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Financial Origami: How the Wall Street Model Broke

ISBN: 978-1-118-00181-3
192 pages
April 2011
Financial Origami: How the Wall Street Model Broke (1118001818) cover image
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.

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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.

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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.

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April 11, 2011
Financial Origami

Origami, the Japanese art of folding paper into beautiful shapes, is the perfect metaphor for the financial engineering that Wall Street has engaged in for years.  Instead of folding paper, Wall Street’s quants and rocket scientists fold the attributes of Wall Street’s stocks, bonds or derivatives into new securities in order to allocate risk, reduce financing costs, and create free-flowing capital.  It’s now clear that this type of financial origami was a major factor in the credit crisis and financial meltdown of 2008-2009.

In his new book, Financial Origami; How the Wall Street Model Broke (Wiley/Bloomberg Press; Hardcover; April 2011; $27.95; 978-1-118-00181-3) 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.

Financial Origami explains how in the comparatively stable years of the early 2000s, when there was less risk to transfer, Wall Street began manufacturing risk by creating products that multiplied risk exposures and encouraged subprime lending. With the collapse of Lehman Brothers the model effectively died. Moynihan explains how the recent model of financial origami essentially became a process of taking the attributes of a few, basic pieces of paper, such as stocks, bonds and insurance contracts, and folding and refolding them to form something that seems new. Over time, Wall Street’s penchant for financial origami ceased to be a benefit to the economy and became detrimental to overall financial and economic stability.

The broken model of folding existing products into "new" ones is not the only financial engineering performed in the world of finance. Financial Origami also touches on additional instances such as:

  • 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
  • How Wall Street began manufacturing risk by creating products that multiplied risk exposures and encouraged subprime lending

While the credit crisis put a spotlight on financial innovation, the rapid growth of the over-the-counter derivatives market and engineered products has been a simmering controversy since the 1980s. Moynihan explains the events that have shaped financial markets, firms, and products over the past forty years, and has hurt Wall Street over the past three. It also explores the evolution of Wall Street, shows the logical sequence of events that caused the financial crisis of 2007-2009 and shares insight on how to fix some of Wall Street’s problems.

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