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Contents

Preface Acknowledgments Chapter 1 An overview of the financial crisis 2007/8 Introduction The good times New models of lending The time bomb ticks The time bomb explodes Why, oh why did no-one see it coming? Escape Timeline of the financial crisis 2007/8 Chapter 2 Governments and the financial crisis Introduction Externalities Government regulation Economic intervention Government deficits Demand management Monetary policy Fiscal policy Lobbying Summing up Chapter 3 Personal finance, housing and the financial crisis Introduction Housing Mortgage borrowing Credit card and other personal debt Pensions The housing market strikes back Chapter 4 The business of banking Introduction Banks in general Commercial banks Investment banks Bank holding companies Glass Steagall act Central banks Asset liability mismatch The bank bonus culture The bank bonus culture and declining standards Risk/return implications of the bank bonus culture Bank balance sheets Moral hazard Lender of last resort The shadow banking system and non-bank financial institutions Chapter 5 Subprime lenders and borrowers Introduction Community Reinvestment Act The business of subprime lending The dubious economics of subprime lending Structured Instrument Vehicles (SIV) and conduits Repackaging mortgages Rating agencies Chapter 6 Credit default swaps and toxic assets Introduction How do credit default swaps work? Drivers of the CDS market Correlations and credit ratings The unwinding Chapter 7 Bank lending and control systems Introduction Normal commercial bank lending criteria Lending control systems Value at Risk and risk management Bank capital adequacy Chapter 8 Regulation Introduction The need to regulate financial services Capital adequacy and liquidity Lender of last resort Deposit insurance Tight versus loose regulation The US system of financial regulation The UK system of financial regulation Eurozone regulation International regulation Too big to fail Mark-to-market accounting Chapter 9 The business cycle, booms, busts, bubbles and frauds Introduction Booms, busts and bubbles Frauds and swindles Charles Ponzi Bernard Madoff What makes Ponzi schemes crash? Chapter 10 Finance theories Introduction Earnings versus cash flow Market efficiency The efficient markets hypothesis The capital asset pricing model Risk and uncertainty Risk management models and the normal distribution Options Behavioural finance Conclusion Chapter 11 Other academic theories Introduction Culture and conformity Self-interest Bonuses Mathematical economics Creative destruction The insights of Hyman Minsky The Austrian School of Economics An eclectic view Final words on self-interest Chapter 12 Bank failures in the USA Introduction Case 12.1 Bear Stearns Introduction Recent history Into the abyss J.P. Morgan to the rescue Case 12.2 Lehman Brothers Introduction Bankruptcy Repo 105 Property The CEO Case 12.3 American International Group (AIG) Introduction AIG Financial Products Corporation The end is nigh Case 12.4 Fannie Mae and Freddie Mac Introduction Mortgage securitisation Political pressure The financial crisis Chapter 13 Bank failures in the UK Introduction Case 13.1 Northern Rock Introduction Risky business model Crunch time Britain's first bank run since 1866 Why did things go so wrong? Case 13.2 HBOS Introduction A changed business model Days of reckoning The takeover and the bailout Risk management What went wrong? Case 13.3 Royal Bank of Scotland (RBS) Introduction The NatWest takeover Investment banking The ABN Amro acquisition 2008 financial crisis What went wrong? Chapter 14 Bank failures in Europe Introduction Case 14.1 Fortis Introduction The ABN Amro takeover Fortis problems in the wake of ABN Amro takeover Case 14.2 UBS Introduction Dubious practices The financial crisis hits UBS Case 14.3 Icelandic banks Introduction The root of the problem Accident Cronyism Kaupthing leaked documents The unravelling Case 14. 4 Irish banks Introduction Banking background Anglo Irish Bank Irish Nationwide The bailout Chapter 15 The great depression Introduction The Roaring Twenties The Wall Street Crash The Great Depression unfolds The gold standard Franklin D. Roosevelt Summing up Chapter 16 Government responses to the crisis Introduction US responses British responses Eurozone responses The extent of total bailouts Chapter 17 Lessons and major issues Introduction Financial crises Lessons for governments Lessons for banks Lessons for regulators Lessons for household borrowers Lessons for academics Major issues Notes Glossary Index

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