Financial Origami

An in-depth look at the failure of Wall Street's "proven" financial models

Origami is the Japanese art of folding paper into intricate and aesthetically attractive shapes. As such, it is the perfect metaphor for the Wall Street financial engineering model, which ultimately proved to be the underlying cause of the 2008 financial crisis.

In Financial Origami, Brendan Moynihan describes how the Wall Street business model evolved from a method to transfer risk into a method for manufacturing risk. Along the way, this timely book skillfully dissects financial engineering and addresses how it's often a mechanism to evade regulatory constraints, provide institutional investors with customized products, and, of course, generate revenue for financial engineers.

• Reveals how Wall Street's financial engineering business model morphed into something destructive
• Highlights how the origami model worked well in the comparatively stable years of the early 2000s, when there was less risk to transfer
• Discusses how Wall Street began manufacturing risk by creating products that multiplied risk exposures and encouraged subprime lending

With the collapse of Lehman Brother the Wall Street business model effectively broke. But there are many lessons to be learned from what has transpired, and Financial Origami will show you what they are.

Author's Note.

Introduction.

Chapter 1 Fold Sides to Center.

Commercial Banks.

Savings & Loans.

Securities Firms.

Transferring Risk.

End of an Era.

Chapter 2 Result, Turn Over.

The Three Derivatives.

Options.

Futures.

Swaps.

Chapter 3 Fold Sides to Center, Again.

Changing the Rules.

A New Environment.

Investing in Mortgages.

Banker Incentives.

Chapter 4 Fold Tip to Point.

Other People's Money: Equity.

Agents Transferring Risk Become Principals Taking It.

Chapter 5 Fold Point Back.

Rules, Refold, Rave, Ruin.

A New Environment.

A New Risk.

Chapter 6 Fold in Half.

Mortgage Origami.

Subprime Origami.

The Rating Game.

Banker Incentives.

Manufactured Product.

Chapter 7 Pull Neck Upright.

Low Volatility, Low Risk.

The CDS Market Develops.

More Insurance Than Needed.

Opaque Markets.

Other People's Money: Debt.

Chapter 8 Pull Head to Suitable Angle.

Vindicating Greenspan.

How, Not Will, You Pay?

Broken Markets.

Chapter 9 Complete.

What's Wrong with Wall Street.

Government Sponsored Enterprises.

Government Sanctioned Credit Rating Agencies.

Banks.

What's Right with Wall Street?

Brown Brothers Harriman.

Marketfield Asset Management.

Egan-Jones Co.

Epilogue.

Notes.

About the Author.

Index.

"... skillfully dissect financial engineering." (Journal of Applied IT & Investment Management)

Brendan Moynihan is an editor-at-large for Bloomberg News, where he manages the popular column "Chart of the Day" and writes about the economy and Wall Street. He has been with the company since 2006, after spending more than twenty years on Wall Street as a trader and risk manager. Moynihan is the author of Trading on Expectations (Wiley) and coauthor of What I Learned Losing a Million Dollars. He lives in Barrington Hills, Illinois, with his wife and two sons, and is currently writing a book on English grammar.

The simplicity of Wall Street's business model is often masked by the supposed complexity of its innovations. While the "financially engineered" products that Wall Street peddles to investors may seem different, in reality, they are nothing more than financial origami—where the attributes of stocks, bonds, and derivatives are folded and refolded to form something that seems new. This is the perfect metaphor for how Wall Street works, and ultimately proved to be the underlying cause of the recent financial crisis.

Now, in Financial Origami, Brendan Moynihan—editor-at-large for Bloomberg News and a twenty-year market veteran—describes how the Wall Street business model has evolved from a method to transfer risk into a method for manufacturing risk. Page by page, he skillfully dissects financial engineering and addresses how financial origami, along with its inherent conflicts of interest, have allowed individuals as well as institutions to skirt regulations or taxes, sometimes meet investor needs, and always boost their profits.

But folding existing products into "new" ones is not the only financial origami performed in the world of finance. Other instances touched upon throughout the book include:

• Industry refolding in the form of firms, once specializing in specific tasks within the risk-transfer business, now seeking to offer one-stop shopping for all financial services

• Firms refolding their business charters from private partnerships to publicly traded, shareholder owned corporations

• Altering the mortgage lending process by unfolding the mortgage market: unbundling the origination, funding, and servicing components so they could be carried out by separate companies

• And much more

Along the way, this reliable resource explains the events that have shaped financial markets, firms, and products over the past forty years, and have hurt Wall Street over the past three. It also explores the evolution of Wall Street, shows the logical sequence of events that brought us to this point, and offers insights on how to fix some of the problems we face.

The Wall Street business model effectively broke. But there are many lessons to be learned from what has transpired, and this book will show you what they are—helping you avoid getting caught up in financial origami and the extreme of taking good ideas and running them into the ground.

Praise for Financial Origami

"Financial Origami is a total delight, one of those rare books that has the reader saying to himself, 'Ah-ha! Now I understand' on almost every page. It's the best introduction to Wall Street and its rapidly evolving ways I've ever read."—John Steele Gordon, author, Empire of Wealth and Hamilton's Blessing

"Financial Origami is an eminently readable diagnosis of the evolution of financial engineering, driven by competition, technology, and surplus savings. The building block approach—debt, equity, and derivatives—makes the book understandable to students, novices, and the seasoned professional. Moynihan's historical understanding is critical and is deeper and richer than most of the more journalistic attempts to make sense of the worst financial crisis in a generation."—Marc Chandler, Global Head, Currency Strategy, Brown Brothers Harriman; Associate Professor, New York University, Center for Global Affairs

"Brendan Moynihan may have come up with the defining metaphor for Wall Street; he's certainly delivered a compelling, damning analysis of the financial system's thirty-seven year march to its 2008 meltdown. In eschewing purple prose for hard facts and lucid arguments, Moynihan all the more effectively skewers those who created, hustled, and blessed Wall Street's financial origami, all the way to doomsday."—John Helysar, coauthor of Barbarians at the Gate

Praise for What I Learned Losing a Million Dollars

"The best noncharlatanic finance book I know is What I Learned Losing a Million Dollars by Brendan Moynihan and Jim Paul."—Nassim Taleb, author of the bestseller The Black Swan and Fooled by Randomness

"A new, novel approach aimed at pushing you inside your head and outside the losing habits most folks adopt right after multiple successes. A must-have for traders blessed with a string of hot trades."—Ken Fisher, Chairman, Fisher Investments and Forbes columnist