Foreword                                           xv
Preface                                            xix
Cast of Characters                                 xxiii
    Chapter 1 Introduction                         1    (4)
  PART I THE 1998 LTCM CRISIS                      5    (116)
    Chapter 2 Meriwether's Magic Money Tree        7    (14)
      The Birth of Bond Arbitrage                  7    (4)
      The Dream Team                               11   (3)
      Early Success                                14   (7)
    Chapter 3 Risk Management                      21   (16)
      The General Idea                             21   (1)
      Leverage                                     22   (1)
      Measuring Risk                               23   (1)
      The ρ                                    24   (3)
        Economics                                  24   (1)
        Copycats, Puppies, and Counterparties      25   (2)
      LTCM's Actual Risk Management Practices      27   (10)
        Diversification                            27   (1)
        Operations                                 28   (1)
        The Raw Evidence                           29   (8)
    Chapter 4 The Trades                           37   (34)
      The Short U.S. Swap Trade                    41   (3)
      The European Cross-Country Swap Trade        44   (2)
      (Short UK and Long Europe)
      Long U.S. Mortgage Securities Hedged         46   (2)
      The Box Spread in Japan                      48   (2)
      The Italian Swap Spread                      50   (2)
      Fixed-Income Volatility Trades               52   (2)
      The On-the-Run and Off-the-Run Trade         54   (3)
      Short Longer-Term Equity Index Volatility    57   (3)
      Risk Arbitrage Trades                        60   (3)
      Equity Relative-Value Trades                 63   (2)
      Emerging Market Trades                       65   (2)
      Other Trades                                 67   (1)
      The Portfolio of Trades                      68   (3)
    Chapter 5 The Collapse                         71   (24)
      Early Summer 1998                            71   (2)
      The Salomon Shutdown                         73   (2)
      The Russian Default                          75   (2)
      The Phone Calls                              77   (2)
      The Meriwether Letter                        79   (2)
      Buffett's Hostile Alaskan Offer              81   (1)
      The Consortium Bailout                       82   (2)
      Too Big To Fail                              84   (1)
      Why Did It Happen?                           85   (4)
      Appendix 5.1 The John Meriwether Letter      89   (4)
      Appendix 5.2 The Warren Buffett Letter       93   (2)
    Chapter 6 The Fate of LTCM Investors           95   (6)
    Chapter 7 General Lessons from the Collapse    101  (20)
      Interconnected Crowds                        101  (1)
      VaR                                          102  (3)
      Leverage                                     105  (3)
      Clearinghouses                               108  (2)
      Compensation                                 110  (1)
      What's Size Got to Do with It?               110  (3)
      Contingency Capital                          113  (1)
      The Fed Is a Coordinator of Last Resort      114  (1)
      Counterparty Due Diligence                   115  (1)
      Spread the Love                              115  (1)
      Quantitative Theory Did Not Cause the        116  (2)
      LTCM Collapse
      Deja Vu                                      118  (3)
  PART II THE FINANCIAL CRISIS OF 2008             121  (188)
    Chapter 8 The Quant Crisis                     123  (18)
      The Subprime Mortgage Market Collapse        127  (2)
      What Was the Quant Crisis?                   129  (1)
      The Erratic Behavior of Quant Factors        130  (4)
        Standard Factors                           130  (3)
        Quantitative Portfolio Factors             133  (1)
      Causes of the Quant Crisis                   134  (3)
      The Shed Show                                137  (4)
    Chapter 9 The Bear Stearns Collapse            141  (14)
      A Brief History of the Bear                  141  (2)
      Shadow Banking                               143  (1)
      Window Dressing                              144  (1)
      Repo Power                                   145  (3)
      The Unexpected Hibernation                   148  (2)
      The Polar Spring                             150  (5)
    Chapter 10 Money for Nothing and Fannie and    155  (36)
    Freddie for Free
      The Basic Business                           157  (1)
      Where's the Risk?                            158  (1)
      CDO and CDO2                                 159  (3)
      The Gigantic Hedge Fund                      162  (3)
      Big-Time Profits                             165  (3)
      The U.S. Housing Bubble                      168  (2)
      The Circle of Greed                          170  (16)
        Real Estate Agents and Mortgage Lender     173  (4)
        Tricks
        Home Owners                                177  (1)
        Profits and Politicians                    177  (3)
        The Media and Regulators                   180  (2)
        Grade Inflation                            182  (3)
        Commercial Banks                           185  (1)
      Freddie and Fannie's Foreclosure             186  (1)
      Why Save Freddie and Fannie?                 187  (1)
      Did Anyone Know?                             188  (3)
    Chapter 11 The Lehman Bankruptcy               191  (42)
      The Wall Street Club                         191  (2)
      Why Was Lehman Next?                         193  (3)
      Business Exposure                            196  (6)
      A Chronology of the Gorilla's Death          202  (15)
        Double Down in Real Estate                 203  (4)
        Mildly Seeking Capital                     207  (6)
        The Final Days                             213  (4)
      A Classic Run on the Bank                    217  (5)
        Why Let Lehman Fail?                       219  (3)
      Who Was at Fault?                            222  (4)
        Lehman Brothers                            222  (2)
        The Counterparties                         224  (1)
        The Government and Market Structure        225  (1)
        The Legal Opinion on the Lehman            225  (1)
        Bankruptcy
      Who Would Have Been Next?                    226  (1)
      The Spoils of Having Friends in High         227  (6)
      Places
    Chapter 12 The Absurdity of Imbalance          233  (12)
      The Long-Dated Swap Imbalance                236  (5)
      The Repo Imbalance                           241  (2)
      The 228 Wasted Resources and the Global      243  (2)
      Run on Banks
    Chapter 13 Asleep in Basel                     245  (8)
      Basel I                                      246  (2)
        The Concept                                246  (1)
        The Problems                               247  (1)
      Basel II                                     248  (2)
        The Concept                                248  (1)
        The Problems                               249  (1)
      Basel and the Financial Crisis               250  (3)
    Chapter 14 The LTCM Spinoffs                   253  (12)
      JWM Partners LLC                             253  (5)
      Platinum Grove Asset Management              258  (1)
      The Others                                   259  (3)
      The Copycat Funds                            262  (3)
    Chapter 15 The End of LTCM's Legacy            265  (24)
      The Bear and the Gorilla Attack              265  (6)
      November Rain                                271  (3)
      What Went Wrong?                             274  (7)
        Market Insanity                            275  (6)
      Bigger Shocks                                281  (1)
      Market Imbalance                             282  (3)
      Deleveraging                                 285  (1)
      Coup de Grace                                286  (3)
    Chapter 16 New and Old Lessons from the        289  (20)
    Financial Crisis
      Interconnectedness and Crowds                289  (2)
      Leverage                                     291  (2)
      Systemic Risk and Too Big to Fail            293  (1)
      Derivatives: The Good, the Bad, and the      294  (3)
      Ugly
      Conflicts of Interest                        297  (1)
      Policy Lessons                               298  (3)
      Risk Management                              301  (1)
      Counterparty Interaction                     302  (2)
      Hedge Funds                                  304  (2)
      The Importance of Arbitrage                  306  (3)
  PART III THE AFTERMATH                           309  (44)
    Chapter 17 The Flash Crash                     311  (12)
      Background                                   312  (1)
      Flash Crash Theories                         313  (2)
        Fat Finger Theory                          314  (1)
        High-Frequency Trader Theory               314  (1)
        Jittery Markets                            315  (1)
      The Real Cause of the Flash Crash            315  (6)
        The Waddell-Reed Trade                     316  (1)
        The Computer Glitch                        317  (2)
        Gone Fishing                               319  (2)
      The Aftermath                                321  (2)
    Chapter 18 Getting Greeked                     323  (16)
      Members Only                                 324  (6)
        The Conditions                             324  (4)
        The Benefits of Membership                 328  (1)
        The Drawbacks of Membership                328  (2)
      The Club's Early Years                       330  (2)
      Getting Greeked                              332  (1)
      Greek Choices                                333  (2)
        Remain a Club Member and Order Finances    333  (1)
        Ditch the Club and Keep the Debt           334  (1)
        Ditch the Club and Ditch the Debt          334  (1)
        The IMF and Euro Packages                  335  (1)
      The EU's Future                              335  (4)
    Chapter 19 The Fairy-Tale Decade               339  (14)
      I Hate Wall Street                           340  (4)
      The Real Costs of the Financial Crisis       344  (2)
      An Avatar's Life Force                       346  (3)
      Economic System Choices                      349  (1)
      The Crisis of Crowds                         350  (1)
      The Wine Arbitrage                           351  (2)
  APPENDIXES                                       353  (44)
      Appendix A The Mathematics of LTCM's         355  (6)
      Risk-Management Framework
        A General Framework                        355  (2)
        A Numerical Example                        357  (1)
        Measuring Risk                             357  (4)
      Appendix B The Mechanics of the Swap         361  (4)
      Spread Trade
        The Long Swap Spread Trade                 361  (1)
        The Short Swap Spread Trade                362  (3)
      Appendix C Derivation of Approximate Swap    365  (4)
      Spread Returns
      Appendix D Methodology to Compute            369  (4)
      Zero-Coupon Daily Returns
      Appendix E Methodology to Compute Swap       373  (2)
      Spread Returns from Zero-Coupon Returns
      Appendix F The Mechanics of the              375  (2)
      On-the-Run and Off-the-Run Trade
      Appendix G The Correlations between LTCM     377  (2)
      Strategies Before and During the Crisis
      Appendix H The Basics of Creative            379  (2)
      Mortgage Accounting
      Appendix I The Business of an Investment     381  (12)
      Bank
        Investment Banking                         381  (1)
        Capital Markets                            382  (1)
        Equities                                   382  (1)
        Equity Cash                                382  (1)
        Equity Derivatives                         383  (1)
        Equity Finance                             384  (1)
        Arbitrage (Proprietary Trading)            384  (1)
        Fixed Income                               385  (1)
        Government and Agency Obligations          385  (1)
        Corporate Debt Securities and Loans        385  (1)
        High-Yield Securities and Leveraged        386  (1)
        Bank Loans
        Money Market Products                      386  (1)
        Mortgage- and Asset-Backed Securities      386  (1)
        Municipal and Tax-Exempt Securities        387  (1)
        Financing                                  387  (1)
        Fixed-Income Derivatives                   388  (1)
        Lehman Brothers Bank                       388  (1)
        Foreign Exchange                           388  (1)
        Global Distribution (Global Sales)         389  (1)
        Research                                   389  (1)
        Client Services                            389  (1)
        Private Client Services (Private Wealth    389  (1)
        Management)
        Private Equity                             390  (1)
        Technology                                 390  (1)
        Corporate and Risk Management              390  (1)
        Summary                                    391  (2)
      Appendix J The Calculation of the BIS        393  (4)
      Capital Adequacy Ratio
        The General Calculation                    393  (2)
        An Example                                 395  (2)
Notes                                              397  (46)
Glossary                                           443  (8)
Bibliography                                       451  (14)
About the Author                                   465  (2)
Index                                              467