager has a history of making deals, financial engineering, marketing, or creating new products. For example, if they worked for businesses owned by private equity firms for most of their careers, then the managers are likely to have a short-term mentality and may emphasize cutting costs over other initiatives. Ask questions such as: Does the manager have a background in operations, marketing, or finance?

Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else
by Chrystia Freeland
Published 11 Oct 2012

As with the sale of state assets in developing economies, the role of deregulation in creating a plutocracy turns classic thinking about rent-seeking upside down. Deregulation was part of a global liberalization drive whose goal was to pull the state out of the economy and let market forces rule. But one of its consequences was to give the state a direct role in choosing winners and losers—in this case, giving financial engineers a leg up. Christopher Meyer, a management consultant at the Monitor Group, recently wrote a book about emerging market businesses and how they will reshape the global economy. Rent-seeking is obviously a big part of his story. But when I asked him which country’s businesspeople were the world’s champion rent-seekers, his answer surprised me: “In the financial industry, the United States has the most co-opted regulatory apparatus.”

Stock Market Wizards: Interviews With America's Top Stock Traders
by Jack D. Schwager
Published 1 Jan 2001

They in turn virtually adopted me. I don't know what the magic was, but Elliot Wolk, who was a member of the board of directors and the head of the options department, took a liking to me. Were any of your courses at Harvard helpful in preparing you for the real world? In my senior year, I took a graduate-level course in financial engineering. I did my project on the options market and found it fascinating. ] tried to model what would happen if an option price was forced away from its theoretical value, say because someone placed a large buy or sell order that moved the market. My results convinced me that I had found a way to consistently capture profits in the options market.

The Subterranean Railway: How the London Underground Was Built and How It Changed the City Forever
by Christian Wolmar
Published 30 Sep 2009

He teamed up with the international family banking firm of Speyers, which had offices on both sides of the Atlantic – London, New York and Frankfurt – and was headed, in London, by Sir Edgar Speyer who agreed to help Yerkes raise £5m for the construction of the tube lines. The precise arrangements, which involved the same kind of complex financial engineering that Yerkes had used in the USA, were unfathomable even to Sir Harry Haward, the financial comptroller of the London County Council, which kept a close eye on transport developments in the capital.13 Shares were sold in the USA, France, Germany and the Netherlands, as well as in the UK where, in general, people were sceptical about US financial methods which were generally thought to be dubious and, on occasion, corrupt.

The Looting Machine: Warlords, Oligarchs, Corporations, Smugglers, and the Theft of Africa's Wealth
by Tom Burgis
Published 24 Mar 2015

It is the sister company to China International Fund, whose flag flies above the entrance and which has raised billions for infrastructure projects under undisclosed terms, among them an expansion of Kilamba.38 Cobalt, Nazaki and other oil groups have offices on the lower levels, but the top floors are reserved for the company that Samakuva had in mind – China Sonangol. Since 2004 China Sonangol has amassed stakes in a dozen Angolan oil ventures, including some of the most prolific, as well as a slice of the country’s richest diamond mine. Sonangol, the state oil company that is the Futungo’s financial engine, owns 30 per cent of China Sonangol. The remainder belongs to the band of Hong Kong-based investors that is known as the Queensway Group and is fronted by a bearded, bespectacled Chinese man called Sam Pa. 2 ‘It Is Forbidden to Piss in the Park’ IT IS HARD to imagine a place more beautiful than the east of the Democratic Republic of Congo.

The Future of Technology
by Tom Standage
Published 31 Aug 2005

Critics say they are a way of landing the industry’s customers with the risk that something may go wrong: the criteria for a successful transformation are sufficiently nebulous for clever lawyers to claim that they have been met, whatever the outcome. The larger issue, however, is the way it firms sell financial engineering along with their systems and software. Governments, for instance, I 123 THE FUTURE OF TECHNOLOGY are avid advocates of long-term contracts because they can spread the cost of a large it investment over many years, making it look more manageable. So long as the industry continues to offer this sort of balancesheet support along with the technological variety, its customers may sometimes be tempted to make the wrong decision. 124 A WORLD OF WORK The place to be In the global market for white-collar work, India rules supreme.

The Innovation Illusion: How So Little Is Created by So Many Working So Hard
by Fredrik Erixon and Bjorn Weigel
Published 3 Oct 2016

Globalization, we conclude, was a windfall for the economy, but it changed Western capitalism. The globalist worldview Beginning in the 1980s, the globalist worldview was essentially characterized by how a lot of smart people made economic life simpler. The economic world could be powered by modern algebra, and undertaken by corporate executives, financial engineers, McKinsey wizards, central bankers, Treasuries, and folks with advanced degrees from the Faculty of Spreadsheets. With the help of globalization, they had cracked the code of modern economic growth, free from the persistent macroeconomic irritations of the past, let alone systemic crises. The future had only one direction: undisrupted ascent.

What to Think About Machines That Think: Today's Leading Thinkers on the Age of Machine Intelligence
by John Brockman
Published 5 Oct 2015

To guard against those dangers, it helps to be aware that we’re genetically programmed to act in trustful, intelligent-agency-ascribing ways in certain kinds of interactions, be they with people or machines. But sometimes a device that waddles and quacks is just a device. It ain’t no duck. A MACHINE IS A “MATTER” THING EMANUEL DERMAN Professor of financial engineering, Columbia University; senior adviser, KKR Prisma; author, Models.Behaving.Badly and My Life As a Quant A machine is a small part of the physical universe that has been arranged, after some thought by humans or animals, in such a way that when certain initial conditions are set up (by humans or animals) the deterministic laws of nature see to it that that small part of the physical universe automatically evolves in a way that humans or animals think is useful.

Hedgehogging
by Barton Biggs
Published 3 Jan 2005

ccc_biggs_ch09_119-132.qxd 11/29/05 7:02 AM Page 127 The Violence of Secular Market Cycles 127 Another big difference between the U.S. and Japanese bubbles is that the U.S. mania was all about equity money going into technology and the Internet, which were basically productivity-enhancing expenditures. A lot of money was wasted, a lot of money was lost, but, on the other hand, a lot of money funded companies that created new products and inventions. Japan’s craziness was focused with a few exceptions primarily on financial engineering, zaitech it was called at the time, and it had virtually no saving graces. Again, the Japanese banking system was far more involved. By contrast, today, the U.S. banking system is relatively healthy. Third, once the bubble had burst, the authorities in Japan made serious errors in both fiscal and monetary policy that caused a vicious circle of recession and deflation, almost an economic death spiral, that has proved incredibly difficult to get out of.The Bank of Japan raised official interest rates even as the bubble was bursting, and the government raised taxes just as the economy began to recover.

The Fund: Ray Dalio, Bridgewater Associates, and the Unraveling of a Wall Street Legend
by Rob Copeland
Published 7 Nov 2023

And I can be short or long anything in the world, and I’m short or long practically everything. I don’t have any bias, so I do it in a very, um, fundamental way, but, um, very systematic, very, um—we use a lot of artificial intelligence type of approaches to think about portfolio theory. I use a lot of financial engineering to basically take a whole bunch of uncorrelated bets.” He also noted that some 99 percent of Bridgewater trading was automated, based on his longtime rule book. “They’re my criteria, so I’m very comfortable.” The Bridgewater founder turned the question on Ackman, asking how his smaller rival chose investments.

Money and Power: How Goldman Sachs Came to Rule the World
by William D. Cohan
Published 11 Apr 2011

.… Once, ‘placing the customer first’ was the clearly understood norm for investment banks, as they knew they could only sell securities to clients who placed their trust and confidence in them. That model was also efficient because it told the client that it could trust their broker and did not need to perform due diligence on, or look between the lines of, the broker’s advice. But, with the rise of derivatives and esoteric financial engineering, some firms may have strayed from their former business model.” Michael Greenberger, a professor at the University of Maryland School of Law and a former director of trading and markets at the Commodity Futures Trading Commission, believes the day the SEC filed its suit against Goldman is akin to the U.S. victory in the Battle of Midway, in 1942.

…

They talk about hard work, discipline, and commitment and then they always do what’s in their own financial interest to do. Like a law firm or bank that pitches a business, gets the business, and then does the bait and switch. It’s not in their DNA—we’re only talking their private-equity investments—it’s not in their DNA to be engaged. Their financial engineers are crude. They’re quick. They’re slam-bam-thank-you-ma’am, but they like to present it as a committed relationship. It’s only—and all—about the money and maintaining the veneer.” Goldman’s behavior was not unusual, he said. Indeed, it was quite common and he liked that the firm had a relentless desire to win.

Conspiracy of Fools: A True Story
by Kurt Eichenwald
Published 14 Mar 2005

She considered him devious, somebody who would throw a fit if he didn’t get what he wanted. And this, she thought, was going to be one of those times. For several minutes Kopper walked through the deal, explaining it step-by-step. “The accountants are going to sign off on this. The lawyers will approve. It will work.” Martin didn’t buy it. “Michael, this is silly. It’s financial engineering versus a real deal.” “Everybody likes this,” Kopper responded. “Andy took it to Skilling, and Skilling really likes this deal. Causey’s fine with it. This is the deal we should do.” “Oh, come on, Michael,” Martin responded, pointing to the diagram. “What you’ve got there is a shell game.”

…

There was a global shortage of usable water, Mark said. As world economies improved, demand would grow. International markets were opening now; Enron had to get in fast. Opportunities were everywhere—Britain, Germany, Brazil, even the United States. There were synergies with energy and lots of opportunities for the kinds of creative financial engineering Fastow did so well. What did Skilling think of the idea? Lay asked. Baxter replied that he had spoken with Skilling and received, if not a green light, then at least a yellow. Lay was impressed; the two made a strong case. And Enron had been so successful at its other gambles, it certainly seemed like water was something to consider.

The End of Alchemy: Money, Banking and the Future of the Global Economy
by Mervyn King
Published 3 Mar 2016

Entities such as hedge funds and other bodies carrying out fund management are also sometimes described as examples of shadow banking. But since they do not issue demand deposits, the comparison with banks is much less convincing. The challenge posed by shadow banks is to ensure that institutions engaging in the alchemy of banking are regulated appropriately, and I shall return to this issue in Chapter 7. Financial engineering allows banks and shadow banks to manufacture additional assets almost without limit. This has had two consequences. First, the new instruments created are traded largely among big financial institutions and so the financial system has become enormously more interconnected. The failure of one firm causes trouble for the others.

No One Would Listen: A True Financial Thriller
by Harry Markopolos
Published 1 Mar 2010

What it didn’t tell Ocrant—what it wasn’t programmed to find—was that the numbers were fictitious. Mike called Frank when he got the analysis with the results. “It’s amazing,” he told him. “This guy has got beyond astounding returns for a guy we’ve never heard of.” Ocrant went further. At an Association of Financial Engineers conference he had heard a lecture by Andrew Weisman, who was then the chief investment officer and a board member at Nikko Securities, where he oversaw that firm’s hedge fund of funds operation, and was generally considered one of the real experts in hedge funds. He called Weisman and asked him to take a look at a return stream to see if it made sense.

Mathematical Finance: Theory, Modeling, Implementation
by Christian Fries
Published 9 Sep 2007

ISBN 0-131-00287-2. [12] H, P J.; K, J E.: Financial Derivatives in Theory and Practice. John Wiley & Sons, 2000. ISBN 0-471-96717-3. [13] G, E; H, R; J, R E.: Design Patterns. AddisonWesley Professional, 1997. ISBN 0-2-016-3361-2. [14] G, P: Monte Carlo Methods in Financial Engineering. 596 Seiten. Springer, 2003. ISBN 0-387-00451-3. [15] G̈, M; J̈, A: Finanzderivate mit MATLAB. Mathematische Modellierung und numerische Simulation. Vieweg, 2003. ISBN 3528-03204-9. [16] J̈, P: Monte Carlo Methods in Finance. 238 Seiten. John Wiley and Sons Ltd., 2002.

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined
by Lasse Heje Pedersen
Published 12 Apr 2015

Said simply, such models construct a tree of all the possible ways that the stock price can evolve, compute the convertible bond value at the end of each branch of the tree, and then work backward in the tree to compute the current value. Rather than going through the details of this calculation (which is standard financial engineering by now), let us gain some intuition for how convertible bond values depend on stock prices, as seen in figure 15.2. The dotted line shows the value of a straight bond (i.e., a bond without the convertibility option). The value of a straight bond is independent of the stock price when we assume that there is no risk of default; hence, the dotted line is horizontal.

Water: A Biography
by Giulio Boccaletti
Published 13 Sep 2021

The Madras Irrigation Canal Company, for example, was supposed to construct and maintain irrigation canals for about half a million hectares of land, but it was mostly a failure. The revenue for the project was supposed to come from selling water at a fixed government price while charging for other services, including transport. As it turned out, the financial engineering was better than the actual engineering. The planning and execution were poor, and expenditures went well over budget. Besides, the business had been predicated on a switch to wet crops like rice. Alas, that did not happen because cotton prices boomed when supply from America collapsed, due to its Civil War.

Adam Smith: Father of Economics
by Jesse Norman
Published 30 Jun 2018

In effect, it allows analysts to construct recognizable mathematical distributions of the probability of future price movements. These are then used to create the risk-allocation models that underlie banks’ balance sheets, investors’ portfolios, corporate and bond credit ratings and regulators’ rules and interventions. And out of financial analysis has come financial engineering, and so the pricing of such exotic modern instruments as derivatives, collateralized debt obligations (securities backed by mortgages or other assets) and credit default swaps (a kind of loan loss insurance). Thousands of banks and institutional investors around the world use models that rely on the workings of the Efficient Market Hypothesis every day, whether they know it or not—and so do the regulators, who also demand such models from banks and investors in order to do their work.

The Future Is Asian
by Parag Khanna
Published 5 Feb 2019

Instead of underwriting the US dollar, Asians are gaining confidence in investing in their own debt and capital markets. For decades, most Asian nations (with the notable exception of Japan) lacked sufficiently mature financial markets to absorb the region’s enormous savings, which were instead recycled into London and New York. But the financial crisis laid bare how much US banks rely on financial engineering rather than underlying fundamentals to generate growth. For their part, Europeans feel burned by their purchases of US subprime mortgage debt and are less inclined to borrow short-term US dollars only to recycle them back into US consumer debt, plus they still need to worry about their own banking sector’s solvency.

Narrative Economics: How Stories Go Viral and Drive Major Economic Events
by Robert J. Shiller
Published 14 Oct 2019

Even as information technology is affecting the transmission of economic narratives that affect the human mind, it could conceivably go further and replace some of the ultimate decision-making process that individuals use. For example, we already have robo-advisers that offer advice on how much to consume and save and how much to put into the stock market versus other investments. The first robo-adviser was launched in 1996 with William Sharpe’s Financial Engines. Since then, automated advisers such as Schwab Intelligent Portfolios, Betterment, and Wealthfront have proliferated. There are other efforts to automate economic decisions too, such as target date funds, first attracting interest around 2007, that automatically rebalance a long-term investor’s portfolio based on a target retirement date.

Limitless: The Federal Reserve Takes on a New Age of Crisis
by Jeanna Smialek
Published 27 Feb 2023

BACK TO NOTE REFERENCE 10 For instance, Chris Leonard details a huge deal Powell worked on in 2002—the takeover of Rexnord, an industrial conglomerate in Wisconsin—as one that resulted in an “immense” payoff for Powell and Carlyle but left Rexnord “crippled with debt.” He argues that the company, aiming to become more attractive to an outside buyer and work off its debt load—or at least expand profits—ended up disassembling plants and moving production and jobs to Mexico. He implies that the sort of heavy debts Rexnord shouldered, and the type of financial engineering that allows companies to keep kicking their payoff down the road, have become even more common in the years since thanks to the Fed’s bond-buying programs and low rates. Leonard 2022, 161–200. BACK TO NOTE REFERENCE 11 Smialek 2020a. BACK TO NOTE REFERENCE 12 Federal Reserve Bank of St.

When McKinsey Comes to Town: The Hidden Influence of the World's Most Powerful Consulting Firm
by Walt Bogdanich and Michael Forsythe
Published 3 Oct 2022

Skilling’s early work at Enron drew praise from four McKinsey colleagues, who in a 1999 book, Race for the World: Strategies to Build a Great Global Firm, singled out Skilling’s Enron Capital & Trade Resources, the division that carried out the securitizations. “ECT was able to hedge itself against market fluctuations and shortages through skillful financial engineering using instruments such as commodity swaps and over-the-counter options to offset the risk assumed for each agreement,” they wrote. JEDI was just one of hundreds of special purpose vehicles Fastow created at Enron, which inflated profits and hid losses, especially after he became the company’s CFO in 1998.

Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least
by Antti Ilmanen
Published 24 Feb 2022

Private Equity (Buyout) Returns Leveraged buyout funds are the largest segment of the PE market, and often the label PE is used narrowly for them. PE managers strive to create real value through active ownership and governance of firms, or what Kaplan-Stromberg (2009) call governance engineering, financial engineering, and operational engineering. Active PE managers may conceivably help transform companies (“grow the pie”), while active public equity managers arguably compete in a zero-sum game. At first blush, the long-run performance of US buyouts has been extraordinary. Their funds outperformed the S&P500 index by 2–3% annually over 30+ years, and this is after 5–6% annual all-in fees,9 and for all buyout funds – not just the top quartile.10 Gross-of-fee returns or top-quartile manager returns are even more impressive.

Seven Crashes: The Economic Crises That Shaped Globalization
by Harold James
Published 15 Jan 2023

Alexander wrote that “[t]he individual European buyer [of American goods] must be prepared to give a general mortgage upon his entire assets. His loan should be further endorsed by a consortium of banks in his own country, reinforced, where possible, by government guarantees.”75 Even with innovative financial engineering, the lack of a clear outcome to the reparations and inter-Allied debt issues created massive uncertainty for the investment community. Even if European securities were backed by legitimately valuable European assets, it was not clear that the average American investor would feel comfortable “going long” on Europe after the continent had just fought a terrible civil war and newspapers continued to report strife across the Atlantic.

Vulture Capitalism: Corporate Crimes, Backdoor Bailouts, and the Death of Freedom
by Grace Blakeley
Published 11 Mar 2024

This period ended with the neoliberal revolution, when domestic and international shifts led to the defeat of formerly powerful labor unions. Within Ford, thousands of workers were laid off and, as international competitive pressure mounted, the company’s profitability came to hinge on lending and financial engineering rather than production itself. Ultimately, Ford was bailed out by the US federal state when its irresponsible lending left it under a mountain of debt. The neoliberals claimed that their policies were designed to protect and promote human freedom by ending the centralized planning of the postwar years.

The Man Who Knew: The Life and Times of Alan Greenspan
by Sebastian Mallaby
Published 10 Oct 2016

Once currencies began to fluctuate, for example, exporters feared a dollar appreciation that would make their goods uncompetitive; importers feared a dollar decline that would push their costs up. Currency derivatives offered exporters and importers a way to meet in the futures market and cancel out each other’s risks—far from rendering the world unstable, financial engineering promised to make it safer. In similar fashion, the securitization of mortgages allowed risks to be dispersed among thousands of investors; swaps and options, while dangerous if abused, had the same risk-spreading propensity. And when it came to managing the attendant perils, it seemed reasonable to bet that banks and investment houses would do better than regulators who operated at one or two removes.

…

The first casualty of the Lehman fallout was Merrill Lynch, America’s best-known stockbroker, which was also staggering under the weight of disastrous subprime investments. A few hours after Lehman was denied government help, Merrill sold itself hastily to Bank of America in order to avoid bankruptcy. The next day, Tuesday, September 16, the panic spread to the giant insurer American International Group (AIG), where a financial-engineering unit had accumulated enough derivatives exposure to bring the company to its knees—again, counterparty surveillance had done nothing to prevent it from gambling recklessly. If AIG defaulted on its swap contracts, the knock-on effects would bring several other Wall Street houses down. This time the Fed mounted an emergency rescue, pumping in a loan of $85 billion and seizing ownership of four fifths of the company.

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance
by Ron Chernow
Published 1 Jan 1990

At this point, investment banking still functioned according to a textbook model in which capital was tapped for investment, not financial manipulation. Investment bankers were still intermediaries between providers and users of capital, and they considered it unprofessional to function as the “principal” in a transaction. The age of financial engineering hadn’t yet dawned. Morgan Stanley’s monopoly of so much of America’s industry made the firm far less adventurous than J. P. Morgan and Company in exploring foreign markets. In the early postwar years, its few foreign financings had a distinctly Anglo-Saxon or European bias. It sponsored large issues for Australia and Canada, smaller ones for France and Italy.

…

Warburg also saw that merchant banks no longer had the capital to finance industry or government on a large scale. In the advisory area, by contrast, small capital was no handicap. “In the sense that bankers provide money for industry, they’re becoming less important,” he said; “but in the sense of being consultants—what I call ’financial engineers’—they’re becoming much more important.”45 This was the critical insight of the Casino Age, the idea that would push merchant bankers from the staid world of securities issues into the piratical world of takeovers. The merchant bankers would no longer hand out free merger advice to preserve underwriting relationships.

The Last Tycoons: The Secret History of Lazard Frères & Co.
by William D. Cohan
Published 25 Dec 2015

Lazard's part in the sale of Levitt to ITT, which began in 1966 and closed in 1968, illustrates the nuanced role an M&A adviser often plays in a CEO's most important decisions. It was then especially true, and remains so, a world of social salons and clubby relationships where the best bankers are as much armchair psychiatrists as financial engineers. No one was better at mixing and serving as fine a cocktail of these subtleties than Felix Rohatyn. Equally fascinating, though, was how little Felix appeared to know about what Levitt actually did before going into the assignment's kickoff meeting with Joel Carr, the general counsel of Levitt, even though, because it was a public company, any number of financial reports would have been available to him.

…

Sometimes it's getting more and more difficult for me to do the things we do, because in the last analysis, I don't think that's what I want on my tombstone." What he did want on his tombstone, of course--former U.S. secretary of the Treasury--was also a topic of discussion between Felix and his muse. "This is my time," he told McClintick when asked about his interest in a cabinet position. "There's going to be an enormous amount of financial engineering required to redo the national and international financial systems that have grown out of control and are going to have to be put back together. It won't necessarily be me, and I truly don't yearn for it, but it'll be people like me"--and then he made his pitch. "There are going to have to be people involved in public policy who understand financial structures, and who understand the relationship between financial structures and the real world.

Gamers at Work: Stories Behind the Games People Play
by Morgan Ramsay and Peter Molyneux
Published 28 Jul 2011

We had no cash, and we were literally working from hand to mouth, even though our sales were going through the roof. At the end of our first year, we had done $3.5 million in sales on 3,000 units with roughly 200 employees on $500 paid in capital. Now, I’m really proud of that. Many people have asked me, “What are you the most proud of?” I’ve said, “It wasn’t the design. It was the financial engineering that we had to go through to just keep all the wheels on.” Ramsay: How did you produce 3,000 units in 1972 on $500 in capital? Bushnell: That was the trick. You basically took the money that you earned and put it back into inventory. If you do the math quickly—let’s just do it in tens to make it easy—those ten turned into $9,000, which turned into thirty, which turned into… and so on up.

The Age of Spiritual Machines: When Computers Exceed Human Intelligence
by Ray Kurzweil
Published 31 Dec 1998

Lake Research: <http://www.brainresearch.com/> Applications of brain research: <http://www.brainresearch.com/apps.html> Amiram Grinvald’s web site: Imaging the Brain in Action: <http://www.weizmann.ac.il/brain/grinvald/grinvald.htm> The Harvard Brain Tissue Resource Center: <http://www.brainbank.mclean.org:8080> The McLean Hospital Brain Imaging Center: <http://www.mclean.org:8080/> Optical Imaging, Inc., Home Page: <http://opt-imaging.com/> Research Imaging Center: Solving the Mysteries of the Mind, University of Texas Health Science Center at San Antonio: <http://biad63.uthscsa.edu/> Visualization and Analysis of 3D Functional Brain Images, by Finn A rup Nielsen, Institute of Mathematical Modeling, Section for Digital Signal Processing, former Electronics Institute, Technical University of Denmark: <http://hendrix.ei.dtu.dk/staff/students/fnielsen/thesis/finn/finn.html> Weizmann Institute of Science: <http://www.weizmann.ac.il/> The Whole Brain Atlas: <http://www.med.harvard.edu/AANLIB/home.html> COMPUTER BUSINESS/MEDICAL APPLICATIONS Automated Highway System DEMO; National AHS Consortium Home Page: <http://monolith-mis.com/ahs/default.htm> Biometric (The Face Recognition Home Page): <http://cherry.kist.re.kr/center/html/sites.html> Face Recognition Homepage: <http://www.cs.rug.nl/~peterkr/FACE/face.html> The Intelligent Vehicle Initiative: Advancing “Human-Centered” Smart Vehicles: <http://www.tfhrc.gov/pubrds/pr97-10/p18.htm> Kurzweil Educational Systems, Inc.: <http://www.kurzweiledu.com/> Kurzweil Music (Welcome to Kurzweil Music Systems): <http://www.youngchang.com/kurzweil/index.html> Laboratory for Financial Engineering at MIT: <http://web.mit.edu/lfe/www/> Lernout & Hauspie Speech Products: <http://www.lhs.com/> Medical Symptoms Matching Software: <http://www.ozemail.com.au/~lisadev/sftdocpu.htm> Miros Company Information: <http://www.miros.com/About_Miros.htm> Synaptics, Inc.: <http://www.synaptics.com/> Systran: <http://www.systransoft.com/> COMPUTERS AND ART/CREATIVITY Arachnaut’s Lair - Electronic Music Links: <http://www.arachnaut.org/music/links.html> ArtSpace: Computer Generated Art: <http://www.uni.uiuc.edu/~artspace/compgen.html> BRUTUS. 1 Story Generator: <http://www.rpi.edu/dept/ppcs/BRUTUS/brutus.html> But Is It Computer Art?

Civilization: The West and the Rest
by Niall Ferguson
Published 28 Feb 2011

In a series of articles and lectures beginning in mid-2006 and culminating in the publication of The Ascent of Money in November 2008 – when the financial crisis was at its worst – I argued that all the major components of the international financial system had been disastrously weakened by excessive short-term indebtedness on the balance sheets of banks, grossly mispriced and literally overrated mortgage-backed securities and other structured financial products, excessively lax monetary policy on the part of the Federal Reserve, a politically engineered housing bubble and, finally, the unrestrained selling of bogus insurance policies (known as derivatives), offering fake protection against unknowable uncertainties, as opposed to quantifiable risks. The globalization of financial institutions that were of Western origin had been supposed to usher in a new era of reduced economic volatility. It took historical knowledge to foresee how an old-fashioned liquidity crisis might bring the whole shaky edifice of leveraged financial engineering crashing to the ground. The danger of a second Depression receded after the summer of 2009, though it did not altogether disappear. But the world had nevertheless changed. The breathtaking collapse in global trade caused by the financial crisis, as credit to finance imports and exports suddenly dried up, might have been expected to devastate the big Asian economies, reliant as they were said to be on exports to the West.

Atlantic: Great Sea Battles, Heroic Discoveries, Titanic Storms & a Vast Ocean of a Million Stories
by Simon Winchester
Published 27 Oct 2009

The use of the word to describe the South Atlantic is thus a means of calling it the “African Ocean.” 18 Hydrographers—“droggies” in the naval vernacular—are usually seagoing science types, by no means a patrician group. But in Monaco, thanks to Prince Albert’s munificence, they work cheek by jowl with those who are, or wish to be, patricians. Fellow academics at the local university, for instance, teach courses in such subjects as Wealth Management, Hedge Funds, Financial Engineering, and the Science of Luxury Goods and Services, while the droggies deal with lighthouses, buoys, and dredging. 19 There are also some highly unfamiliar capes and headlands used to delineate certain of these seas, of which northern Russia’s Cape Vagina presents many sailors with particular frisson. 20 Sands from the hammada around Bojador are blown as far away as Brazil, where they settle on and help fertilize the alluvial Amazon soils.

Principles: Life and Work
by Ray Dalio
Published 18 Sep 2017

He had been trying to come up with a way to hedge himself against this risk without reducing his expected return. Rusty’s fax arrived on a Friday afternoon and we leaped into action. Getting a client this prestigious and innovative would make a big difference to us. We knew we could do a uniquely great job for Kodak, because we knew a lot about bonds and financial engineering, and we had a historical perspective unmatched in the industry. Bob Prince, Dan Bernstein, and I worked nonstop through the weekend, analyzing the Kodak portfolio and the strategy Rusty was considering. Then we wrote him a long memo laying out our thoughts. Just as I had deconstructed the business of a chicken producer in the 1970s and many other companies since, we broke down Kodak’s pension fund into its constituent parts to better understand the “machine.”

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right
by Philippe Legrain
Published 22 Apr 2014

In the pre-crisis years, it plodded on, outshone by fizzier growth in Britain and southern Europe. But after the crisis struck, it suddenly seemed like a success. Bouncing back quickly from the post-Lehman collapse, its economy grew by 8 per cent in two years.453 With the West laid low by flashy but ultimately fragile financial engineering, a country renowned for its stable and solid industrial engineering looked like a winner. While others had built a house of cards based on debt, Germany had prudently saved. Whereas most of Europe seemed ill-equipped for a new world of global competition with China, German exports to the Middle Kingdom were booming.

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt
by Kwasi Kwarteng
Published 12 May 2014

Fugger openly boasted of his influence, declaring in a letter to Charles in April 1523 that ‘[it] is publicly notorious and clear as the day that, had it not been for me, you would not have been able to obtain the Roman crown’.34 Unlike modern government bonds, which are open to the public to buy, the loans which the Fuggers gave Charles derived largely from their own personal fortunes. The sale of Spanish government debt (juros) to a wider public did not begin until the 1540s when officials discovered that merchants trading at the great fairs of Antwerp and Lyons were eager to buy shares in government loans.35 A further problem of financial engineering arose from the desire of the Spanish soldiers on campaign to be paid in gold coins. As already remarked, the influx of silver from the New World was far more significant than that of gold, and consequently it was an important task of the bankers to convert the silver into gold. This was done efficiently, and it is likely that the Genoese bankers, in the service of the Spanish Crown, used American silver to purchase existing stocks of European gold coin.36 American silver would find its way to the Spanish Netherlands which acted as a ‘distribution centre from which . . .

Why We Can't Afford the Rich
by Andrew Sayer
Published 6 Nov 2014

The phenomenon of speculators keeping their gains while offloading any losses onto others has been a key feature of the crisis. ‘Debt’ or ‘leverage’? While the word ‘debt’ has a negative ring to it, the word ‘leverage’ is positive; indeed it is now often used as a verb, as we leverage our assets in order to reach for the stars. Forgetting that Archimedes’ lever had a purchase point, the financial engineers aspire to move the world without securing the land on which they stand. (Robin Blackburn, 2008)131 So what’s the overall verdict on these practices? Considered on its own, hedging seems prudent, but it is closely coupled with speculation, whose benefits are more ambiguous. The same goes for a host of financial instruments and practices.

All the Money in the World
by Peter W. Bernstein
Published 17 Dec 2008

“Eddie Lampert has not turned around76 Sears and Kmart, just as he did not turn around AutoZone for the long run,” Pearlstein writes. “He cut costs, reduced service, disinvested and got a few good years of operating results out of it. And why should we be surprised? He is not an experienced operator—he’s a financial engineer, and a damn good one. Eddie Lampert may fancy himself as the next Warren Buffett, but he’s got a long way to go to prove it…. So far, all he is is a Wall Street sharpie along the lines of Carl Icahn.” Maybe so, but a very rich one. Lampert (number 67 on the 2006 Forbes list, with a net worth of $3.8 billion) earned $1.3 billion in 2006 and claims a 28 percent average return, compounded since 1988, according to Institutional Investor, which is slightly more than Buffett’s in Berkshire Hathaway.

Accelerando
by Stross, Charles
Published 22 Jan 2005

"Not according to his second wife's latest incarnation." Funding the family reunion isn't going to be a problem, as Amber discovers when she receives an offer of reincarnation good for all the passengers and crew of the Field Circus. She isn't sure quite where the money is coming from. Presumably it's some creaky financial engine designed by Dad, stirring from its bear-market bunker for the first time in decades to suck dusty syndication feeds and liquidate long-term assets held against her return. She's duly grateful – even fervently so – for the details of her own impecunious position grow more depressing the more she learns about them.

The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History
by Kirsten Grind
Published 11 Jun 2012

The story of its final, brutal collapse in the autumn of 2008, and its controversial sale to JPMorgan Chase, is an astonishing account of how one bank lost itself to greed and mismanagement, and how the entire financial industry—and even the entire country—lost its way as well. Kirsten Grind’s The Lost Bank is a magisterial and gripping account of these events, tracing the cultural shifts, the cockamamie financial engineering, and the hubris and avarice that made this incredible story possible. The men and women who become the central players in this tragedy—the regulators and the bankers, the home buyers and the lenders, the number crunchers and the shareholders—are heroes and villains, perpetrators and victims, often switching roles with one another as the drama unfolds.

Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley
by Antonio Garcia Martinez
Published 27 Jun 2016

* A version of this quote was engraved on the bronze facade of the Moody’s building in downtown Manhattan. Moody’s was one of the credit rating agencies whose incompetence or illicit collusion with banks was partially responsible for the credit crisis. * “Quant” is short for some flavor of quantitative analyst or quantitative trader. These are the financial engineers who recycle the mathematics of fluid mechanics or probability for the world of filthy lucre. They absolutely litter Wall Street now, and some areas of finance, like the hyperfast world of high-frequency trading, couldn’t exist without them. The most authentic view of their world was penned by a founder of the Goldman Strategies team, Emanuel Derman, in his classic My Life as a Quant

More: The 10,000-Year Rise of the World Economy
by Philip Coggan
Published 6 Feb 2020

The idea was to relieve the pressure on the indebted French monarchy. The bank then assumed the national debt, and investors were persuaded to swap their government debt for shares in the Mississippi Company, which would exploit France’s American possessions. This was an early example of financial engineering. Shares in the Mississippi Company soared; the word “millionaire” was coined in the process. John Law was the toast of French society. A key element of his plan was that the shares could be bought in instalments, so a large sum could initially be bought with a small stake. But every time an instalment became due, the bubble was tested; people had to be confident enough to pay over more of their own money.

Capitalism in America: A History
by Adrian Wooldridge and Alan Greenspan
Published 15 Oct 2018

In March 1955, Dwight Eisenhower stated matter-of-factly that the United States might employ nuclear weapons “as you use a bullet or anything else.”10 In 1962, during the standoff over Russia’s deployment of nuclear weapons in Cuba, the world came as close to Armageddon as it ever has, with John Kennedy personally calculating the chances of nuclear war at about 25 percent. Still, the cold war also added some discipline to a society that could have been lost in affluence. If the best and brightest went into social activism in the 1960s, and financial engineering in the 1990s, they went into the Pentagon and the CIA in the 1950s. FROM BRAWN TO BRAIN The America that emerged from the Second World War was still overwhelmingly a manufacturing economy—a place where people made things that you could touch rather than simply dealt in bits and bytes, and where blue-collar workers were honored rather than regarded as leftovers from a bygone era.

How Money Became Dangerous
by Christopher Varelas
Published 15 Oct 2019

As we were wrapping up our work in 1996, Justin found that the county’s new finance team was starting to pursue another risky strategy, pension obligation bonds—the same instrument that Lehman Brothers would later push on Stockton right before the market collapse of 2008. This was a similar sort of financial engineering to what Citron had done with the county’s money in the first place, and it was one of only two legal loopholes that would allow the county to borrow money without a public vote, funds that could then be used once again to make large, inappropriate investments. “The county had an underfunded pension system,” Justin said, “so basically they borrowed money, and then that money was invested to pay the pension obligations.

The Rise and Fall of the Neoliberal Order: America and the World in the Free Market Era
by Gary Gerstle
Published 14 Oct 2022

Hence, it would be best, market evangelists argued, if governments would just get out of the way. Glass-Steagall had been a necessary part of Democratic politics earlier in the century, but it was no longer needed. Indeed, it was doing more to impede rather than to encourage economic growth. Banking “modernization” was not only still desirable but essential. A new discipline, financial engineering, attracted many of the best and brightest at America’s top universities. By the 1990s, they were flooding into Wall Street, intrigued by the challenge of designing complex financial instruments, on the one hand, and by the opportunity to pursue big paydays, on the other.78 All these forces converged to produce what many scholars have labeled the “financialization” of the economy, manifest in the size, wealth, and power of investment houses and brokerage firms, now seen as the principal drivers of capital generation, innovation, and profit.79 Plans for reform developed more slowly than with telecommunications; there was more resistance to be overcome, especially in light of the 1980s savings-and-loan debacle.

Engineers of Dreams: Great Bridge Builders and the Spanning of America
by Henry Petroski
Published 2 Jan 1995

According to Steinman’s biographer Ratigan—a World War II correspondent and a writer of “stories and adventure serials”—when Ammann returned from Switzerland he reportedly persuaded Lindenthal to curtail his rival’s articles, although the impending consolidation of the journal with Engineering News may have been a less insidious factor. In any case, there was clearly a lot more than technical know-how to being a successful engineer—and to letting the world know about it. Lindenthal reportedly called the younger engineer into his office one day and told him, “Steinman, bridge engineering is easy. It is the financial engineering that is hard.” A major part of Lindenthal’s complaint, which no doubt centered on his continuing frustrations in finding backers for his Hudson River Bridge proposal, was that bankers added millions of dollars in financing costs to bridges after “engineers had sweated and strained to secure the most economical design.”

Beautiful Architecture: Leading Thinkers Reveal the Hidden Beauty in Software Design
by Diomidis Spinellis and Georgios Gousios
Published 30 Dec 2008

Available at http://se.ethz.ch/∼meyer/publications/lncs/events.pdf. Meyer, Bertrand. 2008. Touch of Class: An Introduction to Programming Well. New York, NY: Springer-Verlag. See http://touch.ethz.ch. Peyton Jones, Simon, Jean-Marc Eber, and Julian Seward. 2000. “Composing contracts: An adventure in financial engineering.” Functional pearl, in ACM SIGPLAN International Conference on Functional Programming (ICFP ’00), Montreal, Canada, September ’00. ACM Press, pp. 280–292. Available at http://citeseer.ist.psu.edu/jones00composing.html. Peyton Jones, Simon, and Philip Wadler. 1993. “Imperative functional programming.”

Who Stole the American Dream?
by Hedrick Smith
Published 10 Sep 2012

Its purpose was to separate commercial banking from investment banking. The law walled off the dull but vital business of safe, reliable banks, where consumers could put their savings and their checking accounts, from the risky business of investment banks engaged in mergers and acquisitions, “financial engineering,” marketing derivatives, and playing the market with company assets for their own profit. But by the 1980s, Wall Street banks chafed at any limitation on their operations. They wanted total deregulation. Investment bankers like Rubin began a drumbeat for tearing down the Glass-Steagall wall.

Analysis of Financial Time Series
by Ruey S. Tsay
Published 14 Oct 2001

Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212) 850-6011, fax (212) 850-6008. E-Mail: PERMREQ@WILEY.COM. For ordering and customer service, call 1-800-CALL-WILEY. Library of Congress Cataloging-in-Publication Data Tsay, Ruey S., 1951– Analysis of financial time series / Ruey S. Tsay. p. cm. — (Wiley series in probability and statistics. Financial engineering section) “A Wiley-Interscience publication.” Includes bibliographical references and index. ISBN 0-471-41544-8 (cloth : alk. paper) 1. Time-series analysis. 2. Econometrics. 3. Risk management. I. Title. II. Series. HA30.3 T76 2001 332 .01 5195—dc21 2001026944 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 To my parents and Teresa Contents 1.

The Alchemists: Three Central Bankers and a World on Fire
by Neil Irwin
Published 4 Apr 2013

The market value of the land in Chiyoda, a Tokyo district with thirty-nine thousand residents in 1990, was equal to that of all the land in Canada, home to twenty-eight million. Rents for residential space in Tokyo were four times higher than in New York City—and the price of residential land was a hundred times higher. The run-up in prices was a classic case of credit-fueled mania, facilitated by some financial engineering, or zaitech, as its Japanese variant came to be called. The savings of an increasingly prosperous nation, one running trade surpluses with the rest of the world, was channeled into Japanese banks. Those banks, in turn, lent to anyone who planned to buy land, which served as collateral. After all, land prices had always gone up in modern Japan.

The Unwinding: An Inner History of the New America
by George Packer
Published 4 Mar 2014

As for Perriello, meeting Dean Price confirmed something that he had come to believe over the past few years and had made a tenet of his campaign: the elites in America didn’t have answers for the problems of the working and middle class anymore. Elites thought that everyone needed to become a computer programmer or a financial engineer, that there would be no jobs between eight dollars an hour and six figures. Perriello believed that the new ideas for making things in America again would come from unknown people in obscure places. Two months later, in early April, Perriello visited the Red Birch refinery with the governor of Virginia, Tim Kaine, and an entourage of local officials and aides and reporters.

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It
by Anat Admati and Martin Hellwig
Published 15 Feb 2013

The investment went from a money-like short-term debt commitment that the money market mutual fund made to the investor to houses that would likely last a few decades. Moreover, the mortgage-related securities ended up being held by banks, and again these investments were funded by short-term debt.42 If one believes that the role of banking is to “produce liquid debt,” one will marvel at the wonders of financial engineering that have made it possible to transform trillions of dollars of the money-like debts of banks and financial institutions into housing and real estate investments.43 If instead one is concerned about having a safe and healthy financial system, one may wonder about the risks that might arise from so much maturity transformation.

Bernie Madoff, the Wizard of Lies: Inside the Infamous $65 Billion Swindle
by Diana B. Henriques
Published 1 Aug 2011

The S&P 500 index had almost regained the ground it lost after the tech-stock collapse in 2000. Even the battered NASDAQ composite index was back where it had been in January 1999, before the last puff of air went into the Internet bubble. Financial deregulation still looked like an excellent idea. So did all the creative financial engineering that produced the Fairfield Sentry derivative notes and the countless other complicated derivatives that were being embraced by institutional investors everywhere. So it appeared that Madoff had guessed correctly when he raised his rates, and his gamble paid off. Investors were still more interested in high profits than in safety.

The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society
by Binyamin Appelbaum
Published 4 Sep 2019

But derivatives can also be used to amplify risk. An investor, for example, can promise to deliver grain they don’t own, betting that they will be able to buy the promised grain at a lower price than the price at which they have agreed to sell it. As financial deregulation opened new markets, and created new risks, financial engineers created new kinds of derivatives — as insurance against those risks and as new opportunities for gambling. The deregulation of exchange rates in the mid-1970s triggered the first big boom. The deregulation of interest rates in the 1980s triggered a second boom. Both paled in comparison to the wave that began in the early 1990s, when clever bankers popularized credit derivatives, which let investors bet on the possibility that borrowers would fail to repay debts.16 The market for credit derivatives proved to be huge.

Alpha Trader
by Brent Donnelly
Published 11 May 2021

I am not a computational finance or applied math expert, so I like to keep things as simple as possible. I come up with a theory, and then I test it. I don’t tweak the parameters or snoop around until I find something useful. I just go in, test, and get out. While a full course in backtesting is beyond the scope of this book, you don’t need a degree in financial engineering to conduct basic backtests of patterns you identify and ideas you come up with. When testing your hypothesis, be aware of a few things: 1. The law of small numbers. You need a decent sample of observations for your analysis to mean anything. If you see that TSLA stock went down the last four Aprils in a row, that’s meaningless.

Aerotropolis
by John D. Kasarda and Greg Lindsay
Published 2 Jan 2009

Is it realistic to expect them to rebuild India from the ground up? “I don’t think the government is asking too much,” Rao said. “The public side has the capabilities—the technical capabilities—but the speed is not there. We are bringing the speed, as well as the best technology, the best financial engineering, and the best talent in the world.” Patel believed him, and so did the bureaucracy, which tripped all over itself in its rush to place an aerotropolis in every backwater. Expectations raged so out of control that Kasarda found himself writing editorials in the Indian press encouraging everyone to calm down—not everybody can be a Hyderabad or a Delhi.

Antifragile: Things That Gain From Disorder
by Nassim Nicholas Taleb
Published 27 Nov 2012

The first heuristic addresses the asymmetry in rewards and punishment, or transfer of fragility between individuals. Ralph Nader has a simple rule: people voting for war need to have at least one descendant (child or grandchild) exposed to combat. For the Romans, engineers needed to spend some time under the bridge they built—something that should be required of financial engineers today. The English went further and had the families of the engineers spend time with them under the bridge after it was built. To me, every opinion maker needs to have “skin in the game” in the event of harm caused by reliance on his information or opinion (not having such persons as, say, the people who helped cause the criminal Iraq invasion come out of it completely unscathed).

Termites of the State: Why Complexity Leads to Inequality
by Vito Tanzi
Published 28 Dec 2017

The difference, which had been sharp in the past, between real investment and financial investment has largely disappeared in recent years. In Excessive Government Withdrawal 107 the financial market, the identification of creditors (savers in the past) and debtors (investors in the past) became vague, because of increasingly complex financial engineering maneuvers that at times made it difficult to distinguish creditors from debtors. In some cases the same individuals or the same enterprise was on both sides of a financial transaction. Because of the growing use of “rocket scientists” and other individuals with sharp quantitative skills, the financial instruments became progressively more complex and more difficult to understand, even for some of the managers of the financial enterprises in which the new instruments were created.

Money and Government: The Past and Future of Economics
by Robert Skidelsky
Published 13 Nov 2018

When the crisis hit, uncertainty about the value of these products and the level of entanglement between different financial institutions brought the entire sector to its knees. V. F i n a nc i a l I n novat ion The rise in embedded leverage was made possible by securitization. Securitization Securitization is the generic name for the use of financial engineering to transform illiquid assets into liquid securities. It is the process of bundling together illiquid assets such as car loans, student loans, credit card debt, mortgages and so on to form ‘asset-backed securities’ (ABSs) which are then sold to various investors for ‘cash’. All of these assets have in common the fact that they are associated with a cash flow – borrowers have to repay the loan which backs the security to the security’s buyer.

Unreal Estate: Money, Ambition, and the Lust for Land in Los Angeles
by Michael Gross
Published 1 Nov 2011

But he was out and IOS was in play, and a cast of contestants ranging from eminent bankers to the sleaziest financiers circled the wounded animal, attracted by the scent of money, for despite all the problems and all the redemptions—effectively a run on IOS by its depositors—there was still at least $1 billion left inside. The ultimate victor was Robert Vesco, an engineer (he designed the first aluminum grille for an Oldsmobile) turned financial engineer, whose International Controls Corp. offered IOS financing in exchange for control of the company. He thought it was worth $2.8 billion. Cornfeld sued, spewed venom at his former colleagues, and barricaded himself in his Geneva villa—all in vain. The Fund of Funds, the operation that had made IOS famous, suspended redemptions on most of its remaining assets.

Barbarians at the Gate: The Fall of RJR Nabisco
by Bryan Burrough and John Helyar
Published 1 Jan 1990

In the middle of negotiations, Peter Cohen had pulled a gun and sprayed the room with bullets. How do you negotiate with people like that? “You’ve made your bid,” Kravis told Jim Robinson’s wife. “You’re on your own at this point.” Financial studies were Frank Benevento’s life. As a consultant to Johnson and Sage, Benevento loved to use terms such as financial engineering to describe his number crunching. Lately Benevento had been busy studying the fee structures of major Wall Street advisers. On Thursday afternoon he walked into Johnson’s office with the results of his latest study. According to the percentile fees currently prevailing on Wall Street, and in light of the tremendous fees being paid the investment bankers and lawyers in this deal, Benevento said, he had compiled his own bill.

The Innovators: How a Group of Inventors, Hackers, Geniuses and Geeks Created the Digital Revolution
by Walter Isaacson
Published 6 Oct 2014

Nolan Bushnell scored a trifecta when he was twenty-nine, which is why he, rather than Bill Pitts, Hugh Tuck, Bill Nutting, or Ralph Baer, goes down in history as the innovator who launched the video game industry. “I am proud of the way we were able to engineer Pong, but I’m even more proud of the way I figured out and financially engineered the business,” he said. “Engineering the game was easy. Growing the company without money was hard.”28 J. C. R. Licklider (1915–90). Bob Taylor (1932– ). Larry Roberts (1937– ). CHAPTER SEVEN THE INTERNET VANNEVAR BUSH’S TRIANGLE Innovations often bear the imprint of the organizations that created them.

Switzerland
by Damien Simonis , Sarah Johnstone and Nicola Williams
Published 31 May 2006

See the terms and conditions on our site for a longer way of saying the above - ‘Do the right thing with our content.’ © Lonely Planet Publications 194 www.lonelyplanet.com ORIENTATION Zürich Contemporary Zürich might still be home to the world’s fourth-biggest stock exchange and remain Switzerland’s financial engine, but it’s also (whisper it softly) surprisingly vibrant and trendy. Located on a picturesque river and lake whose water you can drink, easy to get around and a stranger to the hassled lifestyle that defines bigger cities, this affluent, fashion-conscious place enjoys the finest things in life.

I Want My MTV: The Uncensored Story of the Music Video Revolution
by Craig Marks and Rob Tannenbaum
Published 19 Sep 2011

TOM FRESTON: Viacom was not a major player back then. It was run by Terry Elkes and Ken Gorman, and they owned a few TV stations and cable systems, some radio stations. Their big asset was a syndication company that distributed The Cosby Show. Terry and Ken were smart guys, but they were more the financial engineering types. They had a reputation for being very cheap. It would be impossible for them to look at a business and not think there was a lot of fat to be trimmed. When they saw that Bob had two assistants, they said, “Two assistants is not the Viacom way of doing things. We’re a one-assistant or a split-assistant company.”

The Irrational Bundle
by Dan Ariely
Published 3 Apr 2013

Moreover, you aren’t dealing with real cash; you are only playing with numbers that are many steps removed from cash. Their abstractness allows you to view your actions more as a game, and not as something that actually affects people’s homes, livelihoods, and retirement accounts. You are also not alone. You realize that the smart financial engineers in the offices next to yours are behaving more or less the same way as you and when you compare your evaluations to theirs, you realize that a few of your coworkers have chosen even more extreme values than yours. Believing that you are a rational creature, and believing that the market is always correct, you are even more inclined to accept what you’re doing—and what everyone else is doing (we’ll learn more about this in chapter 8)—as the right way to go.

Security Analysis
by Benjamin Graham and David Dodd
Published 1 Jan 1962

Yet, as Graham and Dodd noted, “Objective tests of managerial ability are few and far from scientific.” (p. 84) Make no mistake about it: a management’s acumen, foresight, integrity, and motivation all make a huge difference in shareholder returns. In the present era of aggressive corporate financial engineering, managers have many levers at their disposal to positively impact returns, including share repurchases, prudent use of leverage, and a valuation-based approach to acquisitions. Managers who are unwilling to make shareholder-friendly decisions risk their companies becoming perceived as “value traps”: inexpensively valued, but ultimately poor investments, because the assets are underutilized.

Power at Ground Zero: Politics, Money, and the Remaking of Lower Manhattan
by Lynne B. Sagalyn
Published 8 Sep 2016

“Even though the Port Authority missed the dates, it moved more rapidly than might have been the case,” Pinsky told me in 2011; “the Port Authority had to get to the timelines.” Shorris considered the missed-dates penalty approach embedded in the MDA naïve. “The situation is bigger and more complex than the sophisticated financial engineering structure can handle. There are many ways out of the situation without going to court,” he said referring to the arbitration that resulted, but “the financing engineering set up pressures.”28 From the authority’s perspective, the financial net effect of this $14.4 million penalty—$4.4 million, after taking into account the $10 million incentive payment the authority did not have to pay the contractors for finishing on time—was relatively minor considering the total 6.7-acre excavation job tagged at $250 million; the daily cost of the $300,000 a day in liquidated damages was also nearly canceled out by the $215,726 a day in rent the developer was paying the Port Authority (out of insurance proceeds).