Financial Theory

Financial Theory - Financial Theory

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Financial Theory: Lecture 2 Transcript September 8, 2009 << back Professor John Geanakoplos: So for those of you who weren't here yesterday--or, last class, first class, I'll say a couple words about what happened, basically four words. The course is really made of up four different elements. The first part is the standard financial theory course that grew up in the last ten years at a lot of major universities, pioneered by a bunch of guys who won Nobel Prizes in business schools. And it's the method, some of them quite clever and I think fun, methods for pricing financial assets and making optimal financial decisions. So you're going to learn all these tricks and how the financial system works, and you'll learn it both from a theoretical point of view, the way they thought of it in these finance schools, and also from a practical point of view since many of these very same problems come up all the time in the hedge fund I helped start. So that'll be the main part of the course, but there are three other things that I want to concentrate on in the course. So the second point is reexamining the logic of laissez-faire and regulation. This is a dramatic moment in our history now where there's tremendous pressure on--temporarily anyway--on the government to establish all sorts of new regulations. There's also tremendous resistance to establishing the new sorts of regulations. So there's a debate going on now in Congress and in the halls of academia about what kind of regulations should we put in place, what regulations would have prevented the crisis we've just lived through. The crisis, by the way, which I don't think we're done with yet. So there's a very powerful argument in economics. The most famous argument in economics, the invisible hand argument that basically says markets work best when they're not encumbered by government interventions. So we're going to reexamine that argument in the context of financial markets. Then the third thing I'm going to discuss in this course at some length is the mortgage market and the recent crisis. After all, my hedge fund is a mortgage hedge fund. We founded it in 1994, by the way, which was--the five years before that I was running the Fixed Income Research Department at Kidder Peabody, which was the biggest player in the mortgage market then on the sell side. The hedge funds buy mortgages, investment banks create and sell the mortgage securities. So I was running the research department at the firm that did twenty percent of the market in what's called CMOs, and then I changed to the buy side and was at a hedge fund that bought those kinds of CMOs, and bought sub-prime mortgage, CDOs, everything. So it seems I suffered greatly through the last two years of the mortgage crisis and it would just be foolish not to explain what was going on and what it felt like to be in a mortgage hedge fund while the rest of the world was collapsing around us. And for quite a while it's given me some great embarrassment to have been part of it all.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/08/2012 for the course ECON 251 taught by Professor Geanakoplos,john during the Fall '09 term at Yale.

Page1 / 16

Financial Theory - Financial Theory

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online