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Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts

November 7, 2018

Boomerang (Michael Lewis)

This week, we'll look at Boomerang by Michael Lewis. As usual, I've included representative quotes from the book along with finance-related lessons (in blue) that we can apply to markets today.

Lewis visits Europe to consider the aftermath of the 2008 financial crisis on Iceland, Greece, Ireland, and Germany.

Each of these countries took enormous financial risks it didn't understand. In each case, there were people who saw what was going on. Their voices were ignored until after the market began to collapse.

Iceland: The Carry Trade

For the past few years, some large number of Icelanders engaged in the same disastrous speculation. With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn't afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising. (p. 8)

Borrowing at a low interest rate and buying an asset that is expected to provide a higher return is known as the carry trade. It's a profitable strategy for traders who get in early. In this case, as other traders piled in - borrowing yen and buying the krona - the krona rose in value, providing those early traders with both positive carry (the difference between what they paid to borrow yen and what they made lending the krona) and the appreciation of the krona itself.

It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay became many times more expensive. Now many Icelanders - especially young Iceladers - own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them. To the Range Rover problem there are two immediate solutions. One is to put it on a boat, ship it to Europe, and try to sell it for a currency that still has value. The other is to set it on fire and collect the insurance: Boom! (p. 9)

At some point, the carry trade runs too far, creating mispricings that will eventually be reversed. In this case, the krona became overvalued and the yen undervalued. Traders needed to exit their positions, buying yen and selling the assets they had bought, but some weren't able to because the assets they bought weren't liquid enough. If you borrow yen in the short term and buy long-term bonds to get a higher interest rate (or worse, buy houses and cars), you're counting on finding a willing buyer to eventually take that position off your hands.

That was the biggest American financial lesson the Icelanders took to heart: the importance of buying as many assets as possible with borrowed money, as asset prices only rose. By 2007, Icelanders owned roughly fifty times more foreign assets than they had in 2002. They bought private jets and third homes, in London and Copenhagen. They paid vast sums of money for services no one in Iceland had theretofore ever imagined wanting. "A guy had a birthday party, and he flew in Elton John for a million dollars to sing two songs," the head of the Left-Green Movement, Steingrimur Sigfusson, tells me with fresh incredulity. "And apparently not very well." They bought stakes in businesses they knew nothing about and told the people running them what to do - just like real American investment bankers! (p. 15)

Since the entire world's assets were rising - thanks in part to people like these Icelandic lunatics paying crazy prices for them - they appeared to be making money. Yet another hedge fund manager explained Icelandic banking to me this way: you have a dog, and I have a cat. We agree that each is worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners but Icelandic banks, with a billion dollars in new assets. "They created fake capital by trading assets amongst themselves at inflated values." (pp. 16-17)

The Danske Bank report alerted hedge funds in London to an opportunity: shorting Iceland. They investigated and found this incredible web of cronyism: bankers buying stuff from one another at inflated prices, borrowing tens of billions of dollars and relending it to the members of their little Icelandic tribe, who then used it to buy up a messy pile of foreign assets. "Like any new kid on the block," says Theo Phanos, of Trafalgar Asset Mangers, in London, "they were picked off by various people who sold them the lowest-quality assets - second-tier airlines, sub-scale retailers. They were in all the worst LBOs." (pp. 19-20)

You didn't need to be Icelandic to join the cult of the Icelandic banker. German banks put $21 billion into the Icelandic banks. The Netherlands gave them $305 million, and Sweden kicked in $400 million. UK investors, lured by the eye-popping 14 percent annual returns, forked over $30 billion - $28 billion from companies and individuals and the rest from pension funds, hospitals, universities, and other public institutions. Oxford University alone lost $50 million. (p. 23)

As a bull market ages, the deals that are done tend be less conservative, and the people participating in those deals tend to be less sophisticated.

Greece: A Subprime Government

In 2001, Greece entered the European Monetary Union, swapped the drachma for the euro, and acquired for its debt and implicit European (read German) guarantee. Greeks could now borrow long-term funds at roughly the same rate as Germans - not 18 percent but 5 percent. To remain the in euro zone, they were meant, in theory, to maintain budget deficits below 3 percent of GDP; in practice, all they had to do was cook the books to show that they were hitting the targets. Here, in 2001, entered Goldman Sachs, which engaged in a series of apparently legal but nonetheless repellent deals designed to hide the Greek government's true level of indebtedness. For these trades Goldman Sachs - which, in effect, handed Greece a $1 billion loan - carved out  reported $300 million in fees. The machine that enabled Greece to borrow and spend at will was analogous to the machine created to launder the credit of the American subprime borrower - and the role of the American investment banker in the machine was the same. The investment bankers also taught the Greek government how to securitize future receipts from the national lottery, highway tolls, airport landing fees, and even funds granted to the country by the European Union. Any future stream of income that could be identified was sold for cash up front and spent. As anyone with a brain must have known, the Greeks would be able to disguise their true financial state for only as long as (a) lenders assumed that a loan to Greece was as good as guaranteed by the European Union (read Germany), and (b) no one outside of Greece paid very much attention. Inside Greece there was no market for whistle-blowing, as basically everyone was in on the racket. (pp. 82-83)

Greece bundled up and sold off tomorrow's income in order to have cash today. That would have made sense if they had invested the money in assets that would have provided a higher return and allowed them to pay the money back. Instead, they spent the money - after having paid fat fees to do the borrowing.

Ireland: An Even Bigger Housing Bubble

Kelly saw house prices rising madly, and heard young men in Irish finance to whom he had recently taught economics try to explain why the boom didn't trouble them. And the sight and sound of them troubled him. "Around the middle of 2006 all these former students of ours started to appear on TV!" he says. "They were now all bank economists and they were nice guys and all that. And they all were saying the same thing: 'We're going to have a soft landing.' "

The statement struck him as absurd on the face of it: real estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than people's expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become, and flee the market, and the market will crash. It was in the nature of real estate booms to end in crashes - just as it was perhaps in Morgan Kelly's nature to assume that if his former students were cast on Irish TV playing the financial experts, something was amiss. "I just started Googling things," he says.


Googling things, Kelly learned that more than a fifth of the Irish workforce was now employed building houses. The Irish construction industry had swollen to become nearly a quarter of Irish GDP - compared to less than 10 percent or so in a normal economy - and Ireland was building half as many new houses a year as the United Kingdom, which had fifteen times as many people to house. He learned that since 1994 the average price for a Dublin home had risen more than 500 percent. In parts of Dublin rents had fallen to less than 1 percent of the purchase price; that is, tyou could rent a million-dollar home for less than $833 a month.The investment returns on Irish land were ridiculously low: it made no sense for capital to flow into Ireland to develop more of it. Irish home prices implied an economic growth rate that would leave Ireland, in twenty-five years, three times as rich as the United States. ("A price-earnings ratio above Google's," as Kelly put it.) Where would this growth come from? Since 2000, Irish exports had stalled and the economy had become consumed with building houses and offices and hotels. "Competitiveness didn't matter," says Kelly. "From now on we were going to get rich building houses for each other." (pp. 90-1)


Their real estate boom had the flavor of a family lie: it was sustainable so long as it went unquestioned and it went unquestioned so long as it appeared sustainable. After all, once the value of Irish real estate came untethered from rents, there was no value for it that couldn't be justified.... 


"There is an iron law of house prices... the more house prices rise relative to income and rents, they more they will subsequently fall." (pp. 91-2)


As it happened, Kelly had predicted the future, with uncanny accuracy, but to believe what he was saying you had to accept that Ireland was not some weird exception in human financial history. "it had no impact," Kelly says. "The response was general amusement. It was what will these crazy eggheads come up with next? sort of stuff." (p. 93)

Kelly wrote his second newspaper article, more or less predicting the collapse of the Irish banks. He pointed out that in the last decade the Irish banks and economy had fundamentally changed. In 1997 the Irish banks were funded entirely by Irish deposits. By 2005 they were getting most of their money from abroad. The small German savers who ultimately supplied the Irish banks with deposits to re-lend in Ireland could take their money back with the click of a computer mouse. Since 2000, lending to construction and real estate had risen from 8 percent of Irish bank lending (the European norm) to 28 percent. One hundred billion euros - or basically the sum total of all Irish bank deposits - had been handed over to Irish commercial property developers. By 2007, Irish banks were lending 40 percent more to property developers alone than they had to to the entire Irish population seven years earlier....

This time Kelly sent his piece of a newspaper with a far bigger circulation, the Irish Independent. The Independent's editor wrote back to say he found the article offensive and wouldn't publish it. Kelly next turned to the Sunday Business Post, but the editor just sat on the piece. The journalists were following the bankers' lead and conflating a positive outlook on real estate prices with a love for country and a commitment to Team Ireland. ("They'd all use the same phrase, 'You're either for us or against us,' " says a prominent Irish bank analyst in Dublin.) (pp. 94-5)


As a bubble inflates, there are always people who point out how irrational the market's behavior is, and they're almost always ignored. In practice, it's hard to tell if they're wrong or simply calling the end of the bubble too early. 

Objective quantitative approaches may help here: are valuations currently high relative to history, relative to other asset classes, and relative to other countries? Have trend-following indicators begun to suggest that the bubble may be popping?


A banking system is an act of faith: it survives only for as long as people believe it will. Two weeks earlier the collapse of Lehman Brothers had cast doubt on banks everywhere. Ireland's banks had not been managed to withstand doubt; they had been managed to exploit blind faith. Now the Irish people finally caught a glimpse of the guy meant to be guarding them: the crazy uncle had been sprung from the family cellar. Here he was, on their televisions, insisting that the Irish banks' problems had nothing whatsoever to do with the loans they'd made... when anyone with eyes could see, in the vacant skyscrapers and empty housing estates around them, evidence of bank loans that were not merely bad but insane. (p. 98)

It would have been difficult for Merrill Lynch's investment bankers not to know, on some level, that, in a reckless market, the Irish banks acted with a recklessness all their own. But in the six-page memo to Brian Lenihan - for which the Irish taxpayer forked over to Merrill Lynch 7 million euros - they kept whatever reservations they might have had to themselves. "All of the Irish banks are profitable and well-capitalized," wrote Merrill Lynch advisers. (p. 112)

"At the time they were all saying the same thing," an Irish bank analyst tells me. "We don't have any subprime." What they meant was that they had avoided lending to American subprime borrowers; what they neglected to mention was that, in the general frenzy, all of Ireland had become subprime. Otherwise sound Irish borrowers had been rendered unsound by the size of the loans they had taken out to buy inflated Irish property. That had been the strangest consequence of the Irish bubble: to throw a nation that had finally clawed its way out of centuries of indentured servitude back into indentured servitude. (p. 113)

Experts aren't always right. Do your own research, and turn off the financial news.

Germany: It's Risk-Free. Right?

The curious thing about the eruption of cheap and indiscriminate lending of money between 2002 and 2008 was the different effects it had from country to country. Every developed country was subjected to more or less the same temptation, but no two countries responded in precisely the same way. Much of Europe had borrowed money to buy stuff it couldn't honestly afford. In effect, lots of non-Germans had used Germany's credit rating to indulge their material desires. The Germans were they exception. Given the chance to take something for nothing, the German people simply ignored the offer. "There was no credit boom in Germany.... Real estate prices were completely flat. There was no borrowing for consumption. Because this behavior is totally unacceptable in Germany. This is deeply in German genes, It is perhaps a leftover of the collective memory of the Great Depression and the hyperinflation of the 1920s." The German government was equally prudent because, he went on, "there is a consensus among the different parties about this: if you're not adhering to fiscal responsibility you have no chance in elections, because the people are that way."

In the moment of temptation Germany became something like a mirror image to Iceland and Ireland and Greece - and the United States. Other countries used foreign money to fuel various forms of insanity. The Germans, through their bankers, used their own money to enable foreigners to behave insanely....


They lent money to American subprime borrowers, to Irish real estate barons, to Icelandic banking tycoons, to do things to German would ever do. The German losses are still being toted up, but at last count they stand at $21 billion in the Icelandic banks, $100 billion in Irish banks, $60 billion in various U.S. subprime-backed bonds, and some yet to be determined amount in Greek bonds. (pp. 145-6)


He'd created the bank when the market was paying higher returns to bondholders: Rhineland Funding was paid well for the risk it was taking. By the middle of 2005, with the financial markets refusing to see a cloud in the sky, the price of risk had collapsed: the returns on the bonds backed by American consumer loans had collapsed. Rothig says he went to his superiors and argued that, as they were being paid a lot less to take the risk of these bonds, IKB should look elsewhere for profits. "But they had a profit target and they wanted to meet it. To make the same profit with a lower risk spread they simply had to buy more," he says. The management, he adds, did not want to hear his message. "I showed them the market was turning," he says. "I was taking the candy away... instead of giving it. So I became the enemy." When he left, others left with him, and the investment staff was reduced, but the investment activity boomed. "One-half the number of people with one-third the experience made twice the number of investments," he says. "They were ordered to buy...."

As long as the bonds offered up by the Wall Street firms abided by the rules specified by IKB's experts, they got hoovered into the Rhineland Funding portfolio without further inspection. Yet the bonds were becoming radically more risky, because the loans that underpinned them were becoming crazier and crazier. After he left, Rothig explains, IKB had only five investment officers, each in his late twenties, with a couple of years' experience: these were the people on the other end of the bets being handcrafted by Goldman Sachs for its own proprietary trading book, and by other big Wall Street firms for extremely clever hedge funds that wanted to bet against the market for subprime bonds. The IKB portfolio went from $10 billion in 2005 to $20 billion in 2007, Rothig says, "and it would have gotten bigger if they had had more time to buy. They were still buying when the market crashed. They were on their way to thirty billion dollars."


By the middle of 2007 every Wall Street firm, not just Goldman Sachs, realized that the subprime market was collapsing, and tried frantically to get out of their positions. The last buyers in the entire world, several people on Wall Street have told me, were willfully oblivious Germans. That is, the only thing that stopped IKB from losing even more than $15 billion on U.S. subprime loans was that the market ceased to function. Nothing that happened - no fact, no piece of data - was going to alter their approach to investing money. 

On the surface IKB's German bond traders resembled the reckless traders who made similarly stupid bets for Citigroup and Merrill Lynch and Morgan Stanley. Beneath it they were playing an entirely different game. The American blond traders may have sunk their firms by turning a blind eye to the risks in the subprime bond market, but they made a fortune for themselves in the bargain, and have for the most part never been called to account. They were paid to put their firms in jeopardy, and so it is hard to know whether they did it intentionally or not. The German bond traders, on the other hand, had been paid roughly one hundred thousand dollars a year, with, at most, another fifty-thousand-dollar bonus. In general, German bankers were paid peanuts to run the risk that sank their banks, which strongly suggests that they really didn't know what they were doing. (pp. 160-2)

The Germans were blind to the possibility that the Americans were playing the game by something other than the official rules. The Germans took the rules at their face value: they looked into the history of triple-A-rated bonds and accepted the official story that triple-A-rated bonds were completely risk-free....

Perhaps because they were some enamored of the official rules of finance, the Germans proved especially vulnerable to a false idea the rules encouraged: that there is such a thing as a riskless asset. After all, a triple-A rating was supposed to mean "riskless asset." There is no such thing as a riskless asset. The reason an asset pays a return is that it carries risk. But the idea of the riskless asset, whcih peaked about late 2006, overran the investment world, and the Germans fell for it the hardest. I'd heard about this, too, from people on Wall Street who had dealt with German bond buyers. "You have to go back to the German mentality," one of them had told me. "They said, 'I've ticked all the boxes. There is no risk.' It was form over substance...." 


IKB had to be rescued by a state-owned bank on July 28, 2007. Against capital of roughly $4 billion it had lost more than $15 billion. As it collapsed, the German media wanted to know how many U.S. subprime bonds these German banks had gobbled up. IKB's CEO, Stefan Ortseifen, said publicly that IKB owned almost no subprime bonds at all - whcih is why he's now charged with misleading investors. "He was telling the truth," says Rothig. "He didn't think he owned any subprime. They weren't able to give any correct numbers of the amounts of subprime they had, because they didn't know. The IKB monitoring systems did not make a distinction between subprime and prime mortgages. And that's why it happened." Back in 2005, Rothig says, he proposed to build a system to track more precisely what loans were behind the complex bonds they were buying from Wall Street firms, but IKB's management didn't want to spend the money. "I told them you have a portfolio of twenty billion dollars, you are making two hundred million dollars a year and you are denying me six point five million. But they didn't want to do it." (pp. 163-5)


People can be spectacularly wrong. It's a particularly bad sign when they can't make well-thought-out arguments for their views and ignore contradictory evidence.

At some point, you'll be tempted to capitulate and change your views because it feels like you're the only one in the world who's willing to stand against the crowd. As we've seen, it's good to question your beliefs and consider new evidence, but that evidence is probably not going to come from experts who are all trading in the consensus direction. Do your own research whenever possible.


ISBN 978-0-393-08181-7
Lewis, Michael. Boomerang: Travels in the New Third World. Norton, 2011.

October 26, 2018

The Big Short (Michael Lewis)

After introducing a quantitative finance course of study, I've decided to offer some brief comments on the finance-related books I've been reading.

This week, we'll be looking at The Big Short by Michael Lewis, who has a gift for telling stories about financial crises from the point of the view of the people who participated in them - in this case, the traders who made money from the crisis of 2008 by shorting subprime mortgage bonds.

Below, I've laid out some representative quotes from the book, each of which is followed by some practical lessons we can apply to today's markets.


"The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of a doubt, what is laid before him." - Leo Tolstoy

This is consistent with Lewis's message throughout the book: overconfidence in financial models can cause the people who use them (ratings agencies, traders at investment banks, and portfolio managers) to ignore the risks of events that those models say are impossible.


Nobody Wants to Take Smart Risks

Now, obviously, Meredith Whitney didn't sink Wall Street. She'd just expressed most clearly and most loudly a view that turned out to be far more seditious to the social order than, say, the many campaigns by various New York attorneys general against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they would have vanished long ago. This woman wasn't saying that Wall Street bankers were corrupt. She was saying that they were stupid. These people whose job it was to allocate capital apparently didn't even know how to manage their own. (p. xvii)

It was then late 2008. By then there was a long and growing list of pundits who claimed they predicted the catastrophe, but a far shorter list of people who actually did. Of those, even fewer had the nerve to bet on their vision. It's not easy to stand apart from mass hysteria - to believe that most of what's in the financial news is wrong, to believe that the most important financial people are either lying or deluded - without being insane. (p. xviii)

"Steve [Eisman]'s fun to take to any Wall Street meeting... because he'll say 'explain that to me' thirty different times. Or 'could you explain that more, in English?' Because once you do that, there's a few things you learn. For a start, you figure out if they even know what they're talking about. And a lot of times they don't!" (p. 23)

"That was a classic Mike Burry trade.... It goes up by ten times but first it goes down by half." This isn't the sort of ride most investors enjoy, but it was, Burry thought, the essence of value investing. His job was to disagree loudly with popular sentiment. (p. 46)

"If you're in a business where you can only do one thing and it doesn't work out, it's hard for your bosses to be mad at you." It was now possible to do more than one thing, but if he bet against subprime mortgage bonds and was proven wrong, his bosses would find it easy to be mad at him. (p. 81)

A smaller number of people - more than ten, fewer than twenty - made a straightforward bet against the entire multi-trillion-dollar subprime mortgage market and, by extension, the global financial system. In and of itself it was a remarkable fact: The catastrophe was foreseeable, yet only a handful noticed. (p. 105)

A guy from a rating agency on whom Charlie tested Cornwall's investment thesis looked at him strangely and asked, "Are you sure you guys know what you're doing?" The market insiders didn't agree with them, but they didn't offer any persuasive counter-arguments. Their main argument in defense of subprime CDOs, was that "the CDO buyer will never go away." Their man argument, in defense of the underlying loans, was that, in their short history, they had never defaulted in meaningful amounts....

"Usually, when you do a trade, you can find some smart people on the other side of it," said Ben. "In this instance we couldn't." (p. 147)

He went on about how the ratings agencies were whores. How the securities were worthless. How they all knew it. He gave words to the stuff we were just suspecting.... When he was finished there was complete silence. No one specifically attempted a defense. They just talked around him. It was like everyone pretended he hadn't said it. (p. 149)

"I do my best to have patience... but I can only be as patient as my investors.... The definition of an intelligent manager in the hedge fund world is someone who has the right idea, and sees his investors abandon him just before the idea pays off." When he was making huge sums of money, he had barely heard from them; the moment he started actually to lose a little, they peppered him with doubts and suspicions. (pp. 187-8)

"Nobody came back and said, 'Yeah, you were right....' It was very quiet." (p. 199)

The people in a position to resolve the financial crisis were, of course, the very same people who had failed to forsee it: Treasury Secretary Timothy Geithner, Fed Chairman Ben Bernanke, Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, and so on." (p. 260)

Paper qualifications - degrees and job titles - don't say much about whether someone is capable of avoiding dumb risks and taking smart ones.

Risk, as measured by option prices, bond yields, and stock valuations, can get extremely overpriced or underpriced if everyone shares the same opinions. Trading against the crowd can be a smart risk, but it's difficult to do because investors pull their money out of managers' strategies at the worst possible time.


The Little Guys Lose

An investor who went from the stock market to the bond market was like a small, furry creature raised on an island without predators removed to a pit full of pythons. It was possible to get ripped off by the big Wall Street firms in the stock market, but you really had to work at it. The entire market traded on screens, so you always had a clear view of the price of the stock of any given company. The stock market was not only transparent but heavily policed. You couldn't expect a Wall Street trader to share with you his every negative thought about public companies, but you could expect he wouldn't work very hard to sucker you with outright lies, or blatantly use inside information to trade against you, mainly because there was at least a chance he'd be caught if he did. The presence of millions of small investors had politicized the stock market. It had been legislated and regulated to at least seem fair. 

The bond market, because it consisted mainly of big institutional investors, experienced no similarly populist political pressure. Even as it came to dwarf the stock market, the bond market eluded serious regulation. Bond salesmen could say and do anything without fear that they'd be reported to some authority. Bond traders could exploit inside information without worrying that they would be caught. Bond technicians could dream up ever more complicated securities without worrying too much about government regulation - one reason why so many derivatives had been derived, one way or another, from bonds. The bigger, more liquid end of the bond market - the market for U.S. Treasury bonds, for example - traded on screens, but in many cases the only way to determine if the price some bond trader had given you was even close to fair was to call around and hope to find some other bond trader making a market in that particular obscure security. The opacity and complexity of the bond market was, for big Wall Street firms, a huge advantage. The bond market customer lived in perpetual fear of what he didn't know. If Wall Street bond departments were increasingly the source of Wall Street profits, it was in part because of this: In the bond market it was still possible to make huge sums of money from the fear, and the ignorance, of customers.
(pp. 61-2)

Goldman Sachs stood between Michael Burry and AIG. Michael Burry forked out 250 basis points (2.5 percent) to own credit default swaps on the very crappiest triple-B bonds, and AIG was paid a mere 12 basis points (0.12 percent) to sell credit default swaps on those very same bonds, filtered through a synthetic CDO, and pronounced triple-A rated.... Goldman Sachs had taken roughly 2 percent off the top, risk-free, and booked all the profit up front. (p. 77)

According to the Bear Stearns analyst, double-A CDOs were trading at 75 basis points above the risk-free rate - that is, Charlie should ahve been able to buy credit default swaps for 0.75 percent in premiums a year. The Bear Stearns traders, by contrast, weren't willing to sell them to him for five times that price.... "I asked him, 'Are desks actually buying and selling at that price?' And he says, 'Gotta go,' and hung up." (p. 164)

As an independent investor, you're at a disadvantage trying to trade over-the-counter securities with investment banks. If you can even get them to talk to you, they'll set the terms and quote the prices at which trades take place. You're also exposed to counterparty risk: if your trading partner goes under, you may never get paid.

It's easier and safer to trade liquid, transparent contracts (like listed options) whenever possible.


Don't Make Trades You Don't Understand

Stage Two, beginning at the end of 2004 was to replace the student loans and the auto loans and the rest with bigger piles consisting with nothing but U.S. subprime mortgage loans. "The problem," as one AIG FP trader put it, "is that something else came along that we thought was the same thing as what we'd been doing." The "consumer loan" piles that Wall Street firms, led by Goldman Sachs, asked AIG FP to insure went from being 2 percent subprime mortgages to 95 percent subprime mortgages. In a matter of months, AIG FP, in effect, bought $50 billion in triple-B-rated subprime mortgage bonds by insuring them against default. And yet no one said anything about it - not AIG CEO Martin Sullivan, not the head of AIG FP, Joe Cassano, not the guy in AIG FP's Connecticut office in charge of selling his firm's credit default swap services to the big Wall Street firms, Al Frost. The deals, by all accounts, were simply rubber-stamped inside AIG FP, and then again by AIG brass. Everyone concerned apparently assumed that they were being paid insurance premiums to take basically the same sort of risk they had been taking for nearly a decade. They weren't. They were now, in effect, the world's biggest holders of subprime mortgage bonds. (pp. 71-2)

There were huge sums of money to be made, if you could somehow get [triple-B bonds] re-rated as triple-A, thereby lowering their perceived risk, however dishonestly and artificially. This is what Goldman Sachs had cleverly done. Their - soon to be everyone's - nifty solution to the problem of selling the lower floors appears, in retrospect, almost magical. Having gathered 100 ground floors from different subprime mortgage buildings (100 different triple-B-rated bonds), they persuaded the rating agencies that these weren't, as they might appear, all exactly the same things. They were another diversified pool of assets! This was absurd. The 100 buildings occupied the same floodplain; in the event of a flood, the ground floors of all of them were equally exposed. But never mind: the rating agencies, who were paid fat fees by Goldman Sachs and other Wall Street firms for each deal they rated, pronounced 80 percent of the new tower of debt triple-A. 

The CDO was, in effect, a  credit laundering service for the residents of Lower Middle Class America. For Wall Street it was a machine that turned lead into gold. (p. 73)

Goldman would buy the triple-A tranche of some CDO, pair it off with the credit default swaps AIG sold Goldman than insured the tranche (at a cost well below the yield of the tranche), declare the entire package risk-free, and hold it off its balance sheet. Of course, the whole thing wasn't risk-free; If AIG went bust, the insurance was worthless, and Goldman could lose everything. Today Goldman Sachs is, to put it mildly, unhelpful when asked to explain exactly what it did. (p. 77)

These supposedly diversified piles of consumer loans now consisted almost entirely of U.S. subprime mortgages. Park conducted a private survey. He asked the people most directly involved in the decision to sell credit default swaps on consumer loans what percentage of those loans were subprime mortgages. He asked Gary Gorton, a Yale professor who had built the model Cassano used to price the credit default swaps: Gorton guessed that the piles were no more than 10 percent subprime. He asked a risk analyst in London, who guessed 20 percent. "None of them knew it was 95 percent," says one trader.... In retrospect, their ignorance seems incredible - but then, an entire financial system was premised on their not knowing, and paying them for this talent. (p. 88)

The big Wall Street firms - Bear Stearns, Lehman Brothers, Goldman Sachs, Citigroup, and others - had the same goal as any manufacturing business: to pay as little as possible for raw material (home loans) and charge as much as possible for their end product (mortgage bonds). The price of the end product was driven by the ratings assigned to it by the models used at Moody's and S&P. The inner workings of these models were, officially, a secret: Moody's and S&P claimed they were impossible to game. But everyone on Wall Street knew that the people who ran the models were ripe for exploitation. "Guys who can't get a job on Wall Street get a job at Moody's," as one Goldman Sachs trader-turned-hedge fund manager put it. Inside the ratings agency there was another hierarchy, even less flattering to the subprime mortgage bond raters. "At the ratings agencies the corporate credit people are the least bad," says a quant who engineered mortgage bonds for Morgan Stanley. "Next are the prime mortgage people. Then you have the asset-backed people, who are basically like brain-dead...." Moody's and S&P didn't actually evaluate the individual home loans, or so much as look at them. All they and their models saw, and evaluated, were the general characteristics of loan pools. (pp. 98-9)

"I called S&P and asked if they could tell me what was in a CDO... and they said, 'Oh yeah, we're working on that.' " Moody's and S&P were piling up these triple-B bonds, assuming they were diversified, and bestowing ratings on them 0 without ever knowing what was behind the bonds! There had been hundreds of CDO deals - 400 billion dollars' worth of the things had been created in just the past three years - and yet none, as far as they could tell, had been properly vetted. (pp. 130-1)

The CDO manager's job was to select the Wall Street firm to supply him with subprime bonds that served as the collateral for CDO investors, and then to vet the bonds themselves. The CDO manager was further charged with monitoring the hundreds or so individual subprime bonds inside each CDO, and replacing the bad ones, before they went bad, with better ones. That, however, was mere theory; in practice, the sorts of investors who... bought the triple-A-rated tranche of CDOs - German banks, Taiwanese insurance companies, Japanese farmers' unions, European pension funds, and, in general, entities more or less required to invest in triple-A-rated bonds - did so precisely because they were meant to be foolproof, impervious to losses, and unncessary to monitor or even think about very much. The CDO manager, in practice, didn't do much of anything, which is why all sorts of unlikely people suddenly hoped to become one. "Two guys and a Boomberg terminal in New Jersey" was Wall Street shorthand for a typical CDO manager. The less mentally alert the two guys, and the fewer the questions they asked about the triple-B-rated subprime bonds they were absorbing into their CDOs, the more likely they were to be patronized by Wall Street firms. The whole point of the CDO was to launder a lot of subprime mortgage market risk that the firms had been unable to place straightforwardly. The last thing you wanted was a CDO manager who asked lots of tough questions. (p. 141)

Chau explained to Eisman that he simply passed all the risk that the underlying home loans would default on to the big investors who had hired him to vet the bonds. His job was to be the CDO "expert," but he didn't spend a lot of time worrying about what was in the CDOs. His goal, he explained, was to maximize the dollars in his care.... Chau's real job was to serve was a new kind of front man for the Wall Street firms he "hired"; investors felt better buying a Merrill Lynch CDO if it didn't appear to be run by Merrill Lynch. (pp. 142-3)

"You know how when you walk into a post office you realize there is such a difference between a government employee and other people.... The ratings agencies were all like government employees." Collectively they had more power than anyone in the bond markets, but individually they were nobodies. "They're underpaid.... The smartest ones leave for Wall Street firms so they can help manipulate the companies they used to work for." (p. 156)

Highly paid, putatively savvy experts took enormous risks they didn't understand. AIG went under because (1) they didn't question the models they were using to price extremely complicated contracts, (2) they believed what the rating agencies told them, and (3) they allowed other traders to take advantage of their ignorance.


Long-Term Options are Underpriced

The model used to by Wall Street to price LEAPS, the Black-Scholes option pricing model, made some strange assumptions. For instance, it assumed a normal, bell-shaped distribution for future stock prices....

It instantly became a fantastically profitable strategy: Start with what appeared to be a cheap option to buy or sell some Korean stock, or pork belly, or third-world currency - really anything with a price that seemed poised for some dramatic change - and then work backward to the thing the option allowed you to buy and sell.... People, and by extension markets, were too certain about inherently uncertain things... had difficulty attaching the appropriate probabilities to highly improbably events. (pp. 113-4)

What struck them powerfully was how cheaply the models allowed a person to speculate on situations that were likely to end in one of two dramatic ways. If, in the next year, a stock was going to be worth nothing or $100 a share, it was silly for anyone to sell a year-long option to buy the stock at $50 a share for $3. Yet the market often did something just like that. The model used by Wall Street to price trillions of dollars' worth of derivatives thought of the financial world as an orderly, continuous process. But the world was not continuous; it changed discontinuously, and often by accident. (p. 116)

Financial options were systematically mispriced. The market often underestimated the likelihood of extreme moves in prices. The options market also tended to presuppose that the distant future would look more like the present than it usually did. Finally, the price of an option was a function of the volatility of the underlying stock or currency or commodity, and the options market tended to rely on the recent past to determine how volatile a stock or currency or commodity might be.... The longer-term the option, the sillier the results generated by the Black-Scholes option pricing model, and the greater the opportunity for people who didn't use it. (pp. 121-2)

They were consciously looking for long shots. They were combing the markets for bets whose true odds were 10:1, priced as if the odds were 100:1. "We were looking for nonrecourse leverage.... We were looking to get ourselves into a position where small changes in states of the world created huge changes in values." (pp. 128-9)

This is a pretty accurate description of the way long-term options are priced. A trading technique called delta-hedging can be used to remove most of the impact of trending stock prices from an option's return. One-year and two-year options that are delta-hedged provide returns that are comparable to those of short-term bonds. When the delta-hedging is removed, options have high returns when markets makes large moves. They can be used to speculate on the possibility of these moves or to protect a stock portfolio from market corrections.

The opposite is true of short-term, or front-month, options, which are overpriced. Unlike longer-dated options, delta-hedged front-month options tend to have negative returns. Front-month options are the most heavily traded, and traders who buy them tend to lose money.

Buying a longer-dated option and selling a front-month option against it is called a calendar spread and is generally a profitable way to trade.


ISBN 978-0-393-07223-5
Lewis, Michael. The Big Short: Inside the Doomsday Machine. Norton, 2011.

September 1, 2018

Introduction to Quantitative Finance

I have a number of students interested in quantitative trading as a career, so I've started a program to introduce them to basic research in the field.

We use a curriculum which I've compiled from thirteen years of experience reading academic research and four years working as a quant. I've also been a contributing member of the International Society of Value Investors since 2011.

I stay abreast of current research via the FinTwit community and maintain lists of the more interesting developments below (organized by topic):
  1. Benchmarks
  2. Value, Long-Term Reversal, Low Volatility, and Quality
  3. Trend-Following, Cross-Sectional Momentum, and Carry
  4. Volatility Risk Premium
  5. Calendar and Diagonal Spreads
  6. Real Estate, Commodities, and Bonds
  7. Seasonality, Sentiment, Macro, and Short-Term Mean Reversion
  8. Craftsmanship Alpha
  9. Tax Alpha
  10. Sarlacc Pits (things to avoid buying)
  11. Market Psychology and Bubbles
Warren Buffett figured a lot of this out decades before everyone else did. Most of Buffett's returns can be explained using the strategies listed above.

Students interview for internship positions when they are in college. I maintain a list of opportunities at the link below. There are also internship opportunities at Morgan Stanley for students who have demonstrated a strong prior interest in finance.

Please feel free to find me on Twitter or contact me through the form at the bottom of this page.

In the meantime, here are some fun facts to whet your appetite.

S&P Global, of S&P 500 fame, published a paper stating that its own index has historically been beaten by randomly picking stocks.

Researchers had a computer form 10 million randomly picked stock portfolios using historical data from 1968 to 2011 and found that 99.9% of them outperformed the S&P 500. They then combined all of the randomly picked portfolios, forming an equally weighted index.

Over the 15-year period from 1999 to 2014, which included two stock market crashes, the equally weighted portfolio compounded at 9.1% per year vs. 4.5% for the S&P 500 for an annualized out-performance of 4.6%.



Most active managers didn't beat the market even though it was theoretically easy to do so. Even the major pension funds, which spend millions of dollars on consultants, didn't do it. Simple models outperform expert intuition.

Trading successfully involves research and disciplined adherence to rule-based strategies.

If you're interested in learning more, please use the form below to contact me. I look forward to meeting you!

Your Name :


Your Email: (required)


Why are you interested in quantitative finance, and what are your eventual goals? (required)


August 14, 2018

The Great Beanie Baby Bubble (Mass Delusion and the Dark Side of Cute)

Here's the vocabulary list for The Great Beanie Baby Bubble (Mass Delusion and the Dark Side of Cute) by Zac Bissonnette.

ISBN 978-1-59184-602-4
Bissonnette, Zac. The Great Beanie Baby Bubble (Mass Delusion and the Dark Side of Cute). Penguin, 2015.

Representative Quotes

"That the speculative bubble in Beanie Babies took place in tandem with the Internet bubble suggests that the cultural forces that were alchemizing Internet stocks had the same effect on Beanie Babies. They rose in an era of unreality defined by magical thinking; as economist Dr. Robert Shiller writes in Irrational Exuberance: 'Speculative market expansions have often been associated with popular perceptions that the future is brighter or less uncertain than it was in the past.' They also, Shiller notes, have a way of clustering around century turns - as if the prospect of going from '99 to '00 is so fantastic as to make all things seem possible. In the new millennium, the residents of America's high culture thought, the Internet would change everything, making everyone who bought Internet stocks rich, no matter how much they paid. Those in the lower culture adapted that optimism to a belief in the investment potential of stuffed animals, and it's hard to say which view was proven more wrong." (p. 6)

"The collectibles business preyed on all the behavioral fallacies that cost investors money: our overreliance on past performance as a predictor of future returns, our tendency to have an inflated concept of the value of things we own (known as the endowment effect), and our tendency toward movement in herds." (p. 72)

"When I look back, the one thing I remember so much about Beanie Babies was how they made people feel so warm and fuzzy inside.... Then it just became people who saw dollar signs - that was by far the majority of it at the height." (p. 73)

"Gernady... was the first retailer to produce a checklist of all the Beanies he knew of, current and retired.... Give a person who is genetically hardwired for collecting a checklist and he'll attempt to buy everything on it." (p. 78) "My downfall was the checklists.... Once you have a checklist, you don't look at what you have. You look at what you don't have." (p. 89)

"The rise of teddy bears paralleled the rise of industrialization and the rise of the child as a person seen as worthy of pampering. Between 1880 and 1910, the percentage of the American labor force that worked in farming fell from 49 percent to 31 percent, and as the population moved away from the realities of life with animals, it romanticized them in its children's toys." (p. 80)

"Once people could buy them for $5 and flip them for two to five times as much, the speed of the fad's spread multiplied - because humans have an insatiable need to brag. The idea of making money reselling stuffed animals was so bizarre - so fantastic - that everyone who did it told everyone they knew about it. Even with relatively tiny volume, stories about profits on Beanies spread word virally of an otherwise unremarkable product." (p. 91)

" 'If other people start collecting, your collection increases in value.' While consumer goods have always gained popularity through word of mouth, word of a profitable investment always spreads more quickly." (p. 93)

"[Gallagher] was essentially making up prices based on the pieces that seemed to be the hardest to find. She tried to cull values based on what Gernady was charging and what the collectors in America Online's collectibles chat room were saying, but there was no transparent market yet. In the beginning she simply decreed that most retired Beanie Babies were worth $10 or $20 each, and then watched in amazement as the market went there. Gallagher, with her own collection, naturally had a strong incentive to be optimistic about her estimates. Among the small group of Chicago suburbs collectors, the price lists that Gallagher - and then the two Beckys - put out became the market." (p. 94)

"In the tulip mania of the 1630s, the Semper Augustus bulb was the rarest and most coveted - and helped to spread the burgeoning market for tulips to its sad and inevitable conclusion: naive newcomers paid too much for tulips that weren't even a little bit rare. Just as the legitimate business model of eBay drove demand for shares of hundreds of other Internet stocks without business models, it was the discovery of hard-to-find oddities that started to turn harmless toy collecting into something truly insane." (p. 96)

"So now beanie Babies are big business, with grown men and women fighting over them and paying thousands of dollars for certain rare models, such as Peanut the Royal Blue Elephant (not to be confused with Peanut the LIGHT Blue Elephant, which only a total loser would pay thousands of dollars for)." (Dave Barry, p. 97)

"The self-styled market experts stoked the idea that in the new Beanies there was the possibility of finding examples that would experience the same appreciation patterns the earlier ones had. The reasoning was of course flawed: by the time Beanie Babies had caught on, the Chinese factories were pumping them out in huge quantities - although the diffused distribution masked just how many Ty was selling.... Warner knew that keeping small numbers of Beanies in many stores was the key to the crazy, telling a reporter in 1996, 'This thing could grow and be around for many years just as long as I don't take the easy road and sell it to a mass merchant who's going to put it in bins.' " (p. 98-99)

"Had the initial sales of Beanie Babies been stronger, it's unlikely that a crazy could ever have developed. There would have been no oddities and limited-production rarities for collectors to hunt for - and for which to pay the high prices that would spread word of an investment opportunity. As the Chicago Tribune reported, 'Start taking about Beanies, and just about everybody knows somebody who financed a wedding, a vacation, a new van or what have you with the proceeds of Beanie sales.' In his 1978 book, Manias, Panics and Crashes, the economist Charles Kindleberger explained the self-perpetuating feeding frenzy that develops when speculators start making money: 'There is nothing so disturbing to one's well-being and judgment as to see a friend get rich.' " (p. 99)

"The idea of people making money with Beanie Babies was too good for fact-checking.... It is perhaps no coincidence that 'the history of speculative bubbles begins roughly with the advent of newspapers. Although the news media - newspapers, magazines, and broadcast media, along with their new outlets on the Internet - present themselves as detached observers of market events, they are themselves an integral part of these events.... The media actively shape public attention and categories of thought, and they create an environment within which the speculative market events we see are played out,'  writes Dr. Shiller." (p. 100)

"In the days of the Internet bubble, a sexy story was often more important than a viable business model. When eBay was looking to raise venture capital money - and later on preparing for its IPO - its dependence on collectors led to eye-rolling among investors and analysts. How could a Web site that was mostly used to help people buy and sell vintage lunch boxes and Beanie Babies possibly be worth $1 billion? As the stock price rose, investors asked whether a company could really sustain a $5 billion valuation with 10 percent of its sales tied to collectors swapping Beanie Babies? Did that mean the market was valuing eBay's business selling Beanie Babies at $500 million?" (p. 123)

"The monthly sales of Beanie Babies on eBay constituted about 0.04 percent of the Beanie Babies Ty was shipping each month. But the prices they were fetching on eBay helped drive sales volume by a huge multiplier. People who had collections could go online and see that they were in the money, which made stocking up on more retail-priced Beanies an easy decision. The media was full of stories about people flipping Beanie Babies for a profit - but most people were not flipping them for a profit. Most people were hoarding them for long-term investment.

"Just as relatively minor discoveries of gold had fueled the gold rush of 1849, it only took $500,000 per month in eBay sales to help drive, at Beanie Babies' height, $200 million per month in retail sales.... 'People don't think in terms of information. They think in terms of narratives.' The stories of people buying $5 Beanie Babies and then selling them to pay for cars spread of the word of Beanie Babies more efficiently than any deliberate marketing strategy could have." (p. 127)

"My daughter who is ten thinks I am addicted.... Yes, we are behind on our house payment, and I beg my husband to buy me 'oh, just one'... My fifteen year old son has cerebral palsy. I tell myself that he can use the proceeds from these Beanies to help himself maintain a decent lifestyle after I am gone." (p. 141)

"There were a few people who became millionaires in less than two years by spreading the idea that never, under any circumstances, ever, should anyone let a child touch a Beanie Baby. Beanies, they said, were destined for greater things." (p. 141)

"First some new thing comes along and captures the public's imagination. Then everyone starts making money. After that, some person of average intelligence is held up as a genius." (p. 142)

"All speculative manias rely on self-proclaimed and media-anointed soothsayers for amplification, and Beanie Babies were no different. The craze never could have inflated as much as it did without the implied credibility that came from the books, magazines, and charismatic prognosticators extolling the toys' investment value." (p. 143)

"When Ty Inc. won on summary judgment in a case against one obscure publisher, it was awarded all the profits - an astonishing $1.36 million plus more than $200,000 in interest on a few low-budget, poorly researched exploitation books that were not even close to being among the most popular of the Beanie guides. It is often said of the gold rush that the people who got rich were the shovel dealers who profited from the greed of the forty-niners. With Beanie Babies, most of the lasting personal fortunes came from selling books and tag protectors, not from speculating in plush." (p. 144)

"The mavens and publishers, even if they weren't themselves Beanie dealers, had powerful incentives to keep prices high.... 'A price guide is only valuable as long as you can raise prices. The premise of selling second-, third-, and fourth-edition price guides is to show people how much more valuable their stuff has become.' Just as business news viewership tanks after a market crash, no one is interested in buying a price guide that tells them their stuff is worth less than it was last year. Robert L. Miller, who published price guides for the collectible Hummel figures for decades, solved that problem by simply raising his value estimates by 10 percent every year....

Every current Beanie Baby available for retail for $5 was projected to be worth at least $40 by 2007. Fox bought virtually all the Beanie Babies he used for the photos from Peggy Gallagher, paying her, by his own admission, inflated prices and then using those prices as the basis for his valuations. 'It was obscene what I was charging him.... He didn't really care about the actual true pricing. He cared more about selling a gazillion books.

" 'It's our own personal 'theory of scarcity' that at least 90% of almost everything gets lost, stolen or destroyed within 10 years,' the Foxes explain in the book. 'Why should Beanies defy the laws of human natures? The point is, only a tiny percentage of Beanies will be sealed in Zip-Loc bags and treated with TLC until the year 2007, no matter how well-intentioned their owners... Whoever is lucky (and smart) enough to hang on to some top grade Beanie Babies for the long haul will be the future supplier for tomorrow's collectors.

" 'If this hobby continues to grow, as we believe it will, 10 years from now even today's 'shocking' high prices may seem low.... After all, people were shocked when Picasso's paintings surpassed the million-dollar mark. Recently one sold for $25 million.'

"The Foxes also provided 'estimates' of how many of each Beanie Baby had been produced, but those guesses turned out to be woefully low - as evidenced by the size of the fortune Warner had accumulated by the time the market crashed. However, the estimates did provide consumers with enough misinformation to make the idea of long-term Beanie scarcity seem plausible." (pp. 145-6)

"Expectations were enormous. McDonald's reported production of one hundred million Teeny Beanie Babies, enough to fill the largest Happy Meal order in history. It was a prediction that there would be enough demand to sell one for every household in America within a span of just a few weeks.... That should have warned consumers that these were unlikely to be scarce enough to appreciate in value, but it didn't....

"Some customers ordered a hundred Happy Meals and asked the cashier to keep the food. Stores received hundreds of calls her hour....

"Two weeks into a planned five-week phenomenon, McDonald's took out ads to apologize and announce that it was ending the giveaway early because it had run out of product. As for the TV commercials promoting Teenie Beanies, the company canceled those after just a couple of days, worried that massive crowds were putting employees' safety in jeopardy....

"The McDonald's promotion brought massive mainstream buzz to a product with distribution only outside the mainstream. It's a combination that hardly ever happens, and it amplified an already enormous imbalance between demand and supply - the equivalent of buying Super Bowl ads to promote a church bake sale....

"Three days after the McDonald's giveaway ended, the Chicago Cubs were in the midst of one of the worst seasons in team history... but they had a special event that day: a Beanie Baby giveaway that 37,958 paying spectators showed up for.... Aside from the Cubs' first home game in 1988... the giveaway had done more to drive ticket sales than any event in its history." (pp. 156-160)

"By 1998 a USA Weekend poll found that 64 percent of Americans owned at least one Beanie Baby." (p. 163)

"As popular as Beanie Babies were, Biank had to stop using them for therapy. These particular stuffed animals were now too valuable to be given to children whose parents were dying of cancer." (p. 164)

"The continuing escalating demand and prices were driven by one of the most fundamental fallacies identified by behavioral economists: humans extrapolate trends and assume that historical price-appreciation patterns will continue even when it is future demand, not past returns, that will impact prices in the long run....

"Far from eliciting skepticism about an overheating market, inflated prices serve to lure more investors in....

"Just like the mutual fund managers who resisted Internet stocks until the worst possible moment, some of the flea market vendors who had been smart enough to avoid Beanies in the early days jumped on the bandwagon just as the craze peaked.

"Manias are often remembered for the peak - the most spectacular period of a frenzy that seemed to have come out of nowhere. Yet in every case it's the slow growth in the beginning, from a tiny base, which ignites the stories that spread the excitement. The year after most outside experts predicted the Beanie Baby fad had already peaked, Ty's wholesale shipments doubled again - and prices on the secondary market continue to climb. It was too late to get any of the really rare Beanies at bargain prices; the Chicago women, whose credibility had increased as the doubers' had diminished, already had those. The ones collectors were clamoring to buy in gift shops were arriving from China by the tens of millions.

"As Rinker was warning, it was the worst possible time to start collecting Beanie Babies, so naturally, more people than ever started collecting Beanie Babies." (pp. 165-7)

"The rising volume of listings on eBay, which had initially contributed to the excitement of Beanie collecting, was now making it easier for collectors to find the Beanies they were missing. The market had become more transparent, and price guide publishers had lost their ability to impact prices. Now you could see values in real time, and any slowdown in growth could instantly stoke pessimism." (p. 171)

"By 1999 [the fraction of Beanies being sold to speculators] was nearing 100 percent, and the only thing that seemed to bring Beanie collectors together was greed. One former Ty sales rep, who once traded a single rare Beanie Baby for a set of braces for her daughter, recalls that as much money as she was making, her visits to retailers had become dark and depressing by 1999. 'I was in a store in South Bend, Indiana, and there were these women who could not afford shoes for their children, but they were carting wheelbarrows full of Beanie Babies.' " (p. 176)

"In Sherman Oaks, Calfornia, a masked man walked into a gift shop with a gun, ordered everybody to the ground, and broke a display case to steal forty Beanie Babies valued at a total of $5,000.... 'He didn't want the cash register... all he wanted was the Beanie Babies.' " (p. 177)

"Even in a trailer park in Elkins, West Virginia, people wanted Beanie Babies. Without the wealth to speculate in the stock market, spending $50 on plush was their connection to the so-called new economy." (p. 178)

"Warner knew that things were coming to an end. He had always said that as long as kids were fighting over Beanie Babies that his business would be find, but now there were enough Beanies being shipped to eliminate the need for fighting - and it was only adults who cared about Beanie Babies anymore anyway.

"Speculative bubbles rely on constant upward movement; once the momentum slows, the bubble collapses. By 1999 every single person who could become a Beanie Baby collector already was one. With no prospects for an influx of increased demand, prices stagnated because there was nothing else for them to do. Once casual collectors could no longer count on quick price appreciation, they dropped out - and then prices fell as the market contracted, driving out still more collectors." (p. 187)

"Warner's previously exacting standards of quality seemed to have disappeared. 'They'll buy it!.. I could put the Ty heart on manure and they'd buy it!'

" 'Ty came to believe that he was a genius, and that every idea he had was brilliant.... After the Beanie mania had produced huge financial results, he focused on the money rather than the people.' " (p. 189)

"That's always what happens after a mania ends. There is some cause that everyone points to... and the intrinsic impermanence is cast aside." (p. 196)

"The same capacity for delusion that fueled the bubble at its height allowed its participants both to maintain their self-esteem after it was over and to fail to learn anything from it. Few of the craze's acolytes acknowledge its insanity even in hindsight. If the mass retirement announcement had not happened, they all seem to believe, the Beanie craze might still be on." (p. 197)

"All you could do was look at them - except they had a way of looking back at you and making you think about all the money you had spent on them. The only thing you could really do with them is brag about how many you had. And no matter how many you had, there was always somebody who had more." (p. 200)

"Even with Beanies selling (and mostly not selling) at yard sales and flea markets for fifty cents each, Warner wouldn't allow any of them to be valued at less than $5 to $7." (p. 202)

"Ty's sales reps who became millionaires mostly blew through the money on cars, boats, and Internet stocks - profiting from a bubble while oblivious to its inability to last. In the nearly fifteen years since the craze ended, few have come close to the incomes they achieved then." (p. 203)

"Retired soap-opera-star-turned-Beanie-hoarder Chris Robinson started his collection in 1998, at the absolute height of the market. During the decline in 1999 and early 2000, he'd doubled down on his gamble: when local gift shops went out of business, Robinson bought out their Beanie Baby inventories at wholesale prices, fancying himself a value investor. Between that and his earlier days lining up at stores as they unloaded shipments, his investment in Beanies stretched well past the $100,000 mark. Today, much like the stock speculators who simply stopped logging in to their brokerage accounts post-2000, he can't bring himself to go online and check the current values.

" 'Before I die, I guess I have to find out what they're currently worth, Robinson, now in his midseventies, says. 'If it takes twenty years, the kids will all have them. They can spit them up - and play with Beanie Babies. Or sell them...' " (p. 223)

"The implosion of Beanie Babies and the rise of eBay brought the broader collectibles industry to its knees.... 'Ten years earlier, it was difficult to connect with people and find pieces.... There was a perceived value because it was so hard to find that piece. But then people could go on eBay and find five hundred of that piece. That's what killed it.' " (p. 225)

"A few Beanie Babies, the ones that were retired prior to the craze's taking off in 1996, are still worth $50 or $100 - occasionally a few hundred for the rarest pieces, once supposed to be enough to cover the down payment on a McMansion. At least 99.5 percent of the perfectly preserved Beanie Babies from the late 1990s are today worth significantly less than they retailed for." (p. 243)

"The speculative boom for Beanie Babies has resulted in an unsurpassed volume of high-quality, perfectly preserved, monetarily worthless plush animals for children most in need of the comfort of something soft. A few years ago, Warner's sister emptied her closets of the hundreds of Beanie Babies she'd accumulated haphazardly during the craze years - they were made by her brother, after all - and dropped them off at the nearest children's hospital.... Today's kids known them only as toys because they're too young to remember that there was at time when people abandoned their senses over beanbag animals." (pp. 243-4)

SAT Vocabulary Words

Pluck: spirited and determined courage.
"anyone with pluck and a willingness to take some risks to close a sale" (p. 18)

Concern: a business; a firm.
"a fast-growing stuffed-animal concern" (p. 20)

Vagary: an unexpected and inexplicable change in a situation or in someone's behavior.
"Warner was too 'narrowly concentrated' for the vagaries of corporate life" (p. 25)

Brassy: (typically of a woman) tastelessly showy or loud in appearance or manner.
"his neighbor, Patria Roche, a bold, brassy lady who looks and acts like Liza Minnelli" (p. 28)

Cachet: the state of being respected or admired; prestige.
"gave Ty Inc. the cachet of being associated with 'designers,' thereby making the company seema  little more high-end than other lines where a bear was just a bear" (p. 37)

Avaricious: having or showing an extreme greed for wealth or material gain.
" 'How to Double Your Money in Collector's Plates: Guaranteed Return with No Risk....' Lest the appeal seem avaricious, readers were also assured that they could 'own and enjoy the beauty of true works of art.' " (p. 70)

Ethos: the characteristic spirit of a culture, era, or community as manifested in its beliefs and aspirations.
"moms are part of an ethos 'that encourages consumerism as the solution to the work/life struggle' " (p. 75)

Maven: an expert or connoisseur.
"first as a Beanie collector, then as a Beanie maven" (p. 75)

Gibe: an insulting or mocking remark; a taunt.
"At the Toy Fair in February 1996, a stranger approached Warner and offered him $2 million for the Beanie Baby line. Warner replied that he'd consider $100 million - which at the time was just a gibe. But it would soon represent less than one month's sales." (p. 78)

Dour: relentlessly severe, stern, or gloomy in manner or appearance.
"Steiff had grown up in a well-to-do but dour and toy-less family and later recalled her gratitude at being allowed once to play with a pile of lentils, which she poured between cups." (p. 79)

Impresario: relentlessly severe, stern, or gloomy in manner or appearance.
"a collectibles impresario and the publisher of Rosie's Collectors' Bulletin" (p. 93)

Injunction: a judicial order that restrains a person from beginning or continuing an action threatening or invading the legal right of another, or that compels a person to carry out a certain act, e.g., to make restitution to an injured party.
"won an injunction... Warner capitulated and paid him $150,000" (p. 111)

Hawk: carry around and offer (goods) for sale, typically advertising them by shouting.
"hawked a $2,000 collection of ninety-four Beanie babies by explaining that many of the pieces in the collection would be retired soon" (p. 114)

Uncouth: (especially of art or language) lacking sophistication or delicacy.
"How very uncouth that they would put [money] ahead of customers in this respect"

Excoriate: censure or criticize severely.
"A parent wrote in to excoriate the very idea of adult Beanie collectors: 'You should be encouraging people to let the children have their toys and find their own items to collect.' "( p. 139)

Cloy: disgust or sicken (someone) with an excess of sweetness, richness, or sentiment.
"cloying tales of the impact Beanies had on people's lives" (p. 140)

Acolyte: a person assisting the celebrant in a religious service or procession.
"Few of the craze's acolytes acknowledge its insanity even in hindsight." (p. 197)

Halcyon: denoting a period of time in the past that was idyllically happy and peaceful.
"retailers Ty would never have imagined selling to in the halcyon days" (p. 201)

Jilted: suddenly reject or abandon (a lover).
"jilted lovers" (p. 209)

Arraign: call or bring (someone) before a court to answer a criminal charge.
"plead guilty at his arraignment" (p. 213)

August 10, 2018

The Richest Woman in America (Hetty Green in the Gilded Age)

Here's the vocabulary list for The Richest Woman in America: Hetty Green in the Gilded Age by Janet Wallach.

ISBN 978-0-385-53197-9
Wallach, Janet. The Richest Woman in America: Hetty Green in the Gilded Age. Crown, 2013.

Representative Quotes

"New York was celebrating a financial boom. New instutitutions were opening on every corner, filling the canyons of Wall Street with retail banks, commercial banks, insurance companies, and brokerage firms. Investors in mining, real estate, and transportation were flush with funds. Eager to spend their new wealth, they were tearing down old buildings as fast as they could and putting up new ones so frequently that Harper's Magazine complaned the city was unrecognizable for anyone born forty years before. Walt Whitman called it a 'rabid, feverish itching for change.'

Newly rich couples filled extravagent mansions with fabulous furnishings and installed bathrooms with hot and cold running water on every floor. Those who earned $10,000 a year and wanted a place in society were expected to have a big new house, a country place, a carriage, and a box at the opera, and, of course, to play host to lavish parties and balls." (p. 22-3)

"While Caroline thrived on New York's social whirl, Hetty sought escape from the city's commotion. While Caroline gushed with friends over the latest fashions, Hetty cocked an ear toward the men conversing on finance. While Caroline was intent on enhancing her position, Hetty was focused on expanding her fortune. The debutantes' world held little attraction for her: she may have enjoyed dancing, and she may have indulged in gossip, but she had no taste for frothy teas, no craving for fussy clothes, no liking for luxuries that money could buy. Hetty hungered for money itself." (p. 30)

"When [Hetty's father] asked her why she still had money in her New York bank account, she told him that with the $1,200 he had given her, she had bought $200 worth of clothes. The rest, she proudly announced, she had invested in bonds that had already grown in value. 'That investment turned out so well that I soon made others,' she told an acquaintance." (p. 31)

"Entrepreneurs willing to build the rail lines prodded the federal government to grant them land along which they could lay the tracks. But even though the land was free, they needed money for payrolls and equipment. Smart investors and shrewd speculators could see the future whizzing before them. Tempted by the possibility of huge returns from reailroads and from the development of the land surrounding them into towns, mining centers, and manufacturing hubs, they poured money into New York banks. A flood of new funds arrived from Boston and New Bedford, from Chicago and St. Louis, and from London, Paris, and Frankfurt. Awash in capital, the banks loaned money at easy interest rates to railroad promoters, mining prospectors, land speculators, merchants, and farmers." (p. 33)

"Everyone wanted a piece of the prosperity pie. Eager clients could almost taste their earnings as they bought shares of everything from the Crystal Palace, even as its stock was plummeting from 175 to 53, to the Reading Railroad to Pacific mining ventures. 'You can't lose,' stock salesmen promised naive clients. Trading in railroad stocks zoomed. Canny manipulators devised new instruments that enabled them to purchase more shares with less cash....

That same month Eerie Railroad stocks started sliding. Soon after, investors were agog when the New Haven Railroad announced that its president, Rober Schuyler, a prominent member of New York society, had swindled the company of $2 million. More railroads slipped as confidence fell, and for a few months Wall Street, trading primarily in railroad stocks, ran gloomily off the track. But if speculators who had bought on margin were forced to sell their shares to cover their losses, shrewd investors like Commodore Vanderbilt and speculators like Jay Gould swooped up the stocks at low prices. Hetty Robinson would later do the same.

Railroads were falling, but a feverish rush for gold sent mining stocks soaring. Midwestern banks opened branches in New York so that customers could redeem their notes in the East. Five new bank buildings, commended for their graceful architecture, were under construction on Wall Street, and the total number of banks in the city was on its way to doubling. It seemed as though everyone was becoming rich.

For three years the boom continued. Banks encouraged spending and loaned generously at low interest. When customers reached their credit limit, instead of cutting off further loans, the bankers urged them to borrow more, and then sold the loans at discounted prices to other institutions. With easy money, merchants and manufacturers expanded their businesses. Consumers shopped at a furious pace, importing fancy French furnishings for their oversized mansions....

The country was drunk on prosperity." (p. 35)

"And then the bubble burst. Toward the end of 1857, the news from the Ohio Life Insurance and Trust Company leaked the first bits of air. Unbeknownst to its Midwestern directors, the manager of its New York branch had embezzled millions of dollars. In addition, the bank had borrowed funds from other New York institutions in order to lend money to railroad builders and speculators in railroad stocks. But European demand for American grain had waned with the end of the Crimean War, and with bumper crops around the world, Midwestern farmers received lower prices and shipped fewer foodstuffs by railroad.

"The overextended railroads had borrowed millions of dollars from Ohio Life and could not pay them back. When the insurance company revealed its $2 million loss from the embezzlement plus $5 million in losses on loans to railroad builders, stocks speculators, and in its own trading accounts, the New York banks demanded the money owed them. In response, Ohio Life declared bankruptcy at its New York office and shut its doors.

"Events spiraled downward.

"Midwestern banks were forced to borrow more money from New York. The farmers who withdrew their money from their accounts every summer to cover seasonal costs could not replace it in the fall; nor could they repay the merchants who had extended them credit. N.H. Wolfe, the oldest flour and grain company in New York, declared bankruptcy. The president of a Michigan railroad announced his resignation. Railroad stocks slid to hailf their prices of four years earlier.

"Big bankers, worried that other clients were overextended, nervously called their customers for immediate repayment of matured loans. But Ohio Life was not the only one that had borrowed far beyond its means. Within weeks other banks and major Wall Street investors, ruined by bad loans, suspended operations or defaulted. Rumors raced through the city, growing more exaggerated at every telling. Crowds huddled in the canyons of Wall Street as panicked creditors, worried that their banks would not be able to pay them, withdrew their money. Although each bank issued its own version of paper money backed by gold, in reality the paper notes were not at par value with the metal. The public demanded the gold. With imports high and confidence low, the banks were forced to make their payments in gold, but their stores of specie, as metal coins were called, were shrinking.

"Dark clouds hovered. 'People look dubious and whisper darkly,' one man wrote, noting that several stock operators suffered serious failures. few clever men like Russell Sage, a future role model for Hetty, kept substantial amounts of cash on hand and used it to buy stocks at rock-bottom prices. John Pierpont Morgan told his son there was a good lesson to be learend from other people's greed and good bargains to be found in the aftermath. In future times, Hetty would always keep cash available and use it to buy when everyone else was selling. Much later, Warren Buffett would do the same. But most people watched their money wash away in the flood; it felt like the crash and depression that had taken place twenty years before." (pp. 39-40)

" 'Extra! Extra!' 'War hs begun!' newsboys shouted on April 12. Looming over New York was the treat that the South would lower its import duties to half the northern tariffs, ship cotton to Europe, and open its harbors to household goods and war materiel. What would happen if southern cotton no longer flowed to New York? If southern loans were no longer paid to the city's banks? If southern orders for goods were no longer sent to New York?

"With visions of ships rotting in the East River and grass growing in the streets, New York businessmen were roused from their neutral slumber. They could non longer afford to rest while another financial panic hit the city. Instead, the rallied to keep the Union intact." (p. 51)

"The rules of the marketplace state tht for every seller there must be a buyer. The more the public discounted paper money, pushing it down as low as fifty cents on the dollar, the more Hetty bought. This was the start of the contrary investing she followed for the rest of her life: buying when everyone else was selling; selling when everyone else was buying. 'I buy when things are low and nobody wants them. I keep them until they go up and people are crazy to get them. That is, I believe, the secret of all successful business,' she said.

"Her philosophy reverberates today in the transactions of Warren Buffett. After a tumultuous period in the stock market, he told his shareholders in 2010: 'We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: a climate of fear is their best friend.' " (p. 71)

"The U.S. government provided vast amounts of tax-free land around the tracks in the West and gave rights to the minerals in the ground; but in order to finance the projects, the railroad builders borrowed money, using the land as collateral. American bankers eagerly loaned them the money for construction, and then, to soften their own risk and increase their profits, they issued bonds. Seeking money for the bonds in London, Paris, and Frankfurt, they were welcomed with open arms. The Bank of England was paying interest rates of 3 to 6 percent, while the Americans were offering as much as 18 percent to lenders. Pleased to find such an attractive place for their funds, the Europeans quadrupled their investments to over $200 million in railroads and $1 billion in American stocks and bonds." (p. 78)

"Abigail Adams, who had bought 'State Notes' after the Revolutionary War when there was little confidence in the new government, found out the value of depreciated bonds. Against the objections of her husband, who put his money in land, Abigail used her pin money to buy the bonds, which increased far more in value than her husband's real estate. With Edward's knowledge of railroads and banking, with American industry booming, and with inflation soaring, Hetty increased her share of railroad stocks and U.S. Treasury bonds. The bonds would prove to be an outstanding investment." (p. 79)

"Opportunists in London were also buying greenbacks from local merchants: English businessmen were paid in paper money by American customers but could not exchange the greenbacks for a decent rate at the British banks. Promissory notes, cosigned by prestigious bankers, were being sold at discounts as high as 60 percent. Marcus Goldman, an immigrant from Germany, set up an office on Pine Street to buy and sell this commerical paper. Later he would team with his son-in-law Samuel Sachs, forming the company Gopldman Sachs, to raise capital for American companies. When the American government agreed to pay par value for greenbacks, making the paper money almost equal to gold, arbitrageurs like Goldman and the Lazard Brothers, based in California and London, made a fortune." (pp. 79-80)

"New York was flush with money. The city was flooded with an endless stream of funds from Europe, ready credit from the banks for mortgages, 10 percent margin accounts on Wall Street, junk bonds and other newly devised railroad debentures, and other instruments for trading stocks, such as puts and calls - the option to sell (puts) or buy (calls) a stock at a specified price - used by the financier Russell Sage. The abundance of money had encouraged a 500 percent increase in railroad building since the end of the Civil War, gaining land grants for the builders but allowing tracks to be laid that sometimes went aimlessly from point to point. Along with the railroad boom came massive real estate speculation and a rash of consumer spending across the country.

" 'Everybody seemed to be making money,' said one writer, adding, 'nobody suspected he was living in a fool's paradise.' Even Chicago was quickly climbing back on its feet, with orders in place for steel and iron to erect buildings that would make it the most modern city in the country. In New York, where as fast as the stock market dropped, it bounced back, elegant patrons dined on oysters and champagne at Delmonico's new restaurant." (pp. 86-7)

"Central European banks and London financial institutions had money readily available for speculation in railroads and real estate. Developers in Paris, Berlin, and Vienna were furiously erecting elaborate public buildings and private homes in the beaux arts style, even using the promise of future houses as collateral on new mortgages.

"The rampant rush to buy more land at low interest rates sent property prices soaring. Yet even as the costs rose, real estate opportunists continued to borrow until they reached a point where buyers could not afford the land. THe spectulators were unable to pay back the interest on their loans. When the worthless mortgages caused a few European banks to collapse in the spring of 1873, the British institutions, wary of more shaky mortgages held by the rest of the banks, raised their lending rates. The bubble burst on the Continent.

"Moody's magazine observed a few years later: 'The world as a whole was money mad... All the great European cities seem to have had booms at this time. Vienna and Berlin were the most frenzied. The prices of sites went to purely fictitious figures, and the phenomenon was prevalent of the speculator who bought property, mostly on credit which he did not expect to use, with the expectation of forestalling the deferred payments by a sale at an advance.' The editors continued, 'At the same time, Europe was pouring the oil of its money on the flames of American speculation. Railways spanned the continent and gridironed the states.

" 'Suddenly something snapped, and the machinery stopped. A Vienna bnaking house broke under the weight of too heavy a load of Missouri, Kansas and Texas securities, followed by another carrying too much Canada Southern. The financial organism winced like a leviathan with a harpoon in his vitals.' As the spasms spread from stock exchanges to banks, and from banks to investors, from Instanbul to Stockholm and from Edinburgh to Alexandria, the world crouched in pain. The woulds had come from speculation, but, said Moody's, 'No war ever made more misery.' " (p. 88)

"The scarcity of funds triggered disaster: merchants defaulted because they could not find money to run their businesses; farmers went bankrupt because they could not borrow to plant their crops; railroads lost income because of the smaller shipments of food. The railroadswere already suffering from the Eering Ring outrage with its worthless stock and corrupt activities in Washington; the Union Pacific scandal, which, like the Eerie, uncovered stolen profits and bribed politicians; and a general loss of confidence in railroad management....

"The Northern Pacific Railroad, which had been running at a loss and spending money to lay track faster than it was acquiring funds, announced on September 18, 1873, that it could no longer afford to pay bondholders the 8.5 percent dividend. The railroad folded in default. The highly reputable banking house of Jay Cooke & Company, which earlier had raised hundreds of millions of dollars in bond sales to finance the Civil War, had loaned money to the Northern Pacific. Now the railroad was unable to pay its debts to Jay Cooke, and the prominent firm was forced to close." (p. 89)

"The panic took its toll on almost everyone. It terrorized men who looked as though they had aged ten years in one day. Brokers, vigorous the day before, were walking with their backs bent from the blows of the market. Bankers, so confident yesterday, were leaning on canes, unsteady on their feet today....

"In every case financial crises follwed a period of rampant and extravagent speculation." (pp. 90-1)

"At this time when stocks were being abandoned, Hetty wanted to trade.... 'When I see a good thing going for cheap because nobody wants it, I buy a lot of it and tuck it away.' For Hetty, the decline in the market offered an opportunity for the future.... She had a pile of cash when others were scouring for pennies, but she also had a deft mind and the colossal courage to push against the crowd.

"It was far easier to lose money than to make it.... Vanderbilt bought his stocks for cash and was able to wait out the market. But his followers, who risked their money on 10 percent margin, were racing to cover their losses. When a friend complained, he replied, 'If you had bought a hundred shares instead of a thousand, you could have held on. Never be in too great a hurry to get rich.' " (p. 94)

"While government officials and Congress argued over whether to allwo deflation or encourage inflation, farmers and even small businessmen resorted to methods of barter. In 1874, a conservative Congress passed a bill to devalue the dollar by printing more money. The following year, after the economy failed to improve, Congress legislated to strengthen the system by backing U.S. dollars with gold. Those like Hetty, who had held on to their discounted greenbacks bought after the Civil War, were now flush with wealth." (p. 95)

"When her cleaning lady gave birth to a son, Hetty gave her a gold piece and told her to deposit it in the bank. Keep it there until he is twenty-one, she advised. Instead of understanding the lesson of compound interest, the woman scorned her for saving instead of spending.... 'Watch your pennies and the dollars will take care of themselves.' " (p. 99)

"Mrs. E.H. Green... is believed to be the richest woman in America, a title earned by her own business sagacity, energy, and watchfulness.... She has lived a frugal life, exercised extraordinary keenness in her investments, and by embracing every good opportunity that the stock market afforded her, she has more than quintupled her heritage." (p. 116)

"I have observed that many a tattered garment hides a package of bonds and that gorgeous clothing does not always cover a millionaire." (p. 118)

"When she had read, quizzed, grilled, interrogated, and investigated enough, when she had studied the costs, analyzed the assets, and dug through the debts, when she had found the answers to suit her, when she knew the true worth of a company and understood its weaknesses, when she was satisfied that its basic values were sound and its assets strong, that the downside risk was low and the upside high, then she invested her money." (p. 121)

"She much preferred common people to the stuffy socialites of the upper class." (p. 121)

"If Mr. Astor did not appear at his wife's glittering bals, neither did many of his colleagues. While their wives and daughters, wearing Parisian gowns (and paying a 50 percent import tax for the privilege), descending from their brownstones and townhouses in the dark of night and, under teh gaze of gossip columnists, partied with idle males till 2 a.m., the men who made the money supped early and went to sleep. Jay Gouold, James Lenox, and William Vanderbilt, recoiling at the word 'cotillion,' retreated to their private clubs. Henry James understood: 'The highest luxury of all, the supremely expensive thing, is constituted privacy.' " (p. 123)

"When others were failing, Hetty often stepped in and saved them by buying their mortgages. The secret, of course, was available cash. She loved a bargain, and having money on hand to pick up distressed assets gave her a distinct advantage in the marketplace. Then, when the banks allowed foreclosure on her mortages, Hetty assumed the property.

"Such was the case when she was sued for a mortgage she had purchased years before. In 1873, Hetty had loaned $150,000 for a mortgage, and after three years of nonpayment the bank foreclosed; she bought the property at a bargain price. By 1890 its value had grown to $1 million." (p. 140)

"You should never marry a society man with my consent. I want to see you happily married and in a home of your own, but I want you to marry a poor young man of good principles who is making an honest hard fight for success. I don't care whether he's got $100 or not, provided he is made of the right stuff. You will have more money than you'll ever need and it isn't necessary to look for a young man with money. Now you know my wish and I hope I won't hear anything more about your young man in Newport who knows just about enough to part his hair in the middle and spend his father's money." (p. 147)

"The rich needed to spend their money in order to improve their social position; the newer their money, the more they spent. They were spreading their dollars abroad, buying more clothes, more jewels, more furnishings, more food, and more wines from Europe, creating a demand for more payments in gold from American banks." (pp. 155-6)

"Companies whose stocks had skyrocketed, whose dividends defied gravity, collapsed when their lack of capital was revealed. Money became so tight that short-term interest rates soared as high as 75 percent. The National Cordage Company, one of the most heavily traded stocks on the exchange, could not get credit and declared insolvency. The market plunged. Investors panicked. The Gilded Age, like other eras of avarice, opulence, and easy credit, burst from gluttony." (p. 156)

"Perceptions of Hetty were as varied as those of the Wizard of Oz.... 'I've been reading of Hetty Green. I think she must be crazy....' 'Why, she's worth 40 millions....' 'Then she can't be crazy. She's only eccentric.' " (p. 165)

"The case against the trustees of Edward Robinson's estate was first brought about by the sale of property in Cicero, near Chicago, in 1888. The executors had insisted on selling the vacant land for $650,000 although they had been offered $800,000 for the same acreage. The sale roused Hetty's suspicions: she accused the men of investing her father's money with their own interests in mind. Fees they charged for managing the trust seemed excessive and included payments to their own relatives. Money they paid to public officials 'for improving the morals of the city' went toward procuring improvements on the trustees' property. Improvements they made had no effect on her land but clearly enhanced their own. Claims were made for repairs but no vouchers were produced. And no accounting of the trust had been made in more than a decade. When Hetty asked to see the papers, they balked at bringing them forth." (p. 166)

"Instead of giving her money away lavishly like Annie Leary, she handed it out meagerly, providing jobs, not welfare, avoiding the publicity that led to more requests.... 'Hetty Green has in secret done a vast deal more of philanthropy than the public can give her credit for.' " (p. 170)

"To live content with small means; To seek elegance rather than luxury, And refinement rather than fashion; To be worthy, not respectable, and wealthy, not rich." (p. 176)

"With money readily available, investors and manipulators borrowed from the banks to buy stocks. The rash of buying sent prices zooming: men whispered hot tips in one another's ears; rumors roiled of companies going sour; stories spread of huge amounts of money being made overnight. Hetty watched from the sidelines as America swirled in another carnival of speculation; rich and poor rushed to the carousel and reached for the brass ring. Corporate leaders and clerks bought and sold on margin; many bought shares being offered to bankroll the purchases of worthless firms. The irresponsible borrowing echoed the past: 'I wasn't worth a cent two years ago, and now I owe two million dollars,' mocked Mark Twain in The Gilded Age. The reckless use of margin and the razzle-dazzle of new industrial stocks also predicted the future, foreshadowing the dot-com bubble and the frenzy for initial public offerings at the turn of the twenty-first century.

"Everyone but Hetty seemed to be buying. She did not buy industrials, she said, and never bought with borrowed money.... Her approach was far more cautious: 'When good things are so low that no one wants them, I buy them and lay them away in a safe; when owing to some new development, they go up and my shares are so needed that men will pay well for them, I am ready to sell.'

"She watched for bargains but never bought to be in style... In the frantic heat of the market Hetty kept a cool head. She attributed her success to her basic rule: 'always buying when everyone wants to sell, and selling when everyone wants to buy. As easy as her motto appeared, it took restraint to keep from buying while others swooped up stocks in the euphoria of a boom; it took courage to remain calm while the crowd dumped their shares overboard in a wave of panic." (p. 191-2)

"She believed that a knowledge of business would make a woman a better wife. In the past, said Hetty, at the end of the day the only thing a woman could do to relieve her husband's strain was 'to make herself as pretty as a wax doll. But there is no reason why that primitive idea... should continue to exist in the sense it once did.' A woman who understood the pressures on her husband would be a far more sympathetic spouse.

"In spite of her strong words, she had little support for women's suffrage and no desire to see a woman president. 'I should hope not,' she said piercing the interviewer with her steely eyes. 'I don't believe in so-called women's rights. I am willing to leave politics to the men.' Indeed, she had never taken office at any corporate board, nor had she been the public face of any company; she left it to her husband and son to hold those positions. Nonetheless, she wished women had more rights in the world of commerce. 'I could have succeeded much easier had I been a man. I find men will take advantage of women in business taht they would not attempt with men.' " (pp. 195-6)

"As the boom continued, more and more Americans were eager to take part, borrowing money from the banks to buy stocks at prices that soared like out-of-control hot-air balloons.

"At the same time, the cost of land skyrocketed around the country, as people raced to buy up real estate in cities, towns, and rural communities. Inevitably, the cost of borrowing the money to buy the land rose precipitously. While others bought, Hetty sold. 'I saw the handwriting on the wall,' she said later. 'Every real estate deal which I could possibly close up was converted into cash.'

"In 1905 the call for money surpassed anything that had come before. The heavy requests pushed interest rates up, causing many people to owe the banks far more than they had....

"Black clouds hung over the debtors; many had little choice but to divest their holdings. Hetty watched as rich men arrived at the Chemical; doffing their top hats, drawing out their expensive engraved cards, and handing them to the clerk at the door, they sought her out to sell off their possessions. As rates rose, more and more of 'the solidest men in Wall Street... financials to legitimate businessmen,' came to call, begging to unload everything from palatial mansions to automobiles." (p. 199)

"When it comes to spending your life, there have to be some things neglected. If you try to do too much, you can never get anywhere. As I was naturally made for work, I just as naturally wasn't made for a fashion plate. I have never bothered about what to wear.... I like to see what other people are wearing. It does me good sometimes and gives me a laugh." (p. 221)

"She had enough of courage to live as she chose and to be as thrifty as she pleased, and she observed such of the world's conventions as seemed to her right and useful, coldly and calmly ignoring all the others." (p. 227)

SAT Vocabulary Words

Brocade: a rich fabric, usually silk, woven with a raised pattern, typically with gold or silver thread.
"buying brocades from Frace" (p. 7)

Mainstay: a thing on which something else is based or depends.
"The Howland and Robinson families were a mainstay of whaling and banking" (p. 8)

Sagacious: having or showing keen mental discernment and good judgment; shrewd.
"sagacious businessman" (p. 8)

Rectitude: morally correct behavior or thinking; righteousness.
"He trusted his brothers in commerce and knew he could rely on them for honesty and goodwill, candor and rectitude." (p. 8)

Vestibule: an antechamber, hall, or lobby next to the outer door of a building.
"advancing no farther than the vestibule" (p. 26)

Frock: a loose outer garment, in particular.
"frock coats" (p. 28)

Watchword: a word or phrase expressing a person's or group's core aim or belief.
"Waste was wicked; frugality was his watchword." (p. 30)

Duds: clothes.
"Take your duds and leave." (p. 55)

Fete: a celebration or festival.
"Oridnary fetes were forgotten as Hetty watched her once-vigorous father waste away." (p. 64)

Conundrum: a question asked for amusement, typically one with a pun in its answer; a riddle.
"conundrums, charades, or chess" (p. 75)

Sultan: a Muslim sovereign.
"sultan of Turkey" (p. 75)

Dapper: (typically of a man) neat and trim in dress, appearance, or bearing.
"dapper entrepreneurs who all hoped for blessings" (p. 77)

Sojourn: a temporary stay.
"sojourned in the country and at the seaside" (p. 83)

Scurrilous: making or spreading scandalous claims about someone with the intention of damaging their reputation.
"the scurrilous Gould and his band of thieves were forced of the Eerie board" (p. 87)

Avowed: that has been asserted, admitted, or stated publicly.
"he had borrowed more against company stock than had been avowed; furthermore, he had falsified the company's statements, claiming far less debt than the real amount" (p. 115)

Penurious: parsimonious; mean.
Parsimonious: unwilling to spend money or use resources; stingy or frugal.
"a penurious man who seated his guests on rickety chairs and served them expensive wine poured into broken mugs" (p. 183)

Fortnight: a period of two weeks.
"for a fortnight he followed her to Hoboken" (p. 184)

Palatial: resembling a palace in being spacious and splendid.
"palatial mansions" (p. 199)

Scion: a descendant of a notable family.
"a scion of a real estate family" (p. 210)