By 1998, JPMorgan had hired Terri Duhon to package whole segments of loan portfolios from multiple companies and offer them. In 1994, one of JPMorgan’s whiz kids, Blythe Masters, brokered the world’s first Credit Default Swap with Exxon. Banks could loan more capital instead of keeping it in reserve while spreading risks around in an innovative way. Beyond this, however, the derivatives themselves were wildly profitable.Ĭredit derivatives were born. But, what if banks could find another way to cover potential losses without setting aside their own capital? The banks would then have more capital to lend. Banks are required to set aside a certain percentage of capital in reserve for every loan they make in order to ensure that if a certain number of loans default they will be able to cover the loses. The JPMorgan whiz kids came up with the idea to use derivatives to manage their bank loan risks. Up to this point derivatives had always involved speculation about the future value of some tangible commodity like corn, coal, or beef. Out of these discussions came the idea of Credit Default Swaps, a derivative that ensured a loan against default, a novel idea.
ONE UP ON WALL STREET SPARKNOTES HOW TO
These young people were struggling with the age-old problem of how to manage Risk. Young, very bright minds, partying a bit and meeting in small conference rooms hatched a new idea. A group of young bankers from JPMorgan, were celebrating the success of the company's derivative portfolios. It all started at a ritzy weekend resort in Boca Raton, FL in 1994. Ultimately, the 2008 financial crisis and resulting Great Recession cost the world economy $11 trillion dollars. It is almost double the size of America's manufacturing sector. Wall Street is the largest sector of the American economy. In this post I will attempt to summarize this superb four-part Frontline.
Economically, nothing compares to it in my lifetime.
The situation obsessed me and my blog posts back in 2008 – 2009. On May 1, the program aired the second-half of a huge four-hour documentary on the origins the Great Recession entitled Money, Power, and Wall Street.
ONE UP ON WALL STREET SPARKNOTES SERIES
For a long time I have admired the PBS series Frontline for its outstanding reporting.