Financial Stability, + Website

Financial Stability provides a roadmap by which the world can anticipate and avoid future financial disruptions. This unique discussion of past and present financial events offers new insights that explain economic, political, and legal antecedents of financial crises in Western markets. With a detailed discussion of the history of finance, this book shows modern investors and finance professionals how to learn from past successes and failures to gauge future market threats.

Readers will gain new insight into the antecedents of todays financial markets and the political economy that surrounds them. Armed with this knowledge, they will be able to craft a strategy that steers away from financial disorder and toward maximum stability. Coverage includes discussion of capital, forecasting, and political reaction, and past, present, and future applications within all realms of business. The companion website offers additional data and research, providing a complete resource for those seeking a better understanding of the risk at hand.

As the world struggles to emerge from the latest financial crisis, professionals in finance, the law and other disciplines, and the people they advise, are searching for understanding to avoid future crises. Financial Stability argues that the best lessons are learned from our own mistakes, and that the ability to look ahead depends upon our willingness to look back. Readers will:

• Review the historical laws, practices, and outcomes that shaped the modern day financial markets of the great western economies
• Understand the theory of financial stability, the roles of law and transparency, and the importance of action to punish fraud in order to prevent future contagion
• Work through the theoretical proofs in terms of math, law, accounting, economics, philosophy, and international trade
• Build a strategy for the future with consideration toward needs, sources, balance, and learning from past mistakes

Everywhere around the globe, at all points in history, financial crises have always been rooted in the confluence of politics, finance, and law. Financial Stability puts the latest global financial crisis in perspective, highlighting the lessons we have already learned, and those we need to internalize today.

Preface

Introduction

Part 1: A Flight through Financial Market History—Freedom and Fraud

Chapter 1. The First Few Millennia

Chapter 2. The Bank of England and the Scottish Enlightenment

Chapter 3. U.S. Banking, from British Colonies to 1865

Chapter 4. Bagehot's Dictum (a.k.a. the "Greenspan Put")

Chapter 5. U.S. Financial Markets from 1865 to the Great Depression

Chapter 6. Depression, War, and Aftermath—Reflecting on Finance from 1929 to 1973

Chapter 7. Early Deregulation: The Transactions that Replaced Depression Era Thrifts

Chapter 8. Riskless Arbitrage—Stand-alone Collateralized Mortgage Obligations ("CMOs")

Chapter 9. Paradise Gained, Lost, Regained, and Destroyed—1992 to 2008

Chapter 10. Resurrection, Recovery and Reform—2008-2013

Chapter 11. Different Circumstances Require Different Solutions

Part 2: The Theory of Financial Stability

Chapter 12. Statement: Rule of Law + Freedom + Transparency → Equilibrium

Chapter 13. Saying vs. Doing

Part 3: Proofs of the Theory of Financial Stability

Chapter 14. Mathematics: (1 + i)x > (E = mc²)

Chapter 15. Law: Incomplete "Sale" ≡ Secured Borrowing

Chapter 16. Economics: Savings ≡ Investment

Chapter 17. Accounting: Assets ≡ Liabilities + Capital

Chapter 18. International Trade: Current Account Deficit ≡ Capital Investment — Domestic Savings

Chapter 19. Philosophy: Benevolence > Self Interest > Fraud

Part 4: The Future

Chapter 20. Achieving Wisdom While Avoiding Mistakes of Experience

Chapter 21. Capital Needs

Chapter 22. Sources of Capital

Chapter 23. Managing the Water Balloon

Chapter 24. Balancing the Bubbles

Epilogue: Truth and Consequences

References

About the Companion Website

About the Authors

Index

FREDERICK L. FELDKAMP is a retired partner of Foley & Lardner, LLP, where he chaired the firm's financial asset securitization practice. He has been a key contributor to the legal basis of mortgage-backed securities and other financial innovations in the United States. Feldkamp's numerous publications have appeared in peer-reviewed legal journals around the world.

R. CHRISTOPHER WHALEN is an investment banker and author who lives in New York City. He is Senior Managing Director and Head of Research at Kroll Bond Rating Agency, where he is responsible for financial institution and corporate ratings. Over the past three decades, he has worked for financial firms such as Bear, Stearns & Co., Prudential Securities, Tangent Capital Partners, and Carrington. He was a co-founder and principal of Institutional Risk Analytics from 2003 through 2013, when the firm was acquired by Total Bank Solutions.

The financial panic of 2007–2009 was enough to demonstrate to financial professionals and policymakers the importance of learning from history—including recent history. Readers of Financial Stability will develop a firm grasp of how crisis situations developed in the past and how to use markets to gauge the threat to the future. Financial disruption can be avoided by illuminating and removing conflicts between economic and political interests. By explaining financial stability from analytic, historical, philosophical, legal, accounting, and market perspectives, authors Frederick L. Feldkamp and R. Christopher Whalen uncover an elegant solution to the problem of financial volatility.

From disputes described in Biblical times all the way to the most recent collapse, financial crises throughout history all have a single cause: the hidden leverage and bad debt caused by various types of fraud. That is the basic claim of Financial Stability and, drawing on analysis of 27 years of data, the authors present a remarkably compelling case. After building a firm foundation of historical examples, they reveal a theory of financial stability that is in some ways remarkably simple. The theory does not lack nuance, however, as readers will quickly discover as they work through the mathematical proofs in Financial Stability.

Only a few years after the Great Recession, investors have already begun to realize that free markets have the capacity to narrow credit spreads and stabilize equity markets. Financial Stability outlines the indisputable logic behind this fact, providing a basis from which we can responsibly provide liquidity to accommodate past errors and move forward with a firmer footing.

The financial panic of 2007–2009 was enough to demonstrate to financial professionals and policymakers the importance of learning from history—including recent history. Readers of Financial Stability will develop a firm grasp of how crisis situations developed in the past and how to use markets to gauge the threat to the future. Financial disruption can be avoided by illuminating and removing conflicts between economic and political interests. By explaining financial stability from analytic, historical, philosophical, legal, accounting, and market perspectives, authors Frederick L. Feldkamp and R. Christopher Whalen uncover an elegant solution to the problem of financial volatility.

From disputes described in Biblical times all the way to the most recent collapse, financial crises throughout history all have a single cause: the hidden leverage and bad debt caused by various types of fraud. That is the basic claim of Financial Stability and, drawing on analysis of 27 years of data, the authors present a remarkably compelling case. After building a firm foundation of historical examples, they reveal a theory of financial stability that is in some ways remarkably simple. The theory does not lack nuance, however, as readers will quickly discover as they work through the mathematical proofs in Financial Stability.

Only a few years after the Great Recession, investors have already begun to realize that free markets have the capacity to narrow credit spreads and stabilize equity markets. Financial Stability outlines the indisputable logic behind this fact, providing a basis from which we can responsibly provide liquidity to accommodate past errors and move forward with a firmer footing.