Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Drexel Burnham Lambert pioneered the market in high-yield corporate bonds, also known as junk bonds. Meanwhile, Salomon Brothers helped the GSEs devise the securitization model and launch each new batch of mortgage-backed securities. For other clients, the investment bankers were hard at work figuring out how to hedge against fluctuations in currencies and interest rates. They developed swaps, for instance, that allowed clients to trade excessive exposures in currencies. They made instruments that allowed one client to take on the risk of fluctuating interest rates while another client opted for fixed rates. In the 1990s a team at J.P. Morgan devised the credit default swap (CDS), which offered protection against the risk of nonpayment and allowed lenders to fine-tune their lending risk.28 At the same time, the investment banks progressively increased their own trading activity. They discovered the profits to be made through volume and leverage. The returns were extraordinary. In the early 1980s America’s investment banking elite earned returns of more than 50 percent on equity.