Copyright © 2015 by Andrew Palmer Published by Basic Books, A Member of the Perseus Books Group All rights reserved Printed in the United States of America No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews For information, address Basic Books, 250 West 57th Street, New York, NY 10107 Books published by Basic Books are available at special discounts for bulk purchases in the United States by corporations, institutions, and other organizations For more information, please contact the Special Markets Department at the Perseus Books Group, 2300 Chestnut Street, Suite 200, Philadelphia, PA 19103, or call (800) 810-4145, ext 5000, or e-mail special.markets@perseusbooks.com Designed by Cynthia Young Library of Congress Cataloging-in-Publication Data Palmer, Andrew, 1970– Smart money : how high-stakes financial innovation is reshaping our world-for the better / Andrew Palmer pages cm Includes bibliographical references and index ISBN 978-0-465-06472-4 (hardback) — ISBN 978-0-465-04059-9 (e-book) Banks and banking—Technological innovations Finance—Technological innovations I Title HG1709.P35 2015 332.1​—dc23 2014041326 10 For Julia, Eliza, Joe, and Kasia Contents Preface PART I: LESSONS BADLY LEARNED Handmaid to History From Breakthrough to Meltdown The Most Dangerous Asset in the World PART II: A FORCE FOR GOOD Social-Impact Bonds and the Shrinking of the State Live Long and Prosper Equity and the License to Dream Peer-to-Peer Lending and the Flaws of Finance The Edge: Reaching the Marginal Borrower Tail Risk: Pricing the Probability of Mayhem Conclusion Acknowledgments Glossary Notes Index Preface When I was offered the job of the Economist’s banking correspondent in the early summer of 2007, my reaction was one of apprehension Banking was not an industry that I knew anything about I had a bank account and a mortgage, knew a couple of friends who had gone into the industry and owned much bigger houses than mine, and that was about it Grappling with the ins and outs of bond markets and bank balance sheets was not just going to be unfamiliar ground—I assumed that it was also going to be boring as hell As far as I was concerned, this was an industry that remorselessly piled up profits The previous few years had seen an epic expansion of bank returns The largest one thousand banks in the world reported aggregate pretax profits of almost $800 billion in fiscal year 2007–2008, almost 150 percent higher than in 2000–2001 Banking boasted the largest profit pool in the world in 2006, according to McKinsey, a consulting firm, at 11 percent of the global total My professional life was about to consist of interviewing people who made money hand over fist and would presumably continue to so for as long as I wrote about them They might be greedy, they might be arrogant, but they certainly knew what they were doing I didn’t realize it at the time, but I was already thinking like a financial regulator Fears of a life of tedium turned out to be a bit misplaced I started on the banking beat in September 2007 The summer had already seen large parts of the financial markets take fright The downturn in America’s subprime-mortgage market had made it impossible for investors to value their holdings of securities backed by these types of loans The interbank markets, where banks loan money to each other, had suddenly seized up, as institutions realized that they could not be sure of the standing of their counterparties Something unexpected was happening to the moneymaking machine My very first week in the job coincided with a deposit run at Northern Rock, a British lender that came unstuck when it could no longer fund itself in the markets Some of my earliest interviews on the beat were with people dusting off the manual on how to deal with bank runs Organizing guide ropes inside bank branches was one tactic: better that than have people spill out onto the street, signaling to others that they should join the line One HSBC veteran happily recounted stories of the financial crisis that gripped Asia in the late 1990s, when tellers were instructed to bring piles of cash into view to reassure people that banks were overflowing with money Tales of improvisation from Asia were not supposed to be relevant to the West’s ultrasophisticated financial system But far worse was to come A chain of events was under way that would lead in time to the collapse of Lehman Brothers, a huge US investment bank, state takeovers of swaths of the rich world’s banking systems, a deep global recession, and the Eurozone debt crisis I observed these later phases of the crisis from the position of the Economist’s finance editor, a post that I held from July 2009 until October 2013 The crisis would lead to a complete reversal in public attitudes toward the financial industry The decade leading up to the crisis was one in which finance was lionized Policy makers applauded the march of new techniques, such as securitization, that appeared to send risk away from the banks and spread it more evenly throughout the financial system Belief in the efficiency of markets was so pervasive that the skeptics were both few in number and easily dismissed The events of the past few years have shattered the belief of outsiders in finance’s infallibility That is an entirely good thing The system is far less Darwinian than the bankers would like to believe Banking is not the only industry that gets government handouts—in October 2013 the US government booked a loss on the $50 billion bailout of General Motors, and I don’t see much public discussion of the evils of the car industry—but it has clearly benefited from a safety net that others not have Nor is it really the law of the jungle for individuals in banking I have met a lot of very bright people in the financial industry, but I have also met some very mediocre ones, and pretty much all of them seem to remain employable But when things go so badly wrong, the pendulum almost inevitably swings too far in the other direction Another type of consensus has emerged, one in which finance is demonized, in which bankers are generally bad, in which there is a “socially useful” bit of the industry that doles out loans to individuals and businesses, and the rest of it is dangerous, unnecessary gambling Such anger is understandable But it also has the effect of distorting the public view of the industry *** CHRIS SHEPARD IS THE kind of person that people have in mind when they lament the pull of finance for society’s brightest minds The youthful American used to wear a lab coat working for Genentech, a biotechnology company whose stated mission is to “develop drugs to address significant unmet medical needs.” You don’t get much more noble than that Yet Shepard turned his back on the bench, first for a master of business administration (MBA) and a spell in management consulting and then for the world of high finance His conversation is peppered with references to equity tranches and bond coupons, balance-sheet volatility and payment triggers Shepard founded a venture called Structured Bioequity (SBE) The problem he was trying to address is the harm that can be done to a small biotech firm if one of its drugs fails during clinical trials Clinical trials are designed to gradually widen the pool of people that a new drug is tested on, and their results are very unpredictable About 85 percent of therapies fail in early clinical trials Shepard was particularly focused on the risks involved in Phase II trials, when tests move from a very small group of human guinea pigs to a larger one.1 For a very big pharmaceutical firm, with deep pockets and a fatter pipeline of new drugs, a failed trial need not be the end of the road; it can write another check in order to keep development teams together For smaller firms, which often have no more than two or three drugs in the queue, the damage caused by an unsuccessful clinical trial can be terminal If the lead drug of one of these firms fails, the entire value of the company can be lost, and it may well fold The knowledge gained from working on a particular drug scatters, along with the chances of a better outcome the next time around Shepard’s idea works like an insurance policy Investors in effect indemnify the firm against a failed clinical trial, promising to pay out an agreed amount in that event so that the firm can rebuild its portfolio In return, SBE offers the chance for investors to participate in the upside of a successful drug, by turning the amount indemnified into an equity stake in the company upon successful completion of clinical trials By including enough drugs in the portfolio that is being protected, Shepard thinks that investors can be reasonably confident that some medicines will make it to market And that in turn should mean that promising medical research is not lost when a particular avenue is closed off Progress in getting the first investors to bite was slow, as is typical for an entirely new idea, but when I met him in 2013, Shepard was determined to keep going Asked why he has turned his back on medical research for finance, he shrugs “I think I can make more of a difference this way than as a scientist.” In the wake of the 2007–2008 crisis, that has become an arresting statement to make Two broad misconceptions have taken hold as a result of the convulsions of recent years The first is that if only finance could turn back the clock, all would be well Banks never used to run with such low levels of equity funding—the money that shareholders put in and that gets wiped out when banks sustain losses The securitization markets, where a lot of different income-producing assets such as mortgages get bundled together into a single instrument, never used to be so complex Stock exchanges never used to be the plaything of algorithms The temptation is to try to identify a point in financial history when everything worked better and get back to that point The meme that banking should be boring is widespread Elizabeth Warren, a Democratic senator from Massachusetts, has used this very phrase to promote a bill that would separate American banks into their comfortingly familiar retail businesses (the ones we all use as customers for checking accounts, mortgages, and the like) and their exotic capital-market businesses (where firms raise money and manage risks) Yet turning back the clock, as well as being impractical, is no answer The greatest danger often lurks in the most familiar parts of the financial system Deposits are seen as a “good” source of funding, even though they can be taken out in an instant and get a giant subsidy in the form of deposit insurance Property is regarded as a bread-and-butter banking activity but is the cause of banking crisis after banking crisis Secured lending is seen as prudent, even though it can mean decisions are often made on the basis of the collateral being offered (a house, say) rather than the creditworthiness of the borrower (a borrower with no income and no job, say) If you look at the write-downs recorded during the crisis, where were they found? In investment banks, yes, but also in the retail and commercial banks The biggest bank failure in US history was that of Washington Mutual, which collapsed in 2008 with $307 billion in assets and a pile of rotting mortgages on its books The worst quarterly loss was suffered by Wachovia, another “normal” lender: it chalked up a loss of $23.7 billion in the third quarter of 2008 because of loans kept on its balance sheet Irish and Spanish banks managed to blow themselves up without the assistance of securitization and credit-default swaps (CDS) The thread running through the financial crisis of 2007–2008 was bad information—about the quality of borrowers, about who had exposure to whom, about how a default in one place would affect other loans—and it brought down every type of institution, simple and complex.2 The second misconception concerns the benefits of financial creativity Few areas of human activity now have a worse image than “financial innovation.” The financial crisis of 2007–2008 brought a host of arcane financial processes and products to wider attention Paul Volcker, one former chairman of the Federal Reserve whose postcrisis reputation remains intact, has implied that no financial innovation of the past twenty-five years matches up to the automatic teller machine in terms of usefulness Paul Krugman, a Nobel Prize–winning economist-cum-polemicist, has written that it is hard to think of any major recent financial breakthroughs that aided society.3 A conference held by the Economist in New York in late 2013 debated whether talented graduates should head to Google or Goldman Sachs Vivek Wadhwa, a serial entrepreneur, spoke up for Google; Robert Shiller, another Nobel Prize–winning economist, argued for Goldman Wadhwa had the easier task “Would you rather have your children engineering the financial system creating more problems for us or having a chance of saving the world?” he asked Even an audience of Economist readers in New York was pretty clear about its choice, plumping heavily for Mountain View over Wall Street Yet Shiller’s arguments are the more powerful “Finance is the place you can make your mark on the world You cannot good for the world by yourself,” he told the conference “Most important activities have to have a financial basis.”4 This book is divided into two parts The first is designed to give the reader a broader framework for thinking about financial innovation than just the 2007–2008 crisis and its aftermath The natural response to the idea of financial ingenuity is to say, “No, thanks.” But as the opening chapter demonstrates, the history of human enterprise is also one of financial breakthroughs The invention of money, the use of derivative contracts, and the creation of stock exchanges were smart responses to fundamental, real-world problems Financial innovation helped foster trade, smooth risks, create companies, and build infrastructure The modern world needed finance to come into being Without question, the industry did a bad job in the first years of this century of applying itself to big problems But calling a halt to inventiveness—freezing finance in place, no bright ideas allowed —would not solve the problems associated with the industry As the second chapter explains, the big risks that finance poses materialize long after the “lightbulb moment.” There is a problem with how financial products and markets evolve, but it is a problem that is deeply associated with scale and familiarity, not novelty and creativity The third chapter presents a concrete example of how an absence of innovation can be far more If You Don’t Let Us Dream, We Won’t Let You Sleep (drama), 111 IMF (International Monetary Fund), 125–126 Impact investing, 92 Implied volatility, 116 Impure altruism, 109–110 Income-share agreements, 167, 172–178 Independent variables, 201 Index funds, 40 India, CDS deals in, 37 India, social-impact bonds (SIBs) in, 103 Industrialization, effect of on finance, 3, 27–28 Inflation-protected Treasury bills, 131 Information asymmetry, 174 Innovator’s dilemma, 189 Instiglio, 103 Insurance, 8–10, 16–17, 142, 223–225 Insurance-linked securities, 222 Interbank markets, x Interest, origin of, Interest-rate swaps, 29 International Maritime Bureau Piracy Reporting Centre, 151 International Monetary Fund (IMF), 125–126 International Swaps and Derivatives Association (ISDA), 40 Internet, role of in finance creditworthiness, determination of, 172–173, 202, 218 direct connection of suppliers and consumers, xviii, 32 equity crowdfunding, 152–155 income-share agreements, 172–173 ROSCAs, 210 small business loans, 216 speed and ease of borrowing, 189 student loans, 166–167 Intertemporal exchange, Intuit, 218 Investment grade securities, 121 Ireland, banking crisis in, xiv–xv, 69 Isaac, Earl, 47 ISDA (International Swaps and Derivatives Association), 40 ISDA master agreement, 40 Israel, SIBs in, 97 Italy discrimination against female borrowers in, 208 financial liberalization and, 34 first securities markets in, 14 maritime trade partnerships in, 7–8 J C Flowers, 69, 81 Japan, banking crisis in, 75 Japan, financial innovation in, 27, 29, 39–40 Jha, Saumitra, 27 Jiménez-Martín, Sergi, 73 Job creation, young small firms and, 147–148 Joint-stock firms, 23 JPMorgan, 77, 169 Jump-to-default risk, 238 Käärmann, Kristo, 190 Kabbage, 218 Kahneman, Daniel, 47, 137 Kanjorski, Paul, 145 Kauffman Foundation, 158 Kennedy, John F., 32 Keys, Benjamin, 48 Kharroubi, Enisse, 79 Kickstarter, 172 King, Stephen, 99 Klein, David, 182 Krugman, Paul, xv Lahoud, Sal, 166 Lang, Luke, 153, 161–162 Laplanche, Renaud, 179, 184, 188, 190, 193–194, 196–197 Latency, 53 Law of large numbers, 17 Layering, 57 Left-digit bias, 46 Lehman Brothers, x, 44, 65 Lending direct, 84 marketplace, 184 payday, 200 relationship-based, 11, 151, 206–208 secured, xiv, 76 unsecured, 206 See also Loans; Peer-to-peer lending Lending Club, 172, 179–180, 182–184, 187, 189, 194–195, 197 Leonardo of Pisa (Fibonacci), 19 Lerner, Josh, 59 Lethal pandemic, risk-modeling for demographic profile, 230 exceedance-probability curve, 231–232, 232 figure historical data, 228–229 infectiousness and virulence, 229–230 location of outbreak, 230–231 Leverage, 51, 70–71, 80, 186, 188 Leverage ratio, 76–77 Lewis, Michael, 57 Liber Abaci or Book of Calculation (Fibonacci), 19 LIBOR (London Interbank Offered Rate), 41 Liebman, Jeffrey, 98 Life expectancy government reaction to, 128–129 projections of, 124–127, 126 figure ratio of young to older people, 127–128 Life-insurance policies, 142 Life-settlements industry, 142–143 Life table, 20 Limited liability, 212 Liquidity, 12–14, 39, 185–186 List, John, 109 The Little Book of Behavioral Investing (Montier), 156 Lo, Andrew, 113–115, 117–123 Loans low-documentation, 48–49 secured, 76 small business, 181, 216 student, 164, 166–167, 169–171, 182 syndicated, 41 Victory Loans, 28 See also Lending; Peer-to-Peer lending Logistic regression, 201 London, early fire insurance in, 16–17 London, Great Fire of, 16 London Interbank Offered Rate (LIBOR), 41 Long-Term Capital Management, 123 Longevity, betting on, 143–144 Loss aversion, 136 Lotteries, 212, 213 Low-documentation loans, 48–49 Lumni, 165, 168, 175 Lustgarten, Anders, 111 Lynn, Jeff, 160–161 Mack, John, 180 Mahwah, New Jersey, 52, 53 Marginal borrowers assessment of, 216–217 behavioral finance and, 208–214 industrialization of credit, 206 microfinance and, 203 savings schemes, 209–214 small businesses, 215–219 unsecured lending to, 206 Wonga, 203, 205, 208 Marginal borrowers (continued) ZestFinance, 199, 202, 205–206 Maritime piracy, solutions to, 151–152 Maritime trade, role of in history of finance, 3, 7–8, 14, 17, 23 Market makers, 15–16, 55 MarketInvoice, 195, 207, 217–218 Marketplace lending, 184 Markowitz, Harry, 118 Massachusetts, use of inflation-protected bonds in, 26 Massachusetts, use of social-impact bonds in, 98 Matching engine, 52 Maturity transformation, 12–13, 187–188, 193 McKinsey & Company, ix, 42 Mercator Advisory Group, 203 Merrill, Charles, 28 Merrill, Douglas, 199, 201 Merrill Lynch, 28 Merton, Robert, 31, 113–114, 123–124, 129–132, 142, 145 Mian, Atif, 204 Michigan, University of, financial survey by, 134–135 Microfinance, 203 Micropayment model, 217 Microwave technology, 53 The Million Adventure, 213–214 Minsky, Hyman, 42 Minsky moment, 42 Mississippi scheme, 36 Mitchell, Justin, 166–167 Momentum Ignition, 57 Monaco, modeling risk of earthquake in, 227 Money, history of, 4–5 Money illusion, 73–74 Money laundering, 192 Money-market funds, 43, 44 Monkeys, Yale University study of loss aversion with, 136 Montier, James, 156–157 Moody, John, 24 Moody’s, 24, 235 Moore’s law, 114 Morgan Stanley, 188 Mortgage-backed securities, 49, 233 Mortgage credit by ZIP code, study of, 204 Mortgage debt, role of in 2007–2008 crisis, 69–70 Mortgage products, unsound, 36–37 Mortgage securitization, 47 Multisystemic therapy, 96 Munnell, Alicia, 129 Naked credit-default swaps, 143 Nature Biotechnology, on drug-development megafunds, 118 “Neglected Risks, Financial Innovation and Financial Fragility” (Gennaioli, Shleifer, and Vishny), 42 Network effects, 181 New York, skyscraper craze in, 74–75 New York City, prisoner-rehabilitation program in, 108 New York Stock Exchange (NYSE), 31, 52, 53, 61, 64 New York Times, Merrill Lynch ad in, 28 Noncorrelated assets, 122 Nonprofits, growth of in United States, 105–106 Northern Rock, x NYMEX, 60 NYSE Euronext, 52 NYSE (New York Stock Exchange), 31, 52, 53, 61, 64 OECD (Organization for Economic Co-operation and Development), 128, 147 Oldfield, Sean, 67–68, 80–84 OnDeck, 216–218 One Service, 94–95, 105, 112 Operating expense ratio, 188–189 Options, 15, 124 Order-to-trade ratios, 63 Oregon, interest in income-share agreements, 172, 176 Organization for Economic Co-operation and Development (OECD), 128, 147 Overtrading, 24 Packard, Norman, 60 Pandit, Vikram, 184 Park, Sun Young, 233 Partnership mortgage, 81 Pasion, 11 Pave, 166–168, 173, 175, 182 Payday lending Consumer Financial Protection Bureau, survey on, 200 information on applicants, acquisition of, 202 underwriting of, 201 PayPal, 219 Peak child, 127 Peak risk, 228 Peer-to-peer lending advantages of, 187–189 auction system, 195 big investors in, 183 borrowers, assessment of, 197 in Britain, 181 commercial mortgages, 181 CommonBond, 182, 184, 197 consumer credit, 181 diversification, 196 explained, 180 Funding Circle, 181–182, 189, 197 investors in, 195 Lending Club, 179–180, 182–184, 187, 189, 194–195, 197 network effects, 181 ordinary savers and, 184 Prosper, 181, 187, 195 RateSetter, 181, 187, 196 Relendex, 181 risk management, 195–197 securitization, 183–184, 196 Peer-to-peer lending (continued) small business loans, 181 SoFi, 184 student loans, 182 Zopa, 181, 187, 188, 195 Pensions, cost of, 125–126 Perry, Rick, 142–143 Peterborough, England, social-impact bond pilot in, 90–92, 94–95, 104–105, 112 Petri, Tom, 172 Pharmaceuticals, decline of investment in, 114–115 Piracy Reporting Centre, International Maritime Bureau, 151 Polese, Kim, 210 Poor, Henry Varnum, 24 “Portfolio Selection” (Markowitz), 118 Prediction Company, 60–61 Preferred shares, 25 Prepaid cards, 203 Present value of cash flows, 19 Prime borrowers, 197 Prince, Chuck, 50–51, 62 Principal-agent problem, Prisoner rehabilitation programs, 90–91, 94–95, 98, 108, 112 Private-equity firms, 69, 85, 91, 105, 107 Projection bias, 72–73 Property banking crises and, xiv, 69 banking mistakes involving, 75–80 behavioral biases and, 72–75 dangerous characteristics of, 70–72 fresh thinking, need for, xvii, 80 investors’ systematic errors in, 74–75 perception of as safe investment, 76, 80 Prosper, 181, 187, 195 Provisioning funds, 187 Put options, 9, 82 Quants, 19, 63, 113 QuickBooks, 218 Quote stuffing, 57 Raffray, Andrộ-Franỗois, 144 Railways, affect of on finance, 2325 Randomized control trials (RCTs), 101 Raphoen, Christoffel, 15–16 Raphoen, Jan, 15–16 RateSetter, 181, 187, 196 RCTs (randomized control trials), 101 Ready for Zero, 210–211 Rectangularization, 125, 126 figure Regulation NMS, 61 Reinhart, Carmen, 35 Reinsurance, 224 Relendex, 181 Rentes viagères, 20 Repurchase “repo” transactions, 15, 185 Research-backed obligations, 119 Reserve Primary Fund, 44 Retirement, funding for anchoring effect, 137–138 annuities, 139 auto-enrollment in pension schemes, 135 auto-escalation, 135–136 conventional funding, 127–128 decumulation, 138–139 government reaction to increased longevity, 128–129 home equity, 139–140 life expectancy, projections of, 124–127, 126 figure life insurance policies, cash-surrender value of, 142 personal retirement savings, 128–129, 132–133 replacement rate, 125 reverse mortgage, 140–142 savings cues, experiment with, 137 SmartNest, 129–131 Reverse mortgages, 140–142 Risk-adjusted returns, 118 Risk appetite, 116 Risk assessment, 24, 45, 77–78, 208 Risk aversion, 116, 215 Risk-based capital, 77 Risk-based pricing model, 176 Risk management, 55, 117–118, 123, 195–197 Risk Management Solutions, 222 Risk sharing, 8, 82 Risk-transfer instrument, 226 Risk weights, 77–78 Rogoff, Kenneth, 35 “The Role of Government in Education” (Friedman), 165 Roman Empire business corporation in, financial crisis in, 36 forerunners of banks in, 11 maritime insurance in, Rotating Savings and Credit Associations (ROSCAs), 209–210 Roulette wheel, use of in experiment on anchoring, 138 Royal Bank of Scotland, 186 Rubio, Marco, 172 Russia, mortgage market in, 67 S-curve, in diffusion of innovations, 45 Salmon, Felix, 155 Samurai bonds, 27 Satsuma Rebellion (1877), 27 Sauter, George, 58 Save to Win, 214 Savings-and-loan crisis in US (1990s), 30 Savings cues, experiment with, 137 Scared Straight social program, 101 Scholes, Myron, 31, 123–124 Science, Technology, and Industry Scoreboard of OECD, 147 Securities and Exchange Commission (SEC), 54, 56, 57, 58, 64 Securities markets, 14 Securitization, xi, 20, 37–38, 117–122, 183–184, 196, 236 Seedrs, 160–161 Sellaband, 159 Shared equity, 80–84 Shared-equity mortgage, 84 Shepard, Chris, xii–xiii Shiller, Robert, xv–xvi, 242 Shleifer, Andrei, 42, 44 Short termism, 58 SIBs See Social-impact bonds Sims, Kath, 96 Single-family-home rental sector, 85 Single-family rental bond, 85 Skype, 190 Sleeping sickness, SIB program for elimination of, 103 Small businesses, as marginal borrowers, 215–219 Smart money, comparison of to dumb money, 155–158 SmartNest, 129–131, 211 Social Finance, 93, 97 Social-impact bonds (SIBs) benefits of, 91, 98–102, 104, 106 in Britain, 95–97 cost-effectiveness of, 100–102 data collection, 104 defined, 90 financial incentive, effect of on donors, 110–111 flexibility of, 105–106 Fresno, California, pilot program in, 103–104 G-8 task force on, 97 health-impact bonds, 103–104 individual givers, attraction of, 109 Massachusetts, prisoner-rehabilitation programs in, 98 New York City, prisoner-rehabilitation program in, 108 Peterborough, England, pilot in, 90–91, 94–95, 104–105, 107 philanthropists, role of, 108 possible abuses of, 111 purpose, 107 risk management in, 108 in United States, 98 Social-impact bonds (SIBs), uses for accomodation for homeless people, 96–97, 106–107 adoption of hard-to-place children, 97 cutting HIV infection rates in Swaziland, 103 early detection of health conditions, 102–104 elimination of sleeping sickness in Uganda, 103 improving educational outcomes for girls in India, 103 keeping troubled adolescents out of foster care, 96 prisoner rehabilitation programs, 90–91, 94–95, 98, 108 soldiers reentering civilian life, 102 Social insurance, 183 Social-investment bank, 92–93 Social Security, 128 Societas publicanorum, SoFi, 184 South Sea Bubble, 36 South Sea Company, 36 S&P 500 index, 29, 40, 157 Spain, banking crisis in, xiv–xv, 69, 75 Spanish flu outbreak (1918–1919), 228, 230 Spear, Leeds & Kellogg, 61 St Mungo’s, 96 Standard & Poor’s (S&P), 24, 49, 157, 184, 234 Standardization, 39–41, 45, 47 Stevens, David, 151–152 Stevens, Teresa, 151–153 Stock exchanges, 14–16 Stocker, Anil, 207, 217 Stop-loss orders, 56 Straw, Jack, 94 Structured Bioequity, xii–xiii Structured finance, 237–238 Structured investment vehicle, 37 Stub quotes, 56 Student loans, 164, 166–167, 169–171 Stumpf, John, 192 Subprime mortgage tranches, loss amounts on, 233 Subprime mortgages, x, 79, 197–198, 233 Sufi, Amir, 204 Summers, Larry, 180 Suppa, Enrico, Sutherland, Martinez, 89–90, 95, 105, 112 Svenska Handelsbanken, 206–207 Swaps, credit-default, 29–30 Swaps, interest-rate, 29 Swaziland, social-impact bonds (SIBs) in Sweden, banking crisis in, 75 Syndicated loans, 41 Tail risks, 221, 237 Tanzania, financial liberalization and, 34 Testosterone and cortisol, effect of on risk appetite and aversion, 116 Thailand, insurance claims for flooding, 225 Thaler, Richard, 137 Thales of Miletus, 10 Thayer, Ignacio, 210–211 Thiel, Peter, 163 This Time is Different (Reinhart and Rogoff), 35 Titmuss, Richard, 110 TransferWise, 190–192 Trente demoiselles de Genève, 22 True Link Financial, 144 Tufano, Peter, 59, 213–214 Tulipmania, 33, 36 Tversky, Amos, 137 UBS, 60 Uganda, social-impact bonds (SIBs) in, 103 Unbanked households, 200 United States aggregate value of property, 69 consumer debt, 183, 204 corporate debt, 120 cost of diagnosed diabetes, 102 cost of entitlements, 100 credit card debt, 183 general solicitation by private firms, 153–154 government interest in alternatives to student debt, 168 government spending, 99 home-ownership rates, 28, 85, 170 household debt, 205 leverage ratio, 2007, 77 life expectancy, 125 median house price, 70 monetary charitable gifts, 109 money raised through IPOs, 120 mortgage debt, 69 nonprofits in, 105–106 prepaid cards, 203 property bubbles, 74–75 real estate cycles, 237 savings-and-loan crisis (1990s), 30 social-impact bonds (SIBs), 98 student debt, 169 Unsecured lending, 206 Upstart, 166–168, 173, 175, 182 Used-car market, use of heuristics in, 46 Vega, Joseph de la, 24 Venture capital (VC), 150–151 Veterans, SIB program for, 102 Veterans Support Organization, 102 Viatical settlements, 142 Victory Loans, 28 Vishny, Robert, 42, 44 Volcker, Paul, xv, 30 Wachovia, xiv Wadhwa, Vivek, xv Warren, Elizabeth, xiv Washington Mutual, xiv Westlake, Darren, 153–154, 158, 161–162 “What Everybody Ought to Know About This Stock and Bond Business” Merrill Lynch ad, 28 When the Money Runs Out (King), 99 Wonga, 203, 205, 208 Woo, Gordon, 221–222, 227–229, 231, 233, 238 World Bank, 169 Wren, Christopher, 16 Wyman, Oliver, 204 Yale University, income-contingent financing program of, 165 Yale University, study of loss aversion, 136 Yunus, Muhammad, 203 Zaccaria, Benedetto, ZestFinance, 199, 201, 205–206 Zombanakis, Minos, 41 Zopa, 181, 187, 188, 195 Zuckerberg, Mark, 174 ... Palmer, Andrew, 1970– Smart money : how high- stakes financial innovation is reshaping our world- for the better / Andrew Palmer pages cm Includes bibliographical references and index ISBN 978-0-465-06472-4... is that banks borrow money at a shorter duration than they loan money out The classic example of this maturity transformation is the deposit and the mortgage Your deposit is a liability for the. .. your mark on the world You cannot good for the world by yourself,” he told the conference “Most important activities have to have a financial basis.”4 This book is divided into two parts The