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Inflation
Decade
(http://inflationdata.com/inflation/images/charts/Average_Annual%20_Inflation%20_Decade.gif)
December
30, 1970
- President Nixon signed The Securities
Investor Protection Act of 1970; created Securities Investor
Protection Corporation (SIPC), private nonprofit corporation to
insure the securities and cash left with brokerage firms by
investors against loss from financial difficulties or failure of
such firms; first line of defense in the event a brokerage firm
fails owing customers cash and securities that are missing from
customer accounts.
1973
- Derivatives - Fisher Black, Myron Scholes
published Black-Scholes Option Pricing Formula in Journal of
Political Economy; specified first successful options pricing
formula
(mathematics of option pricing, dynamic
hedging strategies using options and other derivatives); described general framework
for pricing derivative securities, created financial
engineering; one of most important mathematical
tools in modem theory of finance (Black, F. and Scholes, M.
[1973]. "The Pricing of Options and Corporate Liabilities".
Journal of Political Economy, Vol. 86, p.637).
1997 - Black
(posthumously), Scholes, Merton Miller awarded Nobel
Prize in Economic Sciences "for a new method to
determine the value of derivatives."
1974
- Michael Milken created market for high-yield bond trading;
based on research of W. Braddock Hickman, former president of
the Federal Reserve Bank of Cleveland (Corporate Bond Quality
and Investor Experience, Princeton, NJ: Princeton University
Press, 1958) - corporate default history 1900-1943: diversified
long-term portfolio of non-investment-grade debt securities
outperformed portfolio of investment-grade debt, with the same
level of risk.
April 1977
- Junk Bonds -
Drexel underwrote first junk bond issue, Texas International;
end of 1978 -
Drexel number one issuer; used financial innovation as low-cost
solution to raising capital; created high-yield new-issue bond
market; 1981 -
issued bonds for leveraged buyouts;
1983 - provided junk bond financing for
hostile takeovers (leveraged buyouts taken against incumbent
directors' will); March 1985
- completed first junk bond-financed hostile takeover.
1977
- LBOs - Kohlberg Kravis Roberts & Co. (formed in May 1, 1976 by
former Bear Stearns executives Jerome Kohlberg, Henry Kravis,
George Roberts) financed $26 million leveraged buyout of A.J.
Industries, publicly-traded small manufacturer of brake drums
and other components (66% leverage financed with senior bank
debt); firms' first deal; couldn't persuade anyone to provide
subordinated debt (first LBO done in 1963 - Lewis B. Cullman
acquired Orkin Exterminating for $62.4 million with a $1,000
investment); May 14, 1979
- acquired Houdaille Industries in $355 million buyout; first
public-to-private transaction (leveraged buyout of a publicly
traded company); took almost one year to raise $355 million from
several banks, insurance companies for deal with 86% leverage
financed by multi-layered array of senior, subordinated
securities.
1977
- Securitization - Salomon Brothers (Lewis S. Ranieri) and Bank
of America Corp. (BAC ) developed first private (non-Government
Sponsored Enterprise) mortgage-backed securities (MBS); bonds
pooled thousands of mortgages, passed homeowners' payments
through to investors (only 15 states recognized MBS as legal
investments); created "securitization," converting of home loans
into bonds that could be sold anywhere in world = capital
markets as source of funds for housing, commercial real estate;
1999 - size of market was $678 billion (41.6% credit card
receivables, 19.8% home equity loans, 11.8% auto loans);
1982 - developed
"collateralized mortgage obligation" (repackaged pools of
30-year mortgages into collections of 2-, 5-, and 10-year bonds
to sell to wide range of investors; seen as template for cutting
costs); led effort to obtain federal legislation to support,
build the market (Tax Reform Act of 1986).
October 2008
- Size of Market for Derivative Products
(http://graphics8.nytimes.com/images/2008/10/09/business/1009-web-GREENSPAN.gif)
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