2. Financial Innovations (n)
“Financial Innovations, like innovations
generally, are basically unforecastable
improvements.”
- Merton H. Miller, “Financial Innovation: The Last Twenty Years and the Next “, Source: The Journal of Financial and
Quantitative Analysis, Vol. 21, No. 4 (Dec., 1986), pp. 459-471; Published by: University of Washington School of
Business Administration Stable URL: http://www.jstor.org/stable/2330693 .Accessed: 31/07/2012 p.460
3. The New Yorker Magazine cover
“A View of the World From 9th Avenue”
4. Morningstar Firsts
• 1st to offer robust fund research tools via CD-ROM to financial planners
• 1st to assign “moat” ratings to stocks
• 1st to integrate security, fund, portfolio, and market tracking research
to form complete research lens
• 1st to assign Stewardship Grades to mutual funds
• 1st to produce globally unified fund ratings and reports
• 1st to measure which countries treat retail investors best in terms of
cost, choice, disclosure, protections
Source: Don Phillips, Morningstar e-mail correspondence 8/8/12
5. Alternatives: Hedge Funds & Private Equity
• Alternatives – Hedge Funds
• Established in the early 1990s, Hedge Fund Research (“HFR”) Group is a global hedge
fund asset management firm and the largest distributor of hedge fund data.
• 1993 - From its origins as a fund of funds manager, HFR launched the industry's first
database to standardize hedge fund reporting and categorization and to establish
hedge fund indices.
• 1996 - Introduced the first transparent hedge fund investment platform, affording
investors daily position-level reporting and independent third-party pricing.
• 1999 - Designed and launched the industry's first investable hedge fund index.
https://www.hfr.com/?page=overview&nav=history&t=1134957903
• Alternatives – PIPEs
• Although not supported by any hard, quantitative data yet, it appears that the first “toxic
converts” may have been created by Citadel, a Chicago-based hedge fund, in the
Spring of 1995 for Celgene Corporation.
• Alternatives – Private Equity
• GTCR, a private equity firm in Chicago, is the first to systematize (1960s) the
management-led buyout strategy that has become a feature 21st century capital.
• Hispania Capital, of Chicago, establishes the first Hispanic private equity fund (2003).
6. Equity Seat Rights (ESR) – Stadium Financing
Different from Personal Seat License (PSL) in the following ways
• Ticket price is built in
• Builds equity
• No price increases year to year
• No separate upfront fee
• Is transferable
Source: http://http://www.seatrights.com/esrpsl.php
7. MCD & CAT Issue 1st RMB ‘Dim-Sum’
Bonds by Foreign Firms
Caterpillar to issue yuan bond By Robert Cookson and Hal Weitzman, FT.com
November 24, 2010 -- Updated 0627 GMT (1427 HKT)
• Caterpillar is marketing a two-year Rmb1bn bond to institutional investors in Hong Kong -
Becomes the first foreign industrial multinational to issue debt in the Chinese currency
• Caterpillar, the US-based manufacturer of earth-moving equipment, is marketing a two-year
Rmb1bn bond to institutional investors in Hong Kong, becoming the first foreign industrial
multinational to issue debt in the Chinese currency.
• The issue, which is only the second by a multinational to date, dwarfs a Rmb200m issue
launched by McDonald's in August. The deal will give momentum to the nascent offshore
market in renminbi-denominated debt which financiers hope will become an important
fundraising route for companies with operations in China.
• The interest rate on Caterpillar's corporate bond will be determined according to interest from
Wednesday's marketing effort. McDonald's three-year note was quickly oversubscribed and
secured a 3 per cent coupon.
• McDonald's became the first multinational company to sell renminbi bonds in Hong Kong
in August, after China lifted a series of restrictions on the use of the currency outside the
mainland.
• .
8. 163 Year
Bonds?!
Difficult times – falling
membership rosters and
limited bank lending –
compelled social clubs to
develop creative solutions
to their financial problems.
The 1st 100+ year bonds for
a social club!
-James D. Nowlan, Glory, Darkness, Light: A
History of the Union League Club of
Chicago, (Evanston, IL: Northwestern
University Press, 2004), pp.130;209-211
10. The Spirit of Chicago
Attracted Entrepreneurial
Risk Takers…
“The typical man who grows up here must be an enterprising
man. Each day as he rises he will exclaim, ‘I act, I move, I
push.’”
- Rene-Robert Cavelier sieur de La Salle at the Portage of Chicago, 1673
Quoted in Alex Kotlowitz’ Never a City So Real (New York: Crown, 2004) p. 12
12. Dearth of Beaver Pelts in the East Compel
French Canadian Voyageurs to Search Further
Along North America’s Waterways
• Iroquois raiding
parties move
further west
• Wipe out the
Illinois tribe in
the 1680s
13. Beaver Pelts Used to Make Felt Hats
=
• 10x return on sale of beaver pelts!
14. LaSalle in 1673 (& Others): the Chicago
Portage Was an Ideal Site For Settlement
17. “I wouldn’t give six pence an acre for the whole of it.”
- Major Stephen H. Long, Surveyor of the Illinois & Michigan Canal route in 1823, referring to the area now known as
Chicago’s ‘Loop’. [Quoted in “100 Years of Land Values” – Chicago Title & Trust Advertising brochure, 1933]
18. “The opening of the Erie Canal, in 1825, and of the Oswego Canal four years
later, had provided a continuous water route from New York, through the
Great Lakes, to the west, and Chicago was the logical terminus of that
route.”
- F. Cyril James, The Growth of Chicago Banks (Volume I: The Formative Years, 1816-1896), (New York: Harper & Brothers, 1938),
p.71
19. A canal at Chicago would make Illinois “the seat of an immense
commerce; and a market for commodities of all regions.”
Niles Weekly Register August 6, 1814 quoted in Nature’s Metropolis: Chicago and the Great West by William Cronon (NY: W.W.
Norton & Co., 1991) p. 33
“What a route!” its editor exclaimed. “How stupendous the idea!”
Niles Weekly Register August 6, 1814 quoted in Nature’s Metropolis: Chicago and the Great West
by William Cronon (NY: W.W. Norton & Co., 1991) p. 33
20. The Great Indian Council for the Treaty of Chicago 1833
“The removal of American Indians to the west of the Mississippi, the desire of
Easterners to resettle in the Old Northwest, and President Andrew
Jackson’s financial policies in the 1830s combined to create the largest
land speculation bonanza in U.S. history.”
Robert G. Spinney City of Big Shoulders: A History of Chicago (DeKalb: University of Northern Illinois Press, 2000), p.32
21. Chicago’s Speculative Bubble
“In 1833, they [the government land office] sold the square mile of school lands
denoted by the government, an area that corresponds roughly to the present
business district [the Loop] of Chicago, for the sum of $38,700…In 1834, the
Chicago real-estate boom began in earnest, and the sale of Canal lands on
long credits, in 1835…By the summer of 1836, when [President Andrew]
Jackson’s Specie Circular called a halt to the speculative mania throughout
the west, the total value , at the prices then current, of the land in the
present city limits of Chicago had reached a total of $10,500,000, an amount
sixty times as great as its total value in 1830.”
- F. Cyril James, The Growth of Chicago Banks (Volume I: The Formative Years, 1816-1896), (New York:
Harper & Brothers, 1938), p.103
22. “The mid-1830s saw some of the
most intense land speculation in
American history, with Chicago at
the center of the vortex.... Lots that
had sold for $33 in1829 were going
for $100,000 in 1836. Such prices
bore no relation to current
economic reality. Only wild hopes
for the future could lead people to
pay so much for vacant lots in a
town where the most promising
economic activity consisted of
nothing more substantial than
buying and selling real estate.”
Nature’s Metropolis: Chicago and the Great West by William Cronon (NY:
W.W. Norton & Co., 1991) pp. 29-30
23. “Prices of lots valued in
Chicago in 1836 at a
thousand dollars suddenly
fell to the specie value of
three years before –
perhaps fifty dollars;
while the note that the last
speculative buyer had
given remained $1,000, as
before. Widespread ruin
was the consequence.”
History of Chicago by Alfred T. Andreas (Chicago, 1884; Reprint
Arno Press: NY, 1975) Vol. I, p. 138
24. Chicago Real Estate
• Chicago had several mini-booms
and busts in real
estate – 1852-57, 1863,
after the 1871 Great
Chicago Fire to 1873, and
in the 1890s and in the
1920s and was again
concentrated on Chicago.
25. Chicago’s Reputation for Real Estate
Innovation Was Global
“Chicago’s reputation for real-estate
booms was such that
Berlin in the euphoria of
victory over France in 1870-71
indulged in real-estate
speculation to the extent that it
was called ‘Chicago on the
[river] Spree’.”
Charles P. Kindelberger Manias, Panics, and Crashes:
A History of Financial Crises 4th Ed. (NY: John
Wiley & Sons, 2000) p. 111. Quote is from Fritz
Stern Gold and Iron: Bismark, Bleichroeder, and
the Building of the German Empire (London: Allen
& Unwin, 1977), p. 161
27. First Chicago Mayor William
Butler Ogden in 1841
“As regards Chicago, everything has
changed mightily since you left.
“Property has depreciated monstrously. It
often happens that property which sold
for hundreds, even thousands, is not
now worth even ten dollars. Those too
who were the richest when you left are
of the poorest now.”
First Chicago mayor William Butler Ogden in a letter dated January 25, 1841. Original in the
Chicago Historical Society Archives. [Quoted in “100 Years of Land Values” – Chicago
Title & Trust Advertising brochure, 1933]
28. Public-Private Infrastructure
• The very first publicly-offered company in Chicago was an infrastructure play
(William B. Ogden’s water supply company in the 1830s).
• The second public company Galena-Chicago RR was transportation
• “Between 1855 and 1861 city and state legislators passed laws allowing
three companies to build and operate horse-drawn streetcars. The Chicago
City Railway Company ran them on the south side and the North Chicago
City Railway and the Chicago West Division Railway Company took the
areas their names suggested. Each company got a 25-year monopoly on the
business in the neighborhood it was allotted.”
• Why? Chicago’s municipal charter did not grant it the home rule powers to
either run a municipal transit system or to incur the debt to build such a
system
- Robert Loerzal, “Privatize Public Transit?”, Chicago Reader, Thursday, June 10, 2010, pp. 17-24 (p.17)
29. 19th Century Chicago More Opportunity
Than California?
William Swain of upstate New York, with three companions, embarked for the
California gold fields in mid-April, 1849. When he disembarked at Chicago
for the next leg of the journey, he stopped to look up a family friend.
“When I told him I was going to California for gold, he laughed and asked me if
I had enough money to get back with. He advised me – and urged me – to
put the money I had into land in Chicago and go home again.”
H.W. Brands, The Age of Gold: The California Gold Rush and the New American Dream, (New York:
Anchor, 2002), p.129
31. The Illinois & Michigan Canal
“The Canal made Chicago….The first plat of Chicago was made by the
Canal Commissioners; the first sale of lots in Chicago was made by
the Canal Commissioners. Chicago was made by the Canal as clearly and
positively as western towns have been made…by the advent of the
railroads.”
Chicago Daily Tribune May 13, 1900 p.37
32. 1st Federal Grant for Infrastructure
• “When the [Chicago] City Council heard the first local proposal for streetcars
in 1854, the United States was in the middle of a railroad boom. Stephen
Douglas, by then a U.S. senator, had led the way in 1850 as Congress gave
away 2.6 million acres of federal land to the state of Illinois, which signed it
over to the Illinois Central Railroad Company. In return the railroad agreed to
give the state 7 percent of its gross receipts. It was the first time the
federal government had given away land to help a private company
build a railroad.”
- Robert Loerzal, “Privatize Public Transit?”, Chicago Reader, Thursday, June 10, 2010, pp. 17-24 (p.18)
33. Chicago’s Geographic Importance
“Chicago’s role as the most important inland port of North America in
large measure springs from the decision to construct the canal connecting
Lake Michigan with the Illinois River. The more immediate outcome of that
decision was the platting of the area at the junction of the branches of the
Chicago River in 1830 to make possible the sale of lots to finance the canal.
Having developed as the major port in the Midwest, the settlement then
attracted other transportation modes: the railroads in the last half of
the nineteenth century, the highways in the twentieth, and, finally, the
air carriers, culminating in the development of Chicago O’Hare
International Airport.”
Harold M, Mayer, “The Launching of Chicago: The Situation and the Site,” pp. 3-13 in Rosemary K. Adams, ed.,
- A Wild Kind of Boldness: The Chicago History Reader, (Grand Rapids: William B. Eerdmans, 1998), p.13
35. Chicago’s Exchanges’ Leadership
• More exchanges than any two cities in the world
• Largest Trading Complex in the World (CBOT/CBOE/CSX/NSX).
• 1st all-electronic exchange (NSX)
• #1 in Derivatives Globally
• 1st Modern Futures and Options Exchanges
• 1st IP Exchange
• 1st Carbon/Climate Exchange/Environmental Futures Exchange
37. Mechanical Innovation Links to
Financial Innovation
“Innovations in transportation and shipping were accompanied by the
increasing availability of land, as well as improvements in mechanized
farming. In 1831 Cyrus McCormick invented the reaper. Within three
years the mower and the threshing machine appeared, to be followed
in 1836 by the combine [and by 1837 by John Deere’s self-scouring
plough]. In 1850 the time required to harvest one acre of wheat had
been cut from twenty-seven hours to eleven and a half…. From 1873 to
1882, wheat acreage in the United States rose from 29 million to 41
million, production from 368 to 555 million bushels.”
Jonathan Lurie, The Chicago Board of Trade, 1859-1905: The Dynamics of Se;f-Regulation
(Chicago: University of Illinois Press, 1979) , p.23
40. 1848 – The Year of “Firsts”
“We can itemize the key events of 1848 in one of those lists of Chicago’s
‘firsts’”.
- 1st Telegram received in Chicago (January 15th )
- The Galena & Chicago Union Railway Company construction begins for the
first 32 miles of line (March 1st )
- The Chicago Board of Trade established at 101 S. Water Street by Messrs
Ogden, Hubbard, Kinzie, et.al. (March 15th )
- 1st Telegraph message from New York (relayed via Detroit) to arrive in one
day (April 6th )
- The Illinois & Michigan Canal officially opens (April 16th )
- 1st ocean-going steamship arrives from Montreal (June 27th )
- 1st stockyard (built at Madison & Ashland) & 1st grain elevator (Sept)
- 1st locomotive (the Pioneer) arrives by ship (October 10th )
- William J. Cronon, “To Be the Central City: Chicago, 1848-1857,” pp. 14-23 in Rosemary K. Adams, ed., A Wild Kind of Boldness:
The Chicago History Reader, (Grand Rapids: William B. Eerdmans, 1998), p.15
41. Chicago Board of Trade Est 1848
“A group of Chicago merchants formed the Chicago Board of Trade to develop
a set of codes and rules for buying, weighing and grading the prairie gold
[i.e., wheat and corn] that flowed to Chicago as the great terminal market
of middle America, and for arbitrating commercial disputes which arose
as a result of this trade in grain.”
John H. Stassen, THE COMMODITY EXCHANGE ACT IN PERSPECTIVE A SHORT AND NOTSO-REVERENT HISTORY OF
FUTURES TRADING LEGISLATION IN THE UNITED STATES, 39 Wash. & Lee L. Rev. 825 (1982),
http://scholarlycommons.law.wlu.edu/wlulr/vol39/iss3/3 , p.827
42. The Chicago Board of Trade - Firsts
• 1st Modern Futures Exchange in the World
• 1st to standardize bulk criteria for trading
• 1st to standardize weights and grades
• 1st to establish industry broker examinations
• 1st to offer forward contracts
• 1st to organize other exchanges in new
instruments
• 1st to offer financial futures contracts
• The largest trading complex in the world
43. Why Did Derivatives Flourish in Chicago?
“Futures trading, like banking, is an institution that developed as a contribution
to efficiency of a relatively free competitive economy. A primitive form
of futures trading emerged spontaneously in various market centers at least
as early as 1850. Only in the grain trade at Chicago, however, was the
demand for hedging commercial risks then strong and persistent enough
to permit this unconventional form of trade to survive the fluctuations in
speculative interest, overcome conservative opposition, and live through the
stormy period of experimentation necessary to put it on a firm footing.
When that had been accomplished at Chicago, the new form of trading was
soon adopted at other market centers and for commodities other than
grains.”
-Working, "Futures Trading and Hedging," cited in B. Goss & B. YAMEY, THE ECONOMICS OF FUTURES TRADING 68-69
(1976). [hereinafter cited as Goss & Yamey]. See also Hoffman, supra note 5, at 29
44. Pork Bellies Led to Financial Futures
Pork-belly futures led to development of financial futures
The Chicago Mercantile Exchange started trading futures contracts for frozen
pork bellies in 1961, and although the market was slow to take off,
eventually the contract became the exchange's most actively traded. The
success of the contract helped the CME develop futures for a variety of
financial products, including bonds, stocks and currencies. "Financial
futures were spawned out of the belly of the hog," former Chairman Jack
Sandner once said. The CME recently delisted frozen-pork-belly futures and
options. Canadian Business (8/11)
45. Not All Financial Innovations at the CBOT Were
Limited to Abstract Ideas!
46. 1st in Hedging – Chicago Produce Exchange in 1874
“The creation of a permanent futures exchange in 1874 – the
Chicago Produce Exchange, the ancestor of today’s Chicago
Mercantile Exchange – created a home for ‘hedging’ in the U.S.
commodity markets.”
– Niall Ferguson, The Ascent of Money: A Financial History of the World, (New York: Penguin Books, 2008), p.227
47. The Chicago Stock Exchange – 1st
• 1st Exchange to initiate dual listings (NY & Chicago) in
late 1880s
• 1st Exchange to trade NASDAQ stocks (1980s)
• 1st Exchange to offer unlisted trading privileges
• 1st Exchange to offer remote facility pricing
• 1st Exchange to automate execution system
• 1st Exchange to automate the delivery system
• 1st Exchange to list a new railroad issue in 100 years
(Pioneer Railcorp in 1993)
48. The Chicago Mercantile Exchange
The Chicago Butter and Egg Board, founded in 1898, was a spin-off entity of the
Chicago Board of Trade (CBOT). In the year 1919, it was re-organized as the
Chicago Mercantile Exchange(CME). Roots of the Chicago Butter and Egg Board are traceable to the 19th
century.
Initially, the Chicago Butter and Egg Board traded only two types of contracts, butter and eggs. Over several
decades, it evolved into the Chicago Mercantile Exchange (CME or the "Merc") which now trades
futures contracts and options contracts on over 50 products, from pork bellies to eurodollars and
stock market indices.
49. Chicago Mercantile Exchange - Firsts
• 1st futures contracts on frozen stored meats
• 1st futures contracts on non-storable commodity
• 1st foreign currency futures
• 1st contracts settled in cash rather than physical
• 1st international links between futures exchanges
• 1st US financial exchange to demutualize
• 1st publicly traded US financial exchange
• Largest futures exchange in the US
• Owns and operates the largest futures clearing house in
the world
50. CME Firsts (#2)
“In 1964, CME launches a live cattle contract, the first live
commodity to make a successful market.”
“Under the leadership of Leo Melamed, CME launches the
International Monetary Market (IMM), a futures market in
seven foreign currencies. The era of financial futures
instruments is born.”
“CME pioneers foreign currency trading with the creation of
the International Monetary Market.”
“In 1986 [Nobel Laureate Merton H.] Miller designates
financial futures as ‘the most significant financial
innovation of the last twenty years’.”
http://www.cmegroup.com/stories/#!1-industry-growth
Source: http://www.cmegroup.com/stories/#!1-leo-melamed-birth-financial-futures
51. CME – Bankruptcy 1st!
CME wins approval to launch corp. bankruptcy futures
From the Crain's Chicago Business Newsroom
Nod comes over objections from Chicago Board Options Exchange
February 02 15:52:00, 2007
By Ann Saphir
-----
(Crain’s) — The Chicago Mercantile Exchange got federal regulatory approval to become
the first U.S. exchange to offer contracts that let investors bet on the likelihood of
corporate bankruptcies.
The approval came over the objections of the Chicago Board Options Exchange, which argued the
contracts are too closely tied to individual companies to be considered futures contracts. The
CBOE is planning similar contracts of its own.
The CME will begin by offering three so-called credit event futures contracts that pay out in the event
of bankruptcies at the Tribune Corp., Centex Corp., or the Jones Apparel Group Inc. Prices of the
contracts will fluctuate based on traders’ views of the likelihood of corporate failure, with the price
increasing as collapse looms.
Contracts offering investors similar insurance currently trade in the off-exchange $26 trillion credit-default
swap market, the fastest-growing segment of derivatives trading. A CME spokesman
declined to provide a target date for the launch of the new products.
52. CBOE – 1st
• 1st Options Exchange in the world
• 1st Exchange to establish an industry
• 1st to introduce options on broad-based indices
• 1st to establish an educational options institute
• 1st electronic customer order book
• 1st major benchmark index option
53. Electronic Exchanges
• NSX (1st all-electronic exchange, from 1995 to 2006 based in Chicago)
is #3 Stock Exchange. (NSX also first in competing specialist system,
automated exchange interface, electronic audit trail)
• #1 ECN – Archipelago (1/3 of all OTC trades in US stocks; now merged
with the NYSE)
• “OneChicago, LLC, the all-electronic exchange for trading Single Stock
Futures (SSF), a synthetic stock lending and financing tool, has launched
the trading of SSFs on the Exchange Traded Funds ("ETFs") of
PowerShares QQQ and the iShares Russell 2000. These listings will add
to OneChicago's growing roster of SSFs on ETFs, which includes the
DIAMONDS Trust Series 1 and the Sector Select SPDR Fund.”
Source: http://newsmail.plansponsor.com/cgi-bin1/DM/y/eBgRf0OjTH60CBD0JCav0EG
54. CCX & CCFE
1st Carbon Exchange & 1st Carbon Futures Exchange
“Chicago Climate Exchange is North America's largest and longest running greenhouse
gas emission reduction program. From 2003 through 2010 CCX operated as a
comprehensive cap and trade program with an offsets component. In 2011 CCX
launched the Chicago Climate Exchange Offsets Registry Program to register verified
emission reductions based on a comprehensive set of established protocols.”
“Chicago Climate Futures Exchange® (CCFE®) operates the leading U.S. marketplace
for environmental derivatives, financial instruments with underlying values based on
tradable environmental assets.”
55. IPXI
1st Intellectual Property Exchange
“Intellectual Property Exchange International, Inc. (IPXI) is the world's first financial
exchange that facilitates non-exclusive licensing and trading of intellectual
property (IP) rights with market-based pricing and standardized terms. The result is an
exchange that operates under two core principles: transparency and efficiency. The
initial product traded on IPXI is a Unit License Right (ULR) contract. For more
information, visit the ULR Contracts page. The process starts with analysis designed to
give the marketplace confidence in the quality of all patents listed as ULR contracts.
Then, tapping a wealth of capital markets experience, IPXI undertakes the licensing
process in a manner similar to a public equity offering for a corporation by utilizing a
detailed Offering Memorandum and a Roadshow, including potential purchaser one-on-one
meetings. Once an Initial Offering has been priced, IPXI maintains a Secondary
Market which provides ULR purchasers and sellers an opportunity to realize liquidity
through resale and trading.”
Source:http://www.ipxi.com
56. The “Chicago School” Gone Wild?
“The larger ‘Chicago School’ pushed to the forefront…[However] a few
enthusiasts proved embarrassing…One such [idea, in the 1930s] was
Chicago law professor-turned-federal appeals court judge Richard Posner’s
suggestion of a market for babies to make it easier for couples to
adopt.”
-Kevin Philips, Wealth and Democracy: A Political History of the American Rich,
(New York: Broadway Books, 2002), p.335
58. Chicago – 1st to Adopt the Greenback As
Legal Tender
“In all monetary history there are few incidents more fascinating than this one.
By the formal and spontaneous action of
the business community, Chicago obtained
a sound and uniform currency a full year
[May 16, 1864] before Congressional action
attained a similar ideal for the country as a
whole.”
Whom to thank?
“’The [Chicago] Tribune and the Chicago
Board of Trade started the ball, which, gaining strength as it rolled, finally
crushed out the last remnant of illegitimate banking’ in Chicago.”
F. Cyril James, The Growth of Chicago Banks (Volume I: The Formative Years, 1816-1896),
(New York: Harper & Brothers, 1938), p.361
59. First Chicago Bank – 1st For Women & Pensions
• In 1882 became the first bank to open a Women’s Banking
Department to focus on female customers
• In 1899 became the first bank to establish a pension plan.
(Merged with NBD Bank in 1995 (First Chicago NBD) and then with Bank One in 1998 which is now
part of JP Morgan Chase Bank)
- Source: http://en.wikipedia.org/wiki/First_Chicago_Bank accessed August 7, 2012
60. The First Securities Subsidiary of a Bank
The National Currency Act of 1864 authorized nationally chartered banks to
invest in US Government debt. It also implied that they could invest in
corporate and municipal debt. Later, (in 1902) the Comptroller of the
Currency allowed them to underwrite new issues – but not invest in them.
As a result, in 1903, James B. Frogan, the President of the First
National Bank of Chicago. established a state chartered bank, called
the First Trust and Savings Bank (capital $1,000,000) to hold its
corporate securities. The stock of the First Trust and Savings Bank
was 100% owned by FNB Chicago and its directors were interlocking.
Since the latter bank was state chartered it did not have to comply
with National Bank regulations. This plan became known at the
“Chicago Plan” and was adopted a few years later by the New York
City commercial banks.
Source: Fritz Redlich, Molding of American Banking, Hafner Publishing, 1951, page 389-392
61. U.S.’Bank Clearing System Created in Chicago
In 1909, Charles McKay, the Transit Manager (person in charge of
routing the check clearing system) at the First National Bank of
Chicago (the second largest in the U.S. at that time) proposed a
numerical classification system for bank checks. By 1912 this
system was adopted by the American Banking Association. Costs
dropped dramatically for banks around the country (and globally).
Source: Fritz Redlich, Molding of American Banking, (New York: Hafner Publishing, 1951), p. 185. See also Key to
Numerical System of the American Bankers Association..., Volume 1
By Rand McNally and Company, American Bankers Association (1911).
62. Chicago Clearing House
“Chicago bankers also led the way in creating a system of preventing panics
through the Chicago Clearing House. James B. Morgan of [the] First
National Bank [of Chicago] initiated the new clearing system in 1905 and
ran it effectively. ”
- Larry E. Schweikart, “Banking, Commercial”, pp.61-64, entry in The Encyclopedia of Chicago,
James R. Grossman, et.al., ed., (Chicago: University of Chicago Press, 2004) p.62
64. N.W. Harris & Co.
“N.W. Harris & Co., which some
consider the nation’s first true
investment bank, was founded in
Chicago [in 1882].
Specializing in utility company issues,
within a decade it spawned
branches in New York and Boston.
The Chicago office was absorbed
by what is now Harris Bankcorp in
1907, but the Boston and New York
branches continued under the
name Harris Forbes Companies."
The Deal Makers: Inside the World of Investment Banking
(Garden City, NY: Doubleday, 1984) pp. 48-49
65. Norman Wait Harris
“Probably no one individual in the United States
Has done as much as Mr. N.W. Harris toward
Placing bonds issued for municipal purposes
in their proper light before the investing public.”
Chicago Tribune April 27, 1895 pg. 8
66. N.W. Harris & Co.
Norman Wait Harris decided:
• Commissions were too
small to pay for proper and
thorough due diligence so
NW Harris decided that he
would not sell bonds on
commission. He would
purchase outright the
bonds and resell them.
• N.W. Harris would only
purchase bonds “after the
most careful
consideration”
67. N.W. Harris & Co.
The things that made N.W. Harris the founder of
modern investment banking were his rigorous and
systematic procedures and policies.
NW Harris:
• Undertook to establish true due diligence with technical and legal 3rd
party professionals – “disinterested experts”
• Admonished staff to: “Look for the weak points”.
• Established a “Chinese Wall” between underwriting and sales to
prevent any appearance of conflicts of interest.
• Were “thorough and systematic”
• Examined tax implications
• Employed risk capital in underwritings
• Made a market for all their securities underwritten
• Undertook advisory mandates.
68. N.W. Harris & Co.
That approach for municipals
called for thorough due
diligence conducted by
qualified experts.
“For this purpose only
disinterested experts
(engineers, accountants,
attorneys, appraisers, etc.)
of the highest character and
ability are employed.”
[Forty Years of Investment Banking: 1882-1922 by
Albert W. Harris [Chicago, 1923] p.11].
69. Credit Rating System
Harris and his organization also recognized that stricter
state laws and regulations would serve both as a
bulwark against the entrance into and survival of bucket
shops in the investment banking industry and as a
vetting process of weaker municipalities.
In other words, by prescribing minimum standards
under which municipalities were permitted to issue
securities, Harris ensured that the credit rating of
municipalities became more standardized across the
country, giving investors greater confidence in the
process and better insuring that credit worthy
municipalities had access to capital.
71. Sears Roebuck & Co.’s IPO –
Template for 20th Century IPOs
In June,1906 Julius Rosenwald, Chairman at Sears,
approached his cousin Sam Sachs about the possibility of financing a $5 million for the
construction of a large distribution warehouse for the rapidly expanding Chicago mail
order retailer. At a time when public offerings were priced solely on the value of the
firm’s assets, Sears’ net assets were less than $1 million, making a traditional IPO
implausible. Together with Lehman Bros., Goldman Sachs went even further:
“The two firms underwrote a $10 million offering of preferred and common
stock. The preferred shares would be backed by the net assets of the company
And the common shares by its goodwill, a highly unusual concept at the time.
Underwriters would sell the preferred stock to the public and retain the common
shares for themselves…Michael Miliken would [later, in the 1980s] ‘pioneer’
the
same practice.”
- Lisa Endlich, Goldman Sachs: The Culture of Success, (New York: Touchstone, 2000), p.39
72. Harris & Municipals Spurred Innovation in Utilities
Holding Companies – Samuel Insull’s Innovation
– 1898 w/ merger between Commonwealth Electric and Chicago Edison Co to create
Commonwealth Edison in 1898 started integration. (McD91).
- Established the Middle West Utilities Company in 1912
(Insull by Forrest McDonald [Chicago: U of Chicago Press, 1962] pp150-2)
73. “Perpetual Capital” Thru Open-End Mortgage
• First Open End Mortgage
(1898 – Insull) – established “perpetual capital”.
“Under this [perpetual] mortgage, Insull would issue half a billion in bonds
before he was through.” (Insull by Forrest McDonald [Chicago: U of Chicago Press, 1962] pp.91, 92)
74. Insull’s Innovations Opened New
Underwriting Opportunities for Utilities
• a) 45 yrs term (most had 15 yrs til then);
• b) matured all at once instead of serially;
• c) annual depreciation reserve from
earnings instead of a sinking fund (thereby
protecting the investor by protecting the
property against which the open mortgage
is written against[1896 McD71-3]);
• d) bond covenants – issue to cover only
up to 75% of actual plant for which already
constructed.
(Insull by Forrest McDonald [Chicago: U of Chicago Press, 1962] p.92).
75. Insull’s Banking Needs Made Chicago the
Dominant Center for Investment Banking
The insatiable demand of
Samuel Insull’s utilities empire for
capital institutionalized what may
have been the first known
door-to-door securities salesmen.
Teams of Insull’s employees were
established and under the direction
of the able Messrs. Gilchrist & Scheel
(who came up w/ the idea to raise
capital for the improvements of PSC
of No.Ill) literally sold corporate preferred (and some common) stock door-to-door to
customers and suppliers. Middle West: had more than 6000 shareholders in 1918;
54,000 in 1923;and almost 250,000 shareholders by 1928.
(Insull by Forrest McDonald [Chicago: U of Chicago Press, 1962] pp 203-4)
76. New York - Chicago Rivalry
“In the early 1920s, the Chicago financial community mounted a challenge to
Wall Street. This was the tail end of a period in which Chicago’s leaders
thought their city was destined to replace New York as the nation’s
center of power. Chicago was more centrally located than New York, was
growing more rapidly than its eastern rival, and was more ambitious.”
- Robert Sobel, AMEX: A History of the American Stock Exchange 1921-1971,
(New York: Weybright & Talley, 1972), p.41
77. Insull-Halsey Stuart
“Harold L. Stuart, head of the investment house of Halsey, Stuart & Co.,
was a leader in this movement…His ally in this was Samuel Insull, also
of Chicago and the head of Commonwealth Edison Company, one of
the nation’s largest utilities….They [Stuart & Insull] were out to
prove that a large firm could succeed with the backing of Chicago
financiers and without that of the New York Establishment. So
Commonwealth Edison was not traded at the Big Board [NYSE].”
- Robert Sobel, AMEX: A History of the American Stock Exchange 1921-1971,
(New York: Weybright & Talley, 1972), pp.41-42
80. Insull’s Downfall Affected Chicago for Decades
– and Led to New Financial Firsts…
• 1st Poison Pill defense & 1st Greenmail (Insull versus Cyrus Eaton) – Insull
Investments & Corporation Securities – the assumption of great debt on top of the
cumbersome pyramid structure of course prevented the takeover but led – when NY
bankers put the squeeze on Insull and the market took a down draft – to the collapse
of the Insull empire.
82. As Chicago’s Population Grew…
Historical population of Chicago
Census Pop. %±
1840 4,470 —
1850 29,963 570.3%
1860 112,172 274.4%
1870 298,977 166.5%
1880 503,185 68.3%
1890 1,099,850 118.6%
1900 1,698,575 54.4%
1910 2,185,283 28.7%
1920 2,701,705 23.6%
1930 3,376,438 25.0%
1940 3,396,808 0.6%
1950 3,620,962 6.6%
1960 3,550,404 −1.9%
1970 3,366,957 −5.2%
1980 3,005,072 −10.7%
1990 2,783,726 −7.4%
2000 2,896,016 4.0%
2010 2,695,598 −6.9%
Est. 2011 2,707,120 0.4%
U.S. Decennial Census
83. So Did the Need for Personal Loans
The “first professional
small loan lenders
in the country
appeared in Chicago”
[The Encyclopedia of Chicago “Consumer Credit” p.202].
84. Simultaneously, Complimentary Financial
Innovations in Lending…
“In Chicago, according to the recollection of
one lenders’ lawyer, personal loans were
made against the collateral of household
furniture as early as1850 [ed: 1835].
Historians, however, have found no docu-mentary
evidence of personal lending for
profit until some twenty years later. The
earliest known advertisement for a small
loan service in an American newspaper
appeared in the Chicago Tribune in
November 1869. Getting right to the point:
‘Money to Loan in Small Sums on Short
Time. Room 14. Major Block.’”
James Grant Money of the Mind: Borrowing and Lending in America From the Civil War to
Michael Milken (NY: Farrar Straus, 1992) p.77 end quote from Louis Robinson & Rolf Nugent
Regulation of the Small Loan Business (NY, 1935) p. 39 as quoted in James Grant Money of
the Mind: Borrowing and Lending in America From theCivil War to Michael Milken (NY:
Farrar Straus, 1992) p.77
85. 1st Installment Retail Bank Loans
Household Finance Co.
A critical step in the expansion of
consumer credit came in 1905.
Household Finance’s founder
Frank Mackey had opened his
first small loan office in Chicago
on Madison Street in 1885.
“In 1905, Household Finance
became the first cash lender to
offer monthly installment terms.”
[The Encyclopedia of Chicago “Consumer Credit” p.202]
86. 1st Retailer Installment Loans
Spiegel & Sears
“By 1906 Chicago’s leading
installment seller was the Spiegel
House Furnishing Company.
Spiegel boasted, ‘We Trust The
People – Everywhere’, and their
mail order department spread the
gospel of small, easy payments
from coast to coast. Spiegel’s
example prodded Sears and other
retailers to follow suit. The result
was a credit revolution marked
by ‘the installment plan’”
[The Encyclopedia of Chicago “Consumer Credit” p.202].
87. 1st “Credit Cards” – Western Union Chicago
“Charge cards can be dated back to the early
1900s. In 1914, what seems purely as a
customer service goodwill gesture, Western
Union gave some of their prominent
(preferred) customers a metal card to be
used in deferring payments—interest free—
on services used. One source said this card
became known as ‘Metal Money.’”
http://www.internetbillingsystems.com/history.html
Certificate: http://www.scripophily.net/weunteconewy.html
88. 1st National Credit Cards
“There’s no question that Hertz changed the way the world gets from one
point to another. It also changed the way the world would pay for services
and goods. In 1926 – long before credit-by-card became a way of
commercial life – Hertz issued its first national Credential Card. This
precursor of tomorrow’s charge card allowed Hertz customers to pick up
a car in one location and use their Credential Card to pay for it in another.
The card was the cornerstone of a national network – a consumer service
that also worked to Hertz’ advantage. As John D. Hertz explained,
‘Agents will be able to eliminate the risk of renting vehicles to unknown
persons’.”
- Geoffrey Precourt, Hertz: Going The Extra Mile, (New York,1993), pp.58-59
Hertz was also the 1st to set up rental car facilities at airports;the 1st airport:
Chicago’s Midway Airport in 1932.
89. Growing Access to Credit Set the Stage for
Retail Investors in WW1
• The First World War’s
financing required
innovative ideas. A
group of young,
wealthy Chicagoans
formed a group with
government support to
sell WW 1 Liberty
Bonds during paved
the way (Liberty Bonds
– 4 minute men) 1917
– from 200,000 to
20,000,000 bond
holders between 1917
and 1927.
[Chicago Tribune ]
90. Insull-Halsey Stuart –
1st “Mass-marketers”
of bonds
“To finance his growing empire, Insull borrowed a lesson from his wartime
experience and concluded that he could sell bonds directly to his
customers. To do this he set up security sales departments in each of his
major companies and turned to Harold L. Stuart of Halsey, Stuart & Co.,
who thought that bonds could be mass-marketed through small outlets
to a great untapped supply of buyers awakened to securities by having
bought war bonds. Stuart earned Insull’s respect and all his business,
selling as much as $200 million worth of bonds in one year [and $2.3 billion
over the 10 plus years of their close association.] Insull loved this radical
new approach because it bypassed the Wall Street bankers he despised,
who had always been wary of utility bonds.”
- Maury Klein, The Change Makers: From Carnegie to Gates, How the great Entrepreneurs Transformed Ideas
Into Industries, (New York: Henry Holt, 2003), p.157
91. Household Finance Co.
The stock market crash of 1929
following the stock and real estate
market booms in the 1920s made
many consumers aware of the
need for a more disciplined
approach to personal finances.
HFC formally established the first “Consumer Education
Department” – headed by a southern social justice worker by
the name of Burr Blackburn - and issued their groundbreaking
32 page booklet “Stretching The Dollar: Money Management
For Households” in 1931. Ultimately HFC issued
more than 23 million booklets.
92. 1st Financial Planner
Household Finance Co.
Household Finance of
Chicago was the first
financial firm to create a
standardized financial
regimen for retail
investors.
More than a dozen years
before Merrill Lynch
claimed to have created
the ‘first’ financial
planning advertisement
93. Household Finance Co.
Using worksheets the
booklet demonstrated a
‘scientific’ method for
balancing a family
budget for a family of five
to live comfortably
(in 1931) on a monthly
budget of $150.
94. Household Finance Co.
The booklet sparked copycats and
received acclaim. The New York Times
even reviewed this free, marketing tool:
“There is nothing new in the plan, but it is so clearly explained and
comes at such an appropriate time that the booklet should be of
value to every couple anxious to get along. It takes into account
the needs and pleasures of the present without neglecting the
security of the future… It wisely emphasizes family health, and
strongly recommends the admission of children into the family
financial councils.”
[Quoted in Herman Kogan’s Lending is Our Business: The Story of Household Finance Corporation (Chicago: Lakeside Press, 1965) p.60]
95. One of “The Most Influential Ads” in U.S. History
“Appeared in the fall of 1948…consisted of six thousand words of small
print….The total number of responses exceeded three million, and those
returns translated into millions of prospective customers for the firm’s eager
brokers. His subsequent aggressive campaigns…set new standards for
brokerage firms and other enterprises in the financial services sector.”
- Merton H. Miller, “Louis Engel: The Man Who Brought Wall Street to Main Street,” pp.385-392, in Donald H. Chew, Jr., Ed.,
http://www.crsp.com/50/images/engel.pdf Accessed October 18, 2014
96. In May, 1949: “Only 5 percent of
[American] Families Think
Common Stock is a Wise
Investment”
“The results [of a survey] show that most people don’t invest in stocks because
the subject is entirely unfamiliar to them….What are the chances of making
money in stocks? Nobody knows for sure.”
“Buy Stocks If: The Man Who Brought Wall Street to Main Street,” pp.25-28, in W.M. Kiplinger, Ed., Changing Times: The Kiplinger
Magazine, May, 1949 – Online version accessed via Google Books
http://www.crsp.com/50/images/engel.pdf Accessed October 18, 2014, pp.26-27
99. State Farm
1st to offer insurance to servicemen
(Meyers & Ekern) 1917
1st Mutual Automobile Insurance Co.
(State Farm) 1922
100. State Farm
“[George J.] Mecherle [founder of State Farm in 1922] was an innovator in the
field of insurance. He started the idea of good driver discounts on policy
premiums. His idea of charging six-month premiums instead of the
customary annual lump sum was good for farmers who could pay smaller
amounts during the planting season and it was good for his company
because they could make quicker adjustments to changes in the market
price if competition undercut them. another helpful innovation was to
give support to agents in the field by having the home office do the
paperwork and free up the agents to do what they did best and sell or
renew policies. Still another was a one-time membership fee that helped
State Farm cover the cost of acquiring new policies. Eventually, the farm
bureau did endorse State Farm services and this was a tremendous
advantage over competing companies. Only one year after being founded,
State Farm had sold policies in 46 rural Illinois counties.”
Source: http://illinoisreview.typepad.com/illinoisreview/2006/11/illinois_hall_o_19.html
101. State Farm
Unique approach to carving
out a less-risky demographic
& offering lower rates
a) Deductible of $10,
b) MOC not SOC,
c) Excluded risky urban areas
like Cook County!
102. State Farm
• In the 1955 book, "The Farmer From Merna," a reference to Mecherle's
earlier career, author Karl Schriftgiesser outlined a formula for success. He
said State Farm invented a few ideas and borrowed others. Its blend, he
said, definitely was original.
• Those ideas included (in addition to the ones mentioned above)
(a) centralized billing and claims,
(b) co-insurance payments on claims and
(c) a simplified method of classifying cars and insurance rates for them.
103. Allstate
“In 1931, the giant Sears, Roebuck & co, leapt into the insurance business with the
creation of Allstate Insurance Company, based on the novel idea of selling auto
insurance policies by MAIL ORDER. Recipients of the Sears catalog could
simply clip a coupon from the book, mail it in, and receive an auto insurance policy
by return post….
In 1939 Allstate was the first company to tailor its rates to the characteristics of
automobiles and their owners, such as make, mileage, and age….
The company introduced rate reductions for good drivers in 1939.”
[The Encyclopedia of Chicago “Consumer Credit” p.419].
105. FJW-ID
Chief, Intelligence Unit,
Bureau of Internal Revenue,
Washington, D.C.
Dear Mr. Irey:
The Capone investigation is going steadily ahead. Not as fast as I would like to have it, but the evidence in the case against Al has been strengthened since my last letter to you.
I sent you a copy of an affidavit made by the Reverend H.C. Hoover, by which we established through admissions made by Al Capone to him that he (Capone) was the owner of
the gambling establishment of which we have the book records reflecting a net profit of $574,000, during a period of twenty-four months. I am enclosing a copy of a statement
made by Chester Bragg, prominent real estate dealer in Cicero, in which he states that Al Capone admitted to him that he was the owner of this establishment. I am enclosing a
copy of a report made by David A. Morgan, investigator for the West Suburban Ministers and Citizens Association, of Cicero, and Berwyn, relating to a raid made by him and
others on this gambling establishment, May 16, 1925.
We have secured further evidence relating to the transactions of Louis Lipschultz, who was indicted on March 15th. We have a new witness, Lawrence Pedigo, who states that
he purchased alcohol from Louis Lipschultz in the years 1927 and 1928, valued at $60,000. We have cancelled checks which he made payable to Lipschultz, and which bear
Lipschultz's endorsement, covering about $20,000. We have bank records by which we trace the entire $60,000 from Pedigo into the hands of Louis Lipschultz. This witness
states that Lipschultz informed him that he worked for Al Capone. He stated further that several of the shipments of alcohol which he secured from Lipschultz were analyzed by a
chemist in Rock Island, Illinois, and that it was necessary for him to return the shipments to Lipschultz because the alcohol was poisoned alcohol and he did not dare to sell it to
his patrons. We have secured further evidence relating to Sam Guznik, who was indicted for the years 1927 and 1928. The new evidence relates to the year 1929, and a new
indictment covering the three years is to be returned by the grand jury within a day or two.
I was anxious to get an additional special agent started, promptly, on some new angles of the Capone case, and you wired instructions that Special Agent Sullivan be assigned. It
was necessary for him to complete some work on the police cases, and he has not been available until this afternoon. I have some leads which may establish income to Capone
from houses of prostitution, and Agents Sullivan and Malone are starting out this afternoon on that angle. I believe that this angle will warrant careful investigation, because in the
event that we an show the connection of the taxpayer with this particularly disreputable business, we would probably be assured of a conviction in the event such evidence is
brought before the jury. We also believe that if such evidence is presented, the court would, no doubt, inflict a heavier sentence than would be inflicted if the income related only
to gambling.
Regards,
Special Agent.
The 1st? Tax Fraud
Conviction: Al Capone
- Annually, Al Capone earned $50 million 1920s-1930s
- Owed the IRS $215,830 when convicted in 1931
106. Innovation Because of Glass-Steagall
“By a curious irony, the vast structure of financial regulation erected throughout
the world during the 1930s and 1940s, though intended to, and usually
successful in throttling some kinds of financial innovation, actually served to
stimulate the process along other dimensions.”
- Merton H. Miller, “Financial Innovation: Achievements and Prospects,” pp.385-392, in Donald H. Chew, Jr., Ed.,
The New Corporate Finance: Where Theory Meets Practice, (New York: McGraw Hill Irwin, 2001), 3rd Ed., p.387
107. A ‘Chicago Plan’, proposed by University of Chicago academics in 1933,
advocated a strict policy of dollar for dollar reserves against deposits
and although not adopted as proposed, led to the 1935 Banking Act
whose principles – restricting bank assets and limiting taxpayers’ liability
from Federal Deposit Insurance – were lifted from the Chicago Plan
original proposal.
http://ideas.repec.org/p/lev/wrkpap/76.html
108. Arthur Andersen
Arthur Andersen
• “Think Straight Talk Straight”
• 1st true accountant, 1st true accounting professor
• Created modern accounting profession
• Arthur Andersen – Northwestern University (Kellogg) professor – 1st true
dedicated accounting firm established 1913
• Created the 1st training school for accountants
109. Insull & Andersen’s Accounting Firsts
Samuel Insull
• a) 1st to tailor accounting principles to an industry – utilities
• b) pioneering work in the evolution of cost accounting for which he has
never received full credit (McDonald 107)
Arthur Andersen
• 1st to systematize the methods and service of an accounting firm
• 1st to offer consulting services in addition to auditing
• AA’s Spacek’s constant agitation for higher standards led to the
establishment of FASB
• 1st corporate accounting forensics case (Insull) and treat stock options
• Also, 1st firm to ever be accused in a financial fraud case of being
“knowingly… corrupt” [http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=US&navby=case&vol=000&invol=04-368]
110. • There is good reason to support the “proposition [of]
Samuel Insull’s influence in [the] creation of the
Federal Securities and Exchange Act”.
– Stewart H. Holbrook, The Age of the Moguls, (Garden City, NY: Doubleday & Co., 1953), p.244
• Holding Co. Act of 1935 & other SEC Regs (Chicagoans headed FDIC, IRC, and #2
at SEC when these agencies were established in the 1930s)
111. Futures & the CFTC
“Congress buried among the 1974 amendments to the Commodity Exchange Act an
expanded definition of the term "commodity" to include literally anything, with one exception,
which was or might in the future be the subject of futures trading. As a corollary,
Congress awarded the new CFTC exclusive regulatory jurisdiction over futures trading in
any of these "commodities." Congress expressly intended to accommodate the
creation of new futures markets in federal or federally-insured debt securities, free of
any SEC meddling.
“Thus, in a few words, Congress expanded the Commodity Exchange Act to embrace not only
all agricultural futures (including previously unregulated agricultural commodities such as
coffee, cocoa and sugar), but also silver and gold, petroleum products, Government National
Mortgage Association certificates, and U.S. Treasury bonds, bills, and notes. The one
exception was and is onions, the sole item in this universe which under present law
cannot be a ‘commodity’.”
- John H. Stassen, THE COMMODITY EXCHANGE ACT IN PERSPECTIVE A SHORT AND NOTSO-REVERENT HISTORY OF FUTURES TRADING
LEGISLATION IN THE UNITED STATES, 39 Wash. & Lee L. Rev. 825 (1982), http://scholarlycommons.law.wlu.edu/wlulr/vol39/iss3/3 , pp.833-834
112. ERISA – Modern Pension Legislation From an Illinoisan
• ERISA – Illinois Rep.
John Erlenborn, credited
with ‘fathering’ ERISA
legislation that established
the regulatory framework
for how modern pensions
are structured, regulated
and managed.
113. Nobel Laureates in Economic Science
George Stigler– “George Stigler was one of the great economists of
the twentieth--or any other--century.” — Milton Friedman’s tribute to George Stigler
– History of Economic Thought
– Price Theory
– Economic Theory of Regulation
“Stigler is best known for developing the Economic Theory of
Regulation, also known as capture, which says that interest groups and
other political participants will use the regulatory and coercive powers
of government to shape laws and regulations in a way that is
beneficial to them. This theory is a component of the public choice field
of economics. He also carried out extensive research in the history of
economic thought.”
- Wikipedia http://en.wikipedia.org/wiki/George_Stigler and Milton Friedman’s tribute to George Stigler: http://www.nap.edu/
html/biomems/gstigler.html , July 30, 2012
115. Investment Theory Starts with…
The Chicago Tribune(?!)
“Alfred Cowles created the first relatively accurate long-term index of total
return to investing in common stocks.”
- William N. Goetzmann / Roger G. Ibbotson “History and the Equity Risk Premium”, Yale School of Management October 18,
2005 http://www.econ.ucsb.edu/conferences/equity05/papers/Goetzmann.pdf August 14, 2012, p.8
“Alfred Cowles, 3rd was the founder of the Cowles Commission [a
predecessor of CRSP, housed at the U of Chicago 1939-1955]. Cowles's
primary concern in 1932 was to elevate economics into a more precise
science using mathematical and statistical techniques.”
http://en.wikipedia.org/wiki/Alfred_Cowles
“As its motto (Theory and Measurement) indicates, the Cowles Commission
was dedicated to the pursuit of linking economic theory to mathematics
and statistics….Cowles associates have won Nobel prizes for research
done while at the Cowles Commission. These include Tjalling Koopmans,
Kenneth Arrow, Gerard Debreu, James Tobin, Franco Modigliani. Herbert
Simon, Lawrence Klein, Trygve Haavelmo, Leonid Hurwicz, and Harry
Markowitz.” - http://en.wikipedia.org/wiki/Cowles_Commission
116. “CRSP”
“Beginning in 1960, CRSP, the Chicago Center for Research on
Security Prices, headed by economists Lawrence Fisher and James H. Lorie,
systematically began to collect stock prices and dividends from U.S. capital
market history. Fisher and Lorie published the results of their study of returns
to U.S. stocks in 1964, as “Rates of Return on Investments in Common
Stocks” and in 1977 as a volume including returns to U.S. government
securities as well.”
- William N. Goetzmann and Roger G. Ibbotson “History and the Equity Risk Premium”, Yale School of Management October 18,
2005 http://www.econ.ucsb.edu/conferences/equity05/papers/Goetzmann.pdf accessed August 14, 2012, p.8
117. Chicago’s CFA Society The 1st
• Chicago’s CFA Society: The First Financial Analyst Society
• Analysts traditionally described as "statisticians" providing sales support
to brokers and focused on bonds.
• Analyst Raymond J. Sidney of Federal Securities Corp with a small
group of acquaintances including Hortense Freidman, gather to
exchange ideas. Luncheon meetings evolve into a formal organization
in 1925 with Sidney elected as the first president of the "Investment
Analysts Club of Chicago."
• For this first such U.S. group., membership limited to 100 who were not
brokers, dues were $2/year with lunch at the Morrison Hotel costing 65
cents. Meetings begin to focus on individual stock ideas.
• Outside speakers from leading local universities invited to discuss
business conditions, with club thriving through the end of the decade.
Source Bill Gray, Presentation – “75 Years” – courtesy of Wendi Ruschmann , July 13, 2011 e-mail
118. “The Chicago School” of Economics
According to Economist Joseph Stiglitz,
The “Chicago School” provided the “intellectual foundation”
for the “idea that markets are self-adjusting.”
— Stephen Moore, “The Man Who Saved Capitalism”, The Wall Street Journal, Tuesday, July 31, 2012, p.A13
“Chicago’s workshop system [i.e., inter-disciplinary cross-fertilization] was a
major innovation in conducting economic research and in apprenticing
students in research. It has been copied by many other economics
departments – often at the instigation of Chicago graduates – and also by
business schools and law schools. Although often successful, workshops
elsewhere usually do not achieve the intensity of those at Chicago.”
– Gary S. Becker, in E.Shils, ed., Remembering the University of Chicago: Teachers, Scientists and Scholars, (Chicago, University of Chicago
Press, 1991), p.146 quoted in Johan Van Overtveldt, The Chicago School, (Chicago: University of Chicago Press, 2007), p.40
119. NOBEL LAUREATES
Since Sweden’s central bank, Sveriges Riksbank,
established the Nobel Prize in Economic Sciences in 1968,
seven Chicago Booth faculty members have won the award.
George Stigler, 1982
Merton Miller, 1990
Ronald Coase, 1991
Gary Becker, 1992
Robert Fogel, 1993
Myron Scholes, 1997
Eugene Fama, 2013
120. The University of Chicago Firsts
• • 1st to initiate a Ph.D. program in business (1920).
• 1st to publish a scholarly business journal (1928).
• 1st to offer an executive M.B.A. degree program (1943).
• 1st to establish a minority relations program.
• 1st to adopt computerized bidding for placement interviews and class registration.
• 1st business school to have a Nobel laureate on its faculty (George Stigler, 1982)
• 1st to offer an executive M.B.A. program in Europe and Asia.
• MPT - Modern Portfolio Theory (and the active management of assets by money
managers) is based upon Modern Portfolio Theory, 1st expounded by Harry Markowitz in
1952. A fundamental tenet of which is that a fully diversified portfolio will offer a chance for
consistent returns with minimized risk.
• Eugene Fama first articulated the Efficient Market Theory in 1972 which provided the
rationale and basis for index funds and passive investing by stating that all known information
is reflected in the price of stocks and therefore it is impossible to beat the stock market
indices with regularity.
• Myron Scholes created the first pricing model (Black Scholes Option Pricing Model) for
derivatives that spawned the options industry.
Source: University of Chicago website
121. Chicago School Theory Created Modern
Corporate Finance
“The modern theory of corporate finance begins with the well-known
‘irrelevance’ propositions formulated by Franco Modigliani and Merton
Miller in the late 1950s and early 1960s.”
- Donald H. Chew, Jr., “Financial Innovation in the 1980s and 1990s”, pp.xiii-xxii in Donald H. Chew, Jr., ed., The New Corporate
Finance: Where Theory Meets Practice, (New York: McGraw-Hill Irwin, 2001), 3rd edition, pp.xv-xvi
“The past 40 years [i.e., 1960-2000] have witnessed remarkable changes in the
theory and practice of corporate finance. Beginning with the work of
Franco Modigliani and Merton Miller in the late 1950s, the evolution of
the ‘modern’ theory of corporate finance into its present shape has both
anticipated and responded to a wave of innovations in corporate practice.”
- Donald H. Chew, Jr., “Financial Innovation in the 1980s and 1990s”, pp.xiii-xxii in Donald H. Chew, Jr., ed., The New Corporate
Finance: Where Theory Meets Practice, (New York: McGraw-Hill Irwin, 2001), 3rd edition, p.xiii
122. Harry Markowitz & MPT
“In 1952, Harry Markowitz published his famous model of portfolio
selection which explicitly linked investment return and risk.”
- William N. Goetzmann and Roger G. Ibbotson “History and the Equity Risk Premium”, Yale School of Management
October 18, 2005 http://www.econ.ucsb.edu/conferences/equity05/papers/Goetzmann.pdf accessed August 14,
2012, p.8
Modern Portfolio Theory (MPT), “was invented in the 1950s by Harry
Markowitz. His book, Portfolio Selection, was an outgrowth of his
Ph.D. dissertation at the University of Chicago.”
- Burton G. Malkiel, A Random Walk Down Wall Street, (New York: W.W. Norton , 1990), p.223
“That paper [Markowitz’ Ph.D. dissertation] was innovative on so many
levels, and ultimately so influential both theoretically and in terms of
practicality, that it earned Markowitz a Nobel Prize in Economic
Science in 1990.”
- Peter Bernstein, Against the Gods: The Remarkable Story of Risk, (New York: John Wiley & Sons, 1998), p.248
123. Nobel Laureate Milton Friedman
Milton Friedman – Monetarist
“Inflation is always and everywhere a monetary phenomenon.”
— Friedman, Milton. Inflation: Causes and Consequences. New York: Asia Publishing House
– The Economist obituary called Milton Friedman "the most influential
economist of the second half of the 20th century…[and] possibly of all of it."
“Mr Friedman revolutionised (sic) how economists and policymakers treated
money and inflation.”
“Mr Friedman laid the foundation of modern theories of consumption.”
“A Heavyweight Champ at Five Foot Two: The Legacy of Milton Friedman, a giant among economists".
The Economist. November 23, 2006. Retrieved July 30, 2012.
124. Milton Friedman Saved Capitalism
“Next to Ronald Reagan, in the second half of the 20th
century there was no more influential voice for economic
freedom world-wide than Milton Friedman. Small in
stature but a giant in intellect, he was the economist who
saved capitalism by dismembering the ideas of central
planning when most of academia was mesmerized by the
creed of government as savior.”
— Stephen Moore, “The Man Who Saved Capitalism”, The Wall Street Journal, Tuesday, July 31, 2012, p.A13
125. Economic Theories of Inflation - From Chicago
- Triangle Theory – Robert S. Gordon (Northwestern University)
- Monetarist – Milton Friedman, et.al., (University of Chicago)
- Austrian School – Friedrich Hayek (University of Chicago)
- Rational Expectations Theory – Robert Lucas (University of Chicago)
126. Miller & Modigliani Sparked LBOs
“In short, the discounted cash flow valuation framework stemming
from the Chicago school principle of ‘market efficiency’ …was
being put to use daily during the restructurings of the ‘80s.”
- Donald H. Chew, Jr., “Financial Innovation in the 1980s and 1990s”, pp.xiii-xxii in Donald H. Chew,
Jr., ed., The New Corporate Finance: Where Theory Meets Practice, (New York: McGraw-Hill
Irwin, 2001), 3rd edition, p.xvii
127. Fama’s Efficient Market Hypothesis
“Eugene Fama (1965) eloquently put into words what research studies had been showing for a
number of years: investors cannot expect to earn more than the average market return over time.
In other words, expensive computer models and professional investors will do no better than a
widely diversified portfolio of randomly selected stocks. Under Fama's classification, the Efficient
Market Hypothesis has three parts:
a weak form (stock price changes are independent of one another),
a semi-strong form (publicly-held information cannot be used to an investor's advantage), and
a strong form (no information, either public or private, can be used to an investor's advantage).”
Source: “Pioneers in Finance” http://campus.murraystate.edu/academic/faculty/lguin/FinancialHistory.htm
128. Fama-French Three Factor Model
“A paper by Eugene Fama, Robert R. McCormick Distinguished Service
Professor of Finance, and former faculty member Ken French that
introduced the Fama-French three-factor model was a breakthrough….
‘It tied together previous research about why one stock has a higher
average return[s] than another,’ [David] Booth said. ‘The three-factor
model says that the dimensions of return are risk, size, and financial
health.’”
–Jennifer Vanasco, ““Putting Theory Into Practice”
http://www.chicagobooth.edu/magazine/fall99/boothsinque.html
129. The 1st Index Fund?
“After graduation [from the University of Chicago], [Rex] Sinquefield was eager
to take the risk of putting the theories he learned [at school] into practice,
which he made clear when he interviewed with money managers and banks
in California, New York, and Chicago. ‘I said, look, I want to try out these
new ideas, I’m not interested in anything else. Every one of them told me I
was crazy, nearly every one rejected me. Only American National was
interested in experimenting,’ he said. ‘There’s some debate about this, but
I think I set up the first S&P index fund in the galaxy in 1973. Wells Fargo
thinks they did it–but in any case, both institutions pioneered index funds’.”
–Jennifer Vanasco, ““Putting Theory Into Practice”
http://www.chicagobooth.edu/magazine/fall99/boothsinque.html
130. Timing and ‘Syzygy’?
“Being a successful entrepreneur is some part skill, some part luck,” [David]
Booth said. But one element that’s critically important is timing. The
ideas [underpinning DFA] presented 10 years earlier would have been too
radical; 10 years later, would have been too late. I read an article by Milton
Friedman that talked about syzgy, an astronomical term. When [the sun,
earth, and moon] line up, which happens rarely, all kinds of weird things are
supposed to happen. Being an entrepreneur is looking for syzygy, being
sensitive to that moment when things come together, visualizing it, and
acting upon it.”
–Jennifer Vanasco, ““Putting Theory Into Practice”
http://www.chicagobooth.edu/magazine/fall99/boothsinque.html
131. They All Started the 1st Index Funds!
“John McQuown and David G. Booth at Wells Fargo and
Rex Sinquefield at American National Bank in Chicago both
established the first Standard and Poor's Composite Index
Funds in 1973. Both of these funds were established for institutional
clients; individual investors were excluded. Wells Fargo started with
$5 million from their own pension fund, while Illinois Bell put in $5
million of their pension funds at American National Bank.”
Source: http://en.wikipedia.org/wiki/Index_fund#Origins
132. First Commingled S&P500 Fund
“American National Bank and Trust Company claims to have launched the first
comingled Index fund, an S&P 500 Index Comingled Trust Fund in 1974.
… [ANB’s] marketing materials at the time made the claim that American
National Bank was the first.”
– Janna Sampson, e-mail correspondence, August 1, 2011
133. Roger Ibbotson & Rex Sinquefield
• 1st to show what historical LT returns were in equities, T-Bills,
Treasuries, corporate bonds and inflation
• 1st to show the correlations between major asset classes
• 1st to use historical returns for forecasting
• 1st to use historical data to show the equity risk premium is constant
• 1st to ignore macro-economic variables and focus on historic prices
&returns
• 1st to measure returns from markets outside the U.S.
134. Ibbotson & Sinquefield
- Based on Capital Asset Pricing
Model (CAPM)
- 1st to catalog monthly historical
returns (1926-1974) for U.S.
Equity, Fixed Income (long
Corporates, long Treasuries & T-Bills),
and Inflation (CPI) [first in
The Journal of Business (1976)
then with additions in Stocks,
Bonds, Bills and Inflation, (1977
and subsequent years)
- 1st to show U.S. equity historical
component returns (i.e.,
dividends and capital appreciation)
- 1st to state that T-Bills do not
follow a ‘random walk’
Source:(SBBI ,pp.63-64)
135. Ibbotson &
Sinquefield
- 1st to articulate a ‘risk premium’
for equities over a ‘risk free’
asset:T-Bills
- 1st to empirically demonstrate the
validity of a DCF model;
- 1st to utilize the S&P 500 as a
proxy for the U.S. equity markets
136. Ibbotson & Sinquefield
“Research by Roger Ibbotson and Rex Sinquefield provided some of the first
accurate calculations of the annual rate of return on U.S. asset classes over
long investment horizons with specific measures of the equity and other risk
premiums. These calculations have come into widespread academic and
industrial use as inputs to research and investment decision making through
numerous works that Ibbotson has produced.”.”
- William N. Goetzmann and Roger G. Ibbotson “History and the Equity Risk Premium”, Yale School of Management October 18,
2005 http://www.econ.ucsb.edu/conferences/equity05/papers/Goetzmann.pdf accessed August 14, 2012, p.1
137. Asset Allocation Determines Pension Plans’
Returns
Gary Brinson et al, in 1983 "established the first asset allocation fund of
funds".
-Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, Determinants of Portfolio Performance, The Financial Analysts
Journal, July/August 1986.
**This article was the "first" to argue for the importance of asset allocation
in portfolio construction.
138. Abandoning Bretton Woods
“In the early 1970s, the U.S. government, with strong prodding from academic
economists, notably Milton Friedman, finally abandoned the tie of gold to the
dollar.”
- Professor Merton H. Miller, University of Chicago, “Financial Innovation: Achievements and Prospects”, pp.385-392 in Donald H.
Chew, Jr., ed., The New Corporate Finance: Where Theory Meets Practice, (New York: McGraw-Hill Irwin, 2001), 3rd edition, p.
386
139. Chicagoans’ Push For Macro U.S. Change
Sparked Innovation
“The then Secretary of the Treasury was George Schultz, a former colleague
and long-time friend of Milton Friedman. The Chairman of the Federal
Reserve Board was Arthur Burns, another old friend [of MF]. With Milton
Friedman’s blessing, both gave a cordial audience to Leo Melamed of
the CME and at least a nihil obstat to his proposal for an International
Monetary Exchange.”
- Professor Merton H. Miller, University of Chicago, “Financial Innovation: Achievements and Prospects”, pp.385-392 in Donald H.
Chew, Jr., ed., The New Corporate Finance: Where Theory Meets Practice, (New York: McGraw-Hill Irwin, 2001), 3rd edition, p.
386, n2
140. Chicago & Innovation
Joseph Schumpeter once said that “what really matters for economic
growth is innovation, the act through which these new ideas are
successfully introduced to the market….Schumpeter’s dictum still
holds – what really matters for economic growth is innovation. The
continued health of Chicago business depends on its ability to
attract innovators.”
- Louis P. Cain, “Innovation, Invention, and Chicago Business”, pp.415-417 in James R. Grossman, Ann Durkin Keating,
and Janice L. Reiff., eds., The Encyclopedia of Chicago, (Chicago: University of Chicago Press, 2004).
141. The Future of Financial Innovation in
Chicago
“Financial innovations symbolize the profit-driven response to the changes in
the economic, tax, and regulatory environment. As this environment
changes, and as consolidation within the financial services industry
intensifies competition, market participants will seek out new ways to
conduct financial transactions more efficiently.The rapid pace of financial
innovation therefore seems likely to continue”
- John D. Finnerty, “Financial Engineering in Corporate Finance: An Overview”, in Financial Management, Vol. 17, No. 4 (Winter,
1988), pp. 14-33 Published by: Blackwell Publishing on behalf of the Financial Management Association
International Stable URL: http://www.jstor.org/stable/3665764 Accessed: 15/01/2009, p.31
142. The Future of Financial Innovation in
Chicago (part deux)
“There’s a big role for Silicon Valley-style scorched-earth
entrepreneurship on Wall Street right now, and the people most
likely to innovate are newcomers to the industry who have no
real stake in the portions of it that need scorching.”
- Michael Lewis, “How Not to Lose Your Soul: A Handy Guide for Young Bankers”, in “Opening Remarks”,
Bloomberg Businessweek, no Vol./No. (September 29-October 5, 2014), pp. 16-17 Published by: Bloomberg -
Accessed: 18/10/2014, p.17
143. A Grateful “Thank You” To:
Kim Augustyn, John Bilson, Gary Brinson, Bill Brodsky, Jeff Brown, Rich
Carr, Paul Carbone, Lisa Ezrol Curran, Jeff Diermeier, Bryan Durkin,
Mitch Fulscher, Steve Gollins, Michael Gorham, Tim Greive, Jason
Henrichs, John Herzog, Merrillyn Kosier, Jim Malackowski, Steve
Manus, Angie McKay, Michelle Moreno, David Nealis, Amar Parikh,
Don Philips, Alex Rabinovich, Nick Ronalds, Wendi Ruschmann,
Janna Sampson, Audrey Warner, Bob Watt, Lou Weisbach, Holly
Weckler, and Janet Wilson
And my wife Patty and children Luke, Matt, & Katie
