The Ascent of Money_ A Financial History Part 13

ai The original 1986 advertis.e.m.e.nt was photographed by David Bailey with the actor Roger Moore's daughter Deborah as the improbably alluring Scottish Widow.

aj Friedman noted in 1988 that he had given much the same advice on inflation to the Chinese government, yet found that he received no 'avalanche of protests for [his] having been willing to give advice to so evil a government', despite the fact that it 'has been and still is more repressive than the Chilean military junta'.

ak That is to say, the notional amount outstanding if all derivatives paid out is roughly four and a half times the contracts' estimated market value.

al Arousing expectations which it may be impossible to fulfil. The fifteen-fold increase of house prices in England between 1975 and 2006 has put home owners.h.i.+p out of reach for nearly all those first-time buyers who cannot get financial a.s.sistance from their parents.

am Ireland leads the field with 83 per cent of households owning their own homes, followed by Australia and the United Kingdom (both 69 per cent), Canada (67 per cent) and the United States (65 per cent). The figure for j.a.pan is 60 per cent, for France 54 per cent and for Germany 43 per cent. Note, however, that these figures are for 2000. Since then, the figure for the United States has risen to above 68 per cent. Note also the regional variation: Midwesterners and Southerners are significantly more likely to own their own homes (72 per cent do) than people living in the West and the Northeast. Housing is more affordable in the Midwest and South. 78 per cent of West Virginians own their own homes; just 46 per cent of New Yorkers do.

an 'Life is always uncertain, Miss Demolines.'

'You're quizzing now, I know. But don't you feel now, really, that City money is always very chancy? It comes and goes so quick.'

'As regards the going, I think that's the same with all money,' said Johnny.

'Not with land, or the funds. Mamma has every s.h.i.+lling laid out in a first-cla.s.s mortgage on land at four per cent. That does make one feel so secure! The land can't run away.' (Ch. 25) ao Today, around 37 million American individuals and couples claim the deduction on mortgages of up to $1,000,000, at a cost of $76 billion to the US Treasury.

ap The crucial legislation was the Depository Inst.i.tutions Deregulation and Monetary Control Act of 1980 and the Garn-St Germain Depository Inst.i.tutions Act of 1982.

aq The most notorious case was that of Charles Keating, whose Lincoln Savings and Loan in Irvine, California, received support from five Senators, among them John McCain, when it came under pressure from the Federal Home Loan Bank. McCain had previously accepted political contributions from Keating but was cleared of acting improperly by the Senate Ethics Committee.

ar At the end of 2006 the GSEs held the largest share of mortgages, amounting to 30 per cent of the total debt outstanding. Commercial banks held 22 per cent; residential mortgage-backed securities (RMBS), CDOs and other a.s.set-backed securities accounted for 14 per cent of the total; savings inst.i.tutions for 13 per cent; state and local governments for 8 per cent of the total; and life insurance companies for 6 per cent. Individuals held the rest.

as In the long-standing argument I have had with my wife about the unwisdom of a large-scale leveraged play on the UK property market (her favoured financial strategy), she therefore emerges as the winner on the a.s.sumption that I would have preferred to live in rented university accommodation and played the UK stock market. The optimal strategy would of course have been to own a diversified portfolio of real estate and global stocks, financed with a moderate amount of leverage.

at Between 1997 and 2006, US consumers withdrew an estimated $9 trillion in cash from the equity in their homes. By the first quarter of 2006 home equity extraction accounted for nearly 10 per cent of disposable personal income.

au It is an important feature of American law that in many states (though not all) mortgages are generally 'no recourse' loans, meaning that when there is a default the mortgage lender can only collect the value of the property and cannot seize other property (e.g. a car or money in the bank) or put a lien on future wages. According to some economists, this gives borrowers a strong incentive to default.

av One of which gloried in the name High-Grade Structured Credit Strategies Enhanced Leverage Fund.

aw Few dissented when the International Monetary Fund called it 'the largest financial shock since the Great Depression'.

ax Events subsequent to this writing have indeed borne this out.

ay So impressed have Bill and Melinda Gates been by Pro Mujer that their Foundation is giving the organization $3.1 million.

az The term 'emerging markets' was first used in the 1980s by the World Bank economist Antoine van Agtmael.

ba The total amount disbursed under the Marshall Plan was equivalent to roughly 5.4 per cent of US gross national product in the year of General George Marshall's seminal speech, or 1.1 per cent spread over the whole period of the programme, which dated from April 1948, when the Foreign a.s.sistance Act was pa.s.sed, to June 1952, when the last payment was made. If there had been a Marshall Plan between 2003 and 2007, it would have cost $550 billion. By comparison, actual foreign economic aid under the Bush administration between 2001 and 2006 totalled less than $150 billion, an average of below 0.2 per cent of GDP.

bb Rostow, the author of The Stages of Economic Growth: A Non-Communist Manifesto The Stages of Economic Growth: A Non-Communist Manifesto (1960), offered economic and strategic advice in roughly equal measure to the Democratic administrations of the 1960s. As the equivalent of National Security Adviser to Lyndon Johnson, he was closely a.s.sociated with the escalation of the Vietnam War. (1960), offered economic and strategic advice in roughly equal measure to the Democratic administrations of the 1960s. As the equivalent of National Security Adviser to Lyndon Johnson, he was closely a.s.sociated with the escalation of the Vietnam War.

bc Here is a brief overview of the ten points, based on John Williamson's original 1989 formulation: 1. Impose fiscal discipline; 2. Reform taxation; 3. Liberalize interest rates; 4. Raise spending on health and education; 5. Secure property rights; 6. Privatize state-run industries; 7. Deregulate markets; 8. Adopt a compet.i.tive exchange rate; 9. Remove barriers to trade; 10. Remove barriers to foreign direct investment.

bd Since the term was first used, in 1966, to describe the long-short fund set up by Alfred Winslow Jones in 1949 (which took both long and short positions on the US stock market), most hedge funds have been limited liability partners.h.i.+ps. As such they have been exempted from the provisions of the 1933 Securities Act and the 1940 Investment Company Act, which restrict the operations of mutual funds and investment banks with respect to leverage and short selling.

be Technically, according to the US Securities and Exchange Commission, a short sale is 'any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller'.

bf A swap is a kind of derivative: a contractual arrangement in which one party agrees to pay another a fixed interest rate, in exchange for a floating rate (usually the London interbank offered rate, or Libor), applied to a notional amount.

bg For example, the spread over US Treasuries of the JP Morgan emerging market bond index rose from 3.3 per cent in October 1997, to 6.6 per cent in July 1998, to 17.05 per cent on 10 September 1998.

bh It is surely no coincidence that it was reports of losses at hedge funds run by Bear Stearns and by Goldman Sachs that signalled the onset of the credit crunch in the summer of 2007.

bi Some sovereign wealth funds in fact have a relatively long history. The Kuwait Investment Authority was set up in 1953; Singapore's Temasek in 1974; ADIA, the United Arab Emirates' fund, in 1976; Singapore's GIC in 1981.

bj Having paid $5 billion for a 9.9 per cent stake in Morgan Stanley in December 2007, the China Investment Corporation's chairman Lou Jiwei compared the opportunity to a rabbit appearing in front of a farmer. 'If we see a big fat rabbit,' he said, 'we will shoot at it.' But he added (referring to the subsequent decline in Morgan Stanley's share price), 'Some people may say we were shot by Morgan Stanley.'

bk As Peter Bernstein has said, 'We pour in data from the past . . . but past data . . . const.i.tute a sequence of events rather than a set of independent observations, which is what the laws of probability demand. History provides us with only one sample of the . . . capital markets, not with thousands of separate and randomly distributed numbers.' The same problem - that the sample size is effectively one - is of course inherent in geology, a more advanced historical science than financial history, as Larry Neal has observed.

bl Under the Basel I rules agreed in 1988, a.s.sets of banks are divided into five categories according to credit risk, carrying risk weights ranging from zero (for example, home country government bonds) to 100 per cent (corporate debt). International banks are required to hold capital equal to 8 per cent of their risk-weighted a.s.sets. Basel II, first published in 2004 but only gradually being adopted around the world, sets out more complex rules, distinguis.h.i.+ng between credit risk, operational risk and market risk, the last of which mandates the use of value at risk (VaR) models. Ironically, in the light of 2007-8, liquidity risk is combined with other risks under the heading 'residual risk'. Such rules inevitably conflict with the incentive all banks have to minimize their capital and hence raise their return on equity.

bm In Andrew Lo's words: 'Hedge funds are the Galapagos Islands of finance . . . The rate of innovation, evolution, compet.i.tion, adaptation, births and deaths, the whole range of evolutionary phenomena, occurs at an extraordinarily rapid clip.'