Red-Blooded Risk: The Secret History of Wall Street

CHAPTER 19

The Secret History of Wall Street: 1993-2007

I've allotted myself one chapter to cover the period in which Wall Street, and finance in general, exploded in global impact. In 1980, investment banks were small private partnerships, commercial banks had balance sheets a nineteenth-century auditor would have understood, investment banks and commercial banks were walled off from each other by Glass-Steagall, hedge funds were small and obscure, few individuals owned securities, and fewer individuals cared about anything that happened on Wall Street. Then things changed. The groundwork for change had been laid by finance professors from the 1950s to the 1970s, and the triggering event was the arrival of rocket scientists around 1980. I'm not claiming the professors and quants caused everything that happened, but we set things in motion and the changes that did happen cannot be understood without knowing their quant foundations. I'm going to try to cover the stuff that other histories leave out.

The most obvious change during this period was one of scale. Individual firms got larger, firms merged into gigantic complexes, and private firms went public to raise additional capital. The total market value of securities went up, and uncountable new varieties were introduced. Since 1980, the U.S. economy in real terms has about doubled whether you measure gross domestic product, national income, total nonfinancial corporate profits, or another major aggregate of economic activity. ...