Markham a financial history of the united states from the subprime crisis to the great recession, 2006 2009 (2011)

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


A

Financial
History
of the

United States
From

Enron-Era Scandals to
the Subprime Crisis
(2004-2006)

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


Works by Jerry W. Markham

A Financial History of the United States
From Christopher Columbus to the Robber Barons (1492–1900)

A Financial History of the United States
From J.P. Morgan to the Institutional Investor (1900–1970)

A Financial History of the United States
From the Age of Derivatives into the New Millennium (1970–2001)

A Financial History of Modern U.S. Corporate Scandals

From Enron to Reform

A Financial History of the United States
From Enron-Era Scandals to the Subprime Crisis (2004–2006)

A Financial History of the United States
From the Subprime Crisis to the Great Recession (2006–2009)

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


A

Financial
History
of the

United States
From

Enron-Era Scandals to
the Subprime Crisis
(2004-2006)

Jerry W. Markham

M.E.Sharpe
Armonk, New York
London, England

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


Copyright © 2011 by M.E. Sharpe, Inc.
All rights reserved. No part of this book may be reproduced in any form
without written permission from the publisher, M.E. Sharpe, Inc.,
80 Business Park Drive, Armonk, New York 10504.
Library of Congress Cataloging-in-Publication Data
Markham, Jerry W.
A financial history of the United States : from Enron-era scandals to the subprime crisis (2004–
2006) : from the subprime crisis to the Great Recession (2006–2009) / Jerry W. Markham.
  v. ; cm.
Includes bibliographical references and index.
Contents: Enron and its aftermath — Other Enron era scandals — Corporate governance
reforms — Securities, banking, and insurance — Commodity markets — The rise of the hedge
funds and private equity — The mortgage market — A critical look at the reformers.
ISBN 978-0-7656-2431-4 (cloth : alk. paper)
1. Financial crises—United States—History—21st century. 2. Corporations—Corrupt
practices—United States—History—21st century. 3. Enron Corp—Corrupt practices—History.
4. Investment banking—United States—21st century. 5. United States—Economic policy—21st
century. I. Title.
HB3722.M375 2010
332.0973’090511—dc22

2010007754

Printed in the United States of America
The paper used in this publication meets the minimum requirements of
American National Standard for Information Sciences
Permanence of Paper for Printed Library Materials,

ANSI Z 39.48-1984.
~
EB (c)   10      9      8      7      6      5      4      3      2      1

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


For the Markhams

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I am opposed to millionaires,
but it would be dangerous to offer me the position.
—Mark Twain

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


Contents
From Enron-era Scandals
Subprime Crisis (2004–2006)

to the

List of Abbreviations....................................................................................xix
Preface...................................................................................................... xxiii
Acknowledgments.......................................................................................xxv
Introduction.............................................................................................. xxvii
Photographs follow page 188.

Part I. Enron and Corporate Reforms........................................................1
  1. Enron and Its Aftermath.......................................................................3

The Enron Scandal...................................................................................3
Background........................................................................................3
Government Response........................................................................4

The Trials.................................................................................................7
The Arthur Andersen Fiasco..............................................................7
The Nigerian Barge Fiasco..............................................................10
Broadband Services Prosecutions....................................................13
The NatWest Three...........................................................................15
The Lay and Skilling Criminal Trial................................................18
Lou Pai.............................................................................................32

Summing Up the Enron Litigation........................................................33
The Prosecution’s Scorecard............................................................33
Enron Bankruptcy Proceedings........................................................34
Class-Action Suits............................................................................35
Dynegy..............................................................................................36
  2. Other Enron-Era Scandals.................................................................37

The Telecom Scandals—The Aftermath................................................37
Background......................................................................................37
Nortel................................................................................................41
Adelphia...........................................................................................42
vii

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.

viii

Contents

Other Telecom Firms........................................................................43
WorldCom.........................................................................................43

Other Scandals.......................................................................................47
HealthSouth......................................................................................47
Tyco..................................................................................................51
Cendant and AOL.............................................................................53
Computer Associates........................................................................55
Grocery Store Accounting................................................................56
Pharmaceutical Companies.............................................................57
Conrad Black....................................................................................57
Kmart................................................................................................59
Tax Shelters: Another Enron-Era Scandal.......................................59
Other Accounting Scandals..............................................................65

The Wall Street Scandals.......................................................................66
The Financial Analyst Scandals.......................................................66
Other Financial Analyst Issues........................................................68
Frank Quattrone...............................................................................69
Spitzer’s Downfall............................................................................71
  3. Corporate Governance Reforms........................................................76

Sarbanes-Oxley......................................................................................76
The Enron Reforms...........................................................................76
Other Sarbanes-Oxley Reforms........................................................78

Small Companies..............................................................................79

Loss of Competitive Advantage............................................................80
Competition from Abroad.................................................................80
Blue Ribbon Reviews........................................................................80
Government Concerns......................................................................83

The Executive Compensation Controversy...........................................84
Background......................................................................................84
Fiduciary Duties...............................................................................86
Ovitz’s Compensation......................................................................88
Confiscation Through Taxes.............................................................89
The Reagan and Bush Tax Cuts........................................................91

Compensation Arrangements.................................................................93
Golden Parachutes...........................................................................93
Class Warfare and the Criminalization of Executive Pay................95
Richard Grasso’s Retirement Package.............................................97

SEC Full Disclosure............................................................................100
Background....................................................................................100
Disclosure Fails..............................................................................101
The SEC Tries Again......................................................................102

Compensation Concerns Grow............................................................103
Compensation as Politics...............................................................103

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.

Contents

ix


Incentive Compensation......................................................................104
Options...........................................................................................104
Option Effects.................................................................................106

More Scandals.....................................................................................107
Option Backdating..........................................................................107
Prosecutions...................................................................................109
Other Abuses.................................................................................. 111
The War on Perks............................................................................112

Corporate Reforms—Shareholder Voting............................................117
Proxy Votes.....................................................................................117
Election Proposals.........................................................................120
Majority Votes................................................................................122
Staggered Boards...........................................................................123
Political Correctness......................................................................123
Broker Votes....................................................................................124
Separation of Chairman and CEO.................................................124
Shareholder Bill of Rights..............................................................125

Other Reforms.....................................................................................126
Class-Action Lawsuits....................................................................126
Some Corporate Pushback.............................................................130
Class-Action Lawyer Scandals.......................................................131
Part II. Financial Market Developments................................................137

  4. Securities, Banking, and Insurance..................................................139

Securities Market Developments.........................................................139

Some History..................................................................................139
Regulation......................................................................................141
National Market System.................................................................142
Specialists’ Problems......................................................................143
Information Technology..................................................................144
More Automation............................................................................145
The ECNs Compete........................................................................146
NASDAQ.........................................................................................149
Transformation of NYSE ...............................................................150
Broadening Markets.......................................................................154
Overlapping Regulation.................................................................155

The Options Exchanges.......................................................................156

Some History..................................................................................156
Competition....................................................................................157
Subprime Crisis..............................................................................159

Clearing and Settlement.......................................................................159

Securities Industry..........................................................................159
Additional Developments...............................................................162

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.

x

Contents

Transfer Agents..............................................................................164
Treasury Report..............................................................................164
International Clearing...................................................................165
Concerns over Cross-Border Settlement........................................166
Equity Options Clearing................................................................167

Custody and Payment Systems............................................................167
Free Credit Balances......................................................................167
Collateral Arrangements................................................................169
Payment Systems and Central Banks.............................................170
CHIPS............................................................................................171
Fedwire...........................................................................................172
Fixed Income Clearing Corporation..............................................172
SWIFT............................................................................................172
Payment System Concerns..............................................................173

Stock Lending......................................................................................175

Capital Requirements..........................................................................176
Bank Capital Requirements............................................................176
Subprime Reaction.........................................................................180

SEC Net Capital Requirements...........................................................180

Background....................................................................................180
Drexel Burnham.............................................................................182

Consolidated Supervised Entities...................................................183
Insurance Capital Requirements....................................................184
  5. Commodity Markets..........................................................................189

Market Developments..........................................................................189
Some History..................................................................................189
Regulation......................................................................................190
The Stock Market Crash of 1987....................................................193
Forex Fraud....................................................................................194
Other Over-the-Counter Derivatives.............................................196
Commodity Futures Modernization Act of 2000............................197
EnronOnline...................................................................................199
Energy Market Manipulations........................................................200
FERC Powers.................................................................................204
More Regulation.............................................................................207
Index Traders..................................................................................208
The Enron Loophole.......................................................................209
ECNs in the Commodity Markets...................................................212
Electronic Trading Delayed...........................................................213
Competition from Abroad...............................................................214
Competition and Consolidation.....................................................217

Futures Market Clearinghouse.............................................................218

The Role of the Clearinghouse.......................................................218

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


Contents

xi

The Stock Market Crash of 1987....................................................220
Over-the-Counter Clearing............................................................221
Competition Concerns....................................................................221
Cross-Margining............................................................................222
Custody Arrangements—Futures Commission Merchants.............224
CFTC Capital Requirements..........................................................225

  6. The Rise of the Hedge Funds and Private Equity...........................227

Hedge Funds........................................................................................227
Background....................................................................................227
Mutual Fund Scandals...................................................................231
The SEC’s Response.......................................................................236
Regulating Hedge Funds................................................................241

Hedge Funds Expand...........................................................................244

Hedge Funds Go Public.................................................................244
Hedge Fund Abuses........................................................................245

The Rise of Private Equity...................................................................249
Some History..................................................................................249
Venture Capitalists.........................................................................250
Private Equity.................................................................................254
Private Equity Renewed.................................................................256
Leveraged Loans............................................................................258
CDOs..............................................................................................259
Private Equity and Hedge Funds...................................................261
Private Equity and Privacy............................................................263
Union Objections...........................................................................264
Private Goes Public.......................................................................266
KKR................................................................................................269
The Carlyle Group..........................................................................270
Asset Managers..............................................................................271
Taxes...............................................................................................274
The Credit Crunch and Private Equity...........................................275
Sovereign Wealth Funds.................................................................276
National Security Concerns...........................................................278
  7. The Mortgage Market.......................................................................281

Mortgages............................................................................................281
Some History..................................................................................281
Mortgage Lenders..........................................................................282
Residential Mortgage Providers.....................................................283
Twentieth-Century Mortgage Markets...........................................286
Real Estate Bonds..........................................................................288
The Great Depression.....................................................................290
Residential Markets........................................................................292

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.

xii

Contents

The Rise of the GSEs......................................................................294
Federal Home Loan Bank Board....................................................295
Reconstruction Finance Corporation.............................................296

Building a Mortgage Market...............................................................296

Roosevelt Acts................................................................................296
Home Owner’s Loan Corporation.................................................297
Federal Housing Authority.............................................................298

Reconstruction Finance Corporation—Expansion........................302
Fannie Mae.....................................................................................302
More Programs...............................................................................303
Postwar Boom................................................................................304
The 1950s.......................................................................................305

The S&L Crisis....................................................................................307
S&L Business Plans.......................................................................307
The 1960s.......................................................................................308
Studies............................................................................................310
More Legislation............................................................................311
S&L Problems................................................................................312
The S&L Crisis...............................................................................315
Deregulation...................................................................................317

Problems Grow...............................................................................318
Blame..............................................................................................321
FIRREA..........................................................................................322
Commercial Banks.........................................................................324
  8. A Critical Look at the Reformers.....................................................327

Prosecution Abuses..............................................................................327
The New York Attorney General.....................................................327
Federal Prosecutors.......................................................................328
Justice Department as Regulator...................................................332

Corporate Governance Reforms..........................................................334
Punitive Legislation........................................................................334
Compensation Issues......................................................................334
Athletes and Entertainers...............................................................336
Scalable Compensation..................................................................340
Results............................................................................................341
Union Pension Funds as Reformers...............................................341
Newspapers as Reformers..............................................................344
Conclusion..................................................................................................351
Notes . ......................................................................................................353
Selected Bibliography.................................................................................363
Name Index.................................................................................................. I-1
Subject Index............................................................................................. I-17

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


Contents

xiii

From the Subprime Crisis
Great Recession (2006–2009)

to the

List of Abbreviations................................................................................... xiii
Preface........................................................................................................ xvii
Acknowledgments........................................................................................xix
Introduction..................................................................................................xxi
Photographs follow page 622.
Part III. The Growth of the Mortgage Market......................................375
9. Securitization......................................................................................377
Government-Sponsored Enterprises.....................................................377
GSEs................................................................................................377
Securitization...................................................................................379
Collateralized Mortgage Obligations..............................................381
Mortgage Market Growth.....................................................................382
Secondary Market............................................................................382
Private Securitizations.....................................................................384
Asset-Backed Commercial Paper.....................................................385
Student Loans..................................................................................386
Subprime Lending................................................................................391
Subprime Loans...............................................................................391
Consumer Protection Legislation....................................................392
Predatory Lending Practices...........................................................393
Federal Preemption.........................................................................396
Fannie Mae and Freddie Mac..........................................................399
Collateralized Debt Obligations......................................................402

Monoline Insurers............................................................................403
Credit-Default Swaps.......................................................................406
Mortgage Brokers............................................................................407
Nonbank Subprime Lenders.............................................................408
10. Prelude to a Crisis..............................................................................412
Panics and Bubbles...............................................................................412
Some History....................................................................................412
The Stock Market Crash of 1929.....................................................413
Inflation............................................................................................414
The Stock Market Crash of 1987.....................................................415
Trouble Abroad................................................................................416
Run-Up to the Real Estate Bubble.......................................................418
Breaking the Dot.Com Bubble.........................................................418
Interest Rates...................................................................................419

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


xiv

Contents

More Interest Rate Increases...........................................................423
Changing of the Guard....................................................................425
First-Quarter Results.......................................................................425
Paulson Arrives................................................................................426
Interest Rate Effects.........................................................................427
Third Quarter...................................................................................428
The First Cracks Appear.......................................................................429
The Dow Rises.................................................................................429

False Hopes.....................................................................................430
The New Year—2007...........................................................................431
Mixed Signals..................................................................................431
New Century Financial....................................................................432
More Losses.....................................................................................433
On to the Second Quarter................................................................434
Bear Stearns—The Struggle Begins.................................................437
The Credit Crunch and Private Equity............................................440
Third-Quarter Problems..................................................................444
Fair-Value Accounting.....................................................................448
The Fed Acts on Rates......................................................................449
Subprime Problems Travel Abroad..................................................451
The Crisis at Citigroup....................................................................453
UBS..................................................................................................457
Money Market Fund Problems........................................................459
Asset-Backed Commercial Paper (ABCP) Problems.......................460
Fed Policy........................................................................................461
Fourth-Quarter Results....................................................................463
Fannie and Freddie..........................................................................464
Payday Lending...............................................................................467
Executive Compensation..................................................................468
Part IV. The Subprime Crisis...................................................................471
11. The Crisis Begins................................................................................473
A Crumbling Landscape.......................................................................473
The New Year...................................................................................473
Société Générale..............................................................................475
Countrywide Financial....................................................................476
The Crisis Continues.......................................................................480
Policy Developments........................................................................480
Mortgages........................................................................................482

The Crisis Continues.......................................................................485
Auction Rate Security Market..........................................................486
More Problems.................................................................................490
Bear Stearns Fails............................................................................495

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


Contents

xv

First-Quarter Results.......................................................................499
More UBS Problems........................................................................503
More Losses.....................................................................................504
Economic Turmoil Continues..........................................................504
Financial Services Results...............................................................507
Investigations...................................................................................508
Broadening Problems......................................................................509
Short Sales.......................................................................................510
The Decline Continues.....................................................................512
IndyMac Fails..................................................................................514
Energy Prices...................................................................................516
Federal Housing Administration.....................................................517
Third-Quarter Results......................................................................519
Fannie Mae and Freddie Mac Are Nationalized..............................520

12. The Great Panic Begins......................................................................524
The Financial Hurricane.......................................................................524
Lehman Brothers..............................................................................524

Reserve Primary Fund.....................................................................531
The AIG Debacle.............................................................................534
More Failures.......................................................................................546
Merrill Lynch...................................................................................546
The Crisis at Morgan Stanley..........................................................554
Washington Mutual (WaMu)............................................................557
Wachovia..........................................................................................558
The Bailout...........................................................................................561
The Feds Face the Crisis..................................................................561
The Bailout Bill................................................................................562
Troubled Asset Relief Program (TARP)...........................................565
More Problems.................................................................................565
Government Reactions.....................................................................566
Market Volatility..............................................................................567
The TARP Bailouts...........................................................................567
Municipal Securities........................................................................570
General Electric...............................................................................570
13. The Crisis Continues..........................................................................572
The Contagion Spreads........................................................................572
Crisis Abroad...................................................................................572
Private Equity..................................................................................577
Hedge Funds....................................................................................579
Venture Capital................................................................................583
Dealing with Chaos..............................................................................584
The Crisis Rolls On..........................................................................584

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


xvi

Contents

Greenspan........................................................................................586
More Market Volatility.....................................................................587
More Citigroup Problems................................................................593
Government Action..........................................................................595
More Losses.....................................................................................597
The Automakers Fail............................................................................600
Problems in Motor City...................................................................600
General Motors and Ford................................................................601
The Motor City Bailout Begins........................................................603
The Madoff Fraud and Other Problems...............................................608
Fraud Continues..............................................................................608
The Madoff Fraud............................................................................609
Suicides and Scandals.....................................................................613
A Bad Year Finally Ends......................................................................615
The Economy Continues to Struggle...............................................615
Year-End Results..............................................................................618

Part V. The Crisis Abates..........................................................................623
14. The Rise and Fall of the Subprime Crisis........................................625
The New President...............................................................................625
The New Year—2009........................................................................625
Trouble Abroad................................................................................627
Inauguration Day.............................................................................627
Regulatory Proposals and Stimulus.................................................629
The SEC...............................................................................................630
Conditions Remain Uncertain.........................................................632
Executive Compensation......................................................................636

A Populist Issue Returns..................................................................636
Bonuses at AIG................................................................................638
The Controversy Continues.............................................................640
Compensation Abroad.....................................................................644
The Bottom Is Reached........................................................................646
The Market Decline.........................................................................646
Market Critics Emerge.....................................................................648
Market Volatility..............................................................................649
Government Interference.................................................................651
Economic News................................................................................652
Sunrise in America...............................................................................655
The Second Quarter Begins.............................................................655
TARP Cops.......................................................................................656
TARP Funds.....................................................................................658
Green Shoots....................................................................................660
The Struggle Continues...................................................................662

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


Contents

xvii

The Way to Recovery...........................................................................667
The Rocky Road...............................................................................667
A Parting of the Clouds....................................................................669
Fourth Quarter.................................................................................675
A New Decade Begins..........................................................................684
Recovery Is Slow and Uncertain.....................................................688

15. Regulation, Reform, and the Subprime Crisis.................................696
What Caused the Subprime Crisis?......................................................696
Subprime Affirmative Action............................................................697
CRA “Extortion”.............................................................................698
Down Payment Policies...................................................................700
Safety and Soundness Concerns......................................................700
Freddie Mac and Fannie Mae Quotas.............................................701
Andrew Cuomo................................................................................703
Bush Administration........................................................................704
Interest Rate Policies.......................................................................705
Targeted Interest Rates....................................................................706
Carry Trades....................................................................................707
The Fed’s Liquidity Role..................................................................708
“Helicopter Ben” and “Hank the Bazooka”...................................710
Capital Requirements......................................................................711
SEC Capital Requirements..............................................................714
Fair-Value Accounting.....................................................................715
The Fair-Value Fight........................................................................716
The FASB Reacts..............................................................................720
Real Estate Appraisals.....................................................................721
Appraisal of Income-Producing Property........................................723
Risk Models......................................................................................724
Regulatory Reform...............................................................................725
Financial Literacy of Regulators.....................................................725
Functional Regulation.....................................................................728
Treasury Report...............................................................................728
Subprime Crisis Regulation Proposals............................................729
Turf Wars..........................................................................................730
The SEC and the Goldman Sachs Case...........................................731

Dodd-Frank Wall Street Reform and Consumer Protection Act......736
Elusive Systemic Risk.......................................................................740
The SEC, CFTC, and Derivatives....................................................741
Hedge Funds....................................................................................747
The Ratings Agencies—Shoot the Messenger..................................748
Consumer Protection.......................................................................755
Consumer Financial Protection Bureau..........................................756
Compensation Issues Again.............................................................758

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


xviii

Contents

Federal Insurance............................................................................761
Regulation Abroad................................................................................762
The Financial Services Authority.....................................................762
European Union...............................................................................764

Conclusion..................................................................................................767
Notes .........................................................................................................769
Selected Bibliography.................................................................................777
Cumulative Name Index.............................................................................785
Cumulative Subject Index...........................................................................815
About the Author.........................................................................................826

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.

List of Abbreviations

ABCP
ACORN
AMLF
AFSCME
ARMs
ARS
B&Ls
BIF
BIS
CalPERS
CARS
CBOE
CBOT
CDs
CDOs
CDOROM
CDS
CEA
CFMA
CFPB
CFTC
CIBC
CME
CMOs
CoCos
CPDO
CPFF

CRA
CSEs

asset-backed commercial paper
Association of Community Organizations for Reform Now
Asset-Backed Commercial Paper Money Market Fund
Liquidity Facility
American Federation of State, County and Municipal
­Employees
adjustable-rate mortgages
auction rate security
building and loan societies
Bank Insurance Fund
Bank for International Settlements
California Public Employees’ Retirement System
car allowance rebate systems or “Cash for Clunkers”
Chicago Board Options Exchange
Chicago Board of Trade
certificates of deposit
collateralized debt obligations
Moody’s risk model
credit-default swaps
Commodity Exchange Act of 1936
Commodity Futures Modernization Act of 2000
Consumer Financial Protection Bureau
Commodity Futures Trading Commission
Canadian Imperial Bank of Commerce
Chicago Mercantile Exchange
collateralized mortgage obligations
contingent convertible bonds

constant proportion debt obligation
Commercial Paper Funding Facility
Community Reinvestment Act (1977)
consolidated supervised entities
xix

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


xx

List of Abbreviations

CTAs
DCMs
DCO
DOE
DTCC
DTEFs
ECB
ECMs
ECNs
ERISA
ETFs
FASB
FCIC
FCM
FDIC
FERC
FFEL

FHA
FHLBB
FHLBs
FinCEN
FINRA
FIO
FIRREA

commodity trading advisers
designated contract markets
derivatives clearing organization
Department of Education
Depository Trust & Clearing Corporation
derivatives transaction execution facilities
European Central Bank
exempt commercial markets
electronic communication networks
Employee Retirement Income Security Act of 1979
exchange traded funds
Financial Accounting Standards Board
Financial Crisis Inquiry Commission
futures commission merchant
Federal Deposit Insurance Corporation
Federal Energy Regulatory Commission
Federal Family Education Loan
Federal Housing Administration
Federal Home Loan Bank Board
federal home loan banks
Financial Crimes Enforcement Network
Financial Industry Regulatory Authority

Federal Insurance Office
Financial Institutions Reform, Recovery and Enforcement
Act
FRBNY
Federal Reserve Bank of New York
Freddie Mac Federal Home Loan Mortgage Corporation
FSA
Financial Services Authority (UK)
FSB
Financial Stability Board
FSLIC
Federal Savings and Loan Insurance Corporation
FSOC
Financial Stability Oversight Council
FTC
Federal Trade Commission
GAO
Government Accountability Office
GDP
gross domestic product
Ginnie Mae Government National Mortgage Association (GNMA)
GSEs
government-sponsored enterprises
HAMP
Home Affordability Modification Program
HMDA
Home Mortgage Disclosure Act (1975)
HOEPA
Home Ownership and Equity Protection Act (1994)
HOLC

Home Owner’s Loan Corporation
HUD
U.S. Department of Housing and Urban Development
IASB
International Accounting Standards Board
ICE
InternationalExchange
IMF
International Monetary Fund

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


List of Abbreviations

IOSCO
International Organization of Securities Commissions
IPO
initial public offering
ISDA
International Swaps and Derivatives Association
ITIN
individual taxpayer identification number
JGBs
Japanese government bonds
KKR Kohlberg Kravis Roberts
LBOs
leveraged buyouts
LGIP
Local Government Investment Pool (Florida)

LIBOR
London interbank offered rate
LTCM
Long Term Capital Management
M&A
mergers and acquisition
MERS
Mortgage Electronic Registration Systems
MGIC
Mortgage Guaranty Insurance Corporation
MLEC
Master Liquidity Enhancement Conduit
MMIFF
Money Market Investor Funding Facility
MOC
Mortgage Origination Commission
MRBs
mortgage revenue bonds
MSRB
Municipal Securities Rulemaking Board
NAIC
National Association of Insurance Commissioners
NAMA
National Asset Management Agency
NASAA
North American Securities Administrators Association
NASD
National Association of Securities Dealers
NASDAQ
originally National Association of Securities Dealers

Automated Quotations
NAV
net asset value
NBER
National Bureau of Economic Research
NCUA
National Credit Union Administration
NFA
National Futures Association
NOW
negotiable order of withdrawal
NRSROs
national recognized statistical ratings organizations
NSMIA
National Securities Markets Improvement Act of 1996
NYBOT
New York Board of Trade
NYMEX
New York Mercantile Exchange
NYSE
New York Stock Exchange
OCC
Options Clearing Corporation
OCC
Office of the Comptroller of the Currency
OFAC
Office of Foreign Asset Control
OFHEO
Office of Federal Housing Enterprise Oversight
OPEC

Organization of Petroleum Exporting Countries
OSHA
Occupational Safety & Health Agency
OTC
over-the-counter
OTS
Office of Thrift Supervision
PennyMac
Private National Mortgage Acceptance Company
PIPEs
private investments in public equities

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.

xxi


xxii

List of Abbreviations

PPIP
PWG
RBS
REIT
REMICs
RESPA
RFC
RPF
RTC

S&L
SAIF
Sallie Mae
SBICs
SEC
SEIU
SILF
SIMEX
SIPC
SIVs
SPACs
SPAN
SPVs
SWFs
TAF
TALF
TARP
TIPS
TLGP
TSLF
UAW
USDA
USFE
VaR
VCs
YSP

Public-Private Investment Program
President’s Working Group on Financial Markets
Royal Bank of Scotland

real estate investment trust
real estate mortgage investment conduits
Real Estate Settlement Procedures Act (1974)
Reconstruction Finance Corporation
Reserve Primary Fund
Resolution Trust Corporation
savings and loan
Savings Association Insurance Fund
Student Loan Marketing Association
small business investment companies
Securities and Exchange Commission
Service Employees International Union
Student Loan Insurance Fund
Singapore International Monetary Exchange
Securities Investor Protection Corp.
structured investment vehicles
special-acquisition companies
Standard Portfolio Analysis of Risk
special-purpose vehicle
sovereign wealth funds
term auction facility
Term Asset-Backed Securities Loan Facility
Troubled Asset Relief Program
Treasury inflation protected securities
the FDIC Temporary Liquidity Guarantee Program
Term Securities Lending Facility
United Auto Workers
United States Department of Agriculture
United States Futures Exchange
value-at-risk models

venture capitalists
yield spread premium

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


Preface

This is the fifth volume in a series on the history of finance in America. The
first three volumes trace the development of finance in America from the
colonial period to the beginning of this century. They are entitled A Financial
History of the United States: From Christopher Columbus to the Robber Barons
(1492–1900); A Financial History of the United States: From J.P. Morgan to the
Institutional Investor (1900–1970); A Financial History of the United States:
From the Age of Derivatives into the New Millennium (1970–2001). The fourth
volume describes the Enron era financial scandals and other developments in
finance during the period 2001 to 2005 and is entitled A Financial History of
Modern U.S. Corporate Scandals: From Enron to Reform.
This volume starts with the aftermath of those scandals, particularly the
prosecution of the executives caught up in them. It also addresses the considerable concerns that have been raised by the Enron-era reforms and prosecutions,
describing how the Justice Department and the then–New York attorney general, Eliot Spitzer, resorted to unseemly practices in order to gain convictions.
In addition, this volume discusses the debate over executive pay and corporate
governance practices that arose from the Enron-era scandals.
The history then turns to developments in the securities and derivative
markets, covering hedge funds, venture capital, private equity, and sovereign
wealth funds. It considers the development of the mortgage market in the
United States, addressing the government housing policies that promoted
subprime lending and describing predatory lending practices in the subprime
market. A sixth volume in this series will address the events that preceded the
subprime crisis and elaborates on that crisis in detail.

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(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.


Acknowledgments

The author thanks Beth Peiffer for research assistance, reading, correction of
the manuscript, and preparation of the index. He also acknowledges support
from the Florida International University College of Law.

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(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.