Fall 2016 Professor Maureen O'Hara

447 Sage Hall /mo19@cornell.edu

NBA5430 - Financial Markets and Institutions

Course Description

This course presents an overview of the structure and function of the financial markets. The
course attempts to provide a general working knowledge of the financial system by examining
not only how various intermediaries and markets work, but also their evolution over time. The
role of central banks is particularly emphasized, as is the nature of risk management both within
the financial institution and more broadly for the financial system. Topics considered here
include swaps, credit derivatives, value at risk models, and financial regulation. Just as
intermediation has moved from institutions to markets, the course follows a similar evolution
over the course of the semester. Market topics examined include securitization, the money
markets, the Treasury market, and the financial crisis. The course concludes by looking at digital
currencies and the implications of fin tech for the future of banking.

Required Course Material

Course Packet

The course is taught from materials in the course packet. Students who have little knowledge of
financial markets may benefit from a background textbook. Unfortunately, there is no one
textbook that covers the particular mix of topics we address, and the financial crisis has made
virtually all textbooks out of date. A good general book on reserve in the library is:

Saunders, A and M. Cornett, Financial Markets and Institutions, (McGraw-Hill), 6th

edition, 2015.

Web Site

Course information is available at www.blackboard.cornell.edu. Students should consult the

web page prior to each class to review the daily assignments which are posted there. Materials
for each class should be read in advance of the class. The web page also provides copies of
homework assignments, course documents, and practice exams. There are also two video
tutorials that can be accessed from the blackboard site.

Teaching Assistants

The teaching assistants for this course will be Gaurav Kankanhali (gak79@cornell.edu) and Sam
Hempel (sjh296@cornell.edu ). Regular review sessions will be scheduled; attendance at these
is optional.
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Course Requirements and Grading

Students are expected to read articles and handouts in advance of class and to participate fully in
all class discussions. Daily assignments are listed in the attached schedule, and will be updated
on the web site. Students are also expected to complete several homework assignments (see
below). There is an optional midterm and a compulsory final exam. The midterm is Tuesday
October 25, 7:00-9:00 PM. Because the midterm is optional, there will be no makeup. The final
exam is cumulative: it is on Wednesday December 7 from 9:00 – 11:30 am. Attendance at the
final exam is mandatory. All Exams are closed book. Once an exam has started, no one is
permitted to leave and return to the exam. Students are expected to adhere to the Johnson
School’s Academic Integrity Policy.

There will be no class on Wednesday September 14 or Wednesday Nov. 2. We will have a

makeup class on Friday November 18 at 9 am. Also, per the University calendar there will be
no class Monday September 5 (Labor Day), Monday October 10 (Fall Break) and Wednesday
November 23 (the day before Thanksgiving).
The Johnson School faculty has adopted a suggested grade average of no more than 3.5 for
elective courses. This course will follow that guideline. The following weights will determine
the final grade:

Midterm 30% (or 0)

Final 55% (or 85%)
Assignments and Class Participation 15%

Homework Assignments

There are occasional homework problems/assignments to be completed before class. These

problems will be handed out in class. There are also three graded assignments to be completed
outside of class. These assignments can be found on the course web site. It is fine to work on
the assignments in groups, but each student should turn in his or her copy of the assignment. The
tentative due dates for the assignments are:

1. Swaps – due September 26

2. Money Creation – due Oct. 17
3. Securitization – due Nov. 16

Office Hours

I will try to be available in my office on Tuesday afternoons from 3-5, but please email me if you
would like to meet at another time (mo19@cornell.edu).
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Course Outline and Readings (*denotes optional reading found on blackboard course site)

1. Financial Systems

“Welcome to Less than Zero”, Business Week, April 27, 2015.

Davidson, A., “In Greenbacks We Trust”, New York Times, Feb. 27, 2015.

Bernanke, B., “A Century of US Central Banking: Goals, Framework, Accountability,

Journal of Economic Perspectives, 27 (4), Fall 2013.

“Financial Crisis: Lessons of the Rescue, A Drama in Five Acts”, Wall Street Journal,
September 8, 2013.

McGrane, V., “Major Provisions in the Financial Overhaul Bill,” Wall Street Journal,
June 26, 2010.

“Why General Electric is Unwinding its Finance Arm,” Wall Street Journal, Oct. 13,
2015

S. Schwarzman, “How the Next Financial Crisis will happen”, Wall Street Journal, June
9, 2015.

2. The Business of Banking

“When Bigger Isn’t Better: Banks Retreat from Global Ambitions”, Wall Street Journal,
May 30, 2016.

Dietz, M., P. Harle, and S. Khanna, “A Digital Crack in banking’s business model”,
McKinsey Quarterly, April 2016.

Partnoy, F. and J. Eisinger, “What’s Inside Americas’s Banks?” The Atlantic, Jan. 7,
2013.

Brown, K. C., and D. J. Smith, “Overview of the Swaps Market” in Interest Rate and
Currency Swaps: A Tutorial, Institute of Chartered Financial Analysts, 1995.

Mengle, D., “Credit Derivatives: An Overview,” Economic Review, Fourth Quarter

2007.

Kidd, D., “Value at Risk and Conditional Value at Risk: A Comparison”, CFA Institute,
2012.

 Dominus, S. “The Woman Who Took the Fall for JPMorgan Chase”, New York
Times, October 3, 2012 (on web site – optional reading).
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 Report of JPMorgan Chase and Co. Management Task Force Regarding 2012
CIO Losses, JPMorgan Chase web site, Jan 16, 2013 (on web site – very optional
132 pages long).

Elul, R., “The Promise and Challenges of Bank Capital Reform”, Business Review, Q3
2013.

Anderson, R. W., “How and Why Regulatory Reform is Changing the Structure of
Banking, Banking Perspective, 4(1), First Quarter 2016.

Hoenig, T., “Basel III: A Well-Intended Illusion”, FDIC Speeches, April 9, 2013.

Basel Committee on Banking Supervision Reforms – Basel III.

“Chinese Banks May Need All the Help They Can Get,” Wall Street Journal, Feb. 15,
2016

4. Financial Institutions and the Financial System

Diamond, D. and P. Dybvig, "Bank Runs, Deposit Insurance, and Liquidity," Journal of
Political Economy, 91 (1983).

“The Isle that Rattled the World,” Wall Street Journal, Dec. 27, 2008.
“How did Iceland clean up its banks?” BBC News, 10 February 2016.
“The Tricky Thing about Moral Hazard in China”, Wall Street Journal, April 2, 2015
Haldane, A. G., On Being the Right Size, 2012 Beesley Lectures, BIS web site.

Duffie, D., “The Failure Mechanics of Dealer Banks,” Journal of Economic Perspectives,
24 (1), Winter 2010.
“BNP Paribas Draws Record Fine for ‘Tour de Fraud”, NY Times, June 30, 2014

“Why Only One Banker went to Jail for the Financial Crisis”. NYT Times, April 30,
2014.

 Silver-Greenberg, J. and B. Protess, “A Grieving Father Pulls a Thread that

Unravels BNP’s Illegal Deals”, NY Times, June 30, 2014. (on web site – optional
reading).

4. The Financial System and Central Banking

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Ihrig, J., Meade, E. and G. Weinbach, “Rewriting Monetary Policy 101: What’s the
Fed’s Preferred Post-Crisis Approach to Raising Interest Rates?, Journal of
Economic Perspectives, 29(4), Fall 2015

“Open Market Operations”, FRB – NY.

Greenspan, A., "Commercial Banks and the Central Bank in a Market Economy,"
Economic Review, November 1989.

 *Fed Chairman Simulator – see http://sffed-education.org/chairman/ (optional

but fun)

Billi, R. and G. Kahn, “What is the Optimal Inflation Rate?” Economic Review, Second
Quarter 2008.

“Life in Zimbabwe: Wait for Useless Money,” New York Times, October 2, 2008.

“Zimbabwe swap hyperinflation for deflation with use of U.S. dollar,” Financial Times,
January 25, 2016.

“Yes, Central Banks Can Create Inflation. Just Ask Argentina”, Wall Street Journal,
April 27, 2016.

Dudley, W. C., “Lessons at the Zero Bound: The Japanese and U.S. Experience”,
Federal Reserve Bank of New York Speeches, May 21, 2012.

“Fantasy and Magic: A New Central Bank Approach,” Wall Street Journal, Feb. 23,
2016

Fischer, S., “Monetary Policy, Financial Stability and the Zero Lower Bound”, FRB
Speeches, January 3, 2016.

Bernanke, B., “The Taylor Rule: A Benchmark for monetary policy? Brookings Blog,
April 28, 2015

Taylor, J. B., “Taylor on Bernanke: Monetary Rules Work Better than ‘Constrained
Discretion’”, Wall Street Journal, May 2, 2015

Nechio, F., “Monetary Policy When One Size Does Not Fit All,” Federal Reserve Bank
of San Francisco Economic Letter, June 13, 2011.

Draghi, M., “Monetary Policy in the Eurozone,” European Central Bank, Speech, 21,
November 2014

”Boom! Draghi Pulls Out the Bazooka,” Wall Street Journal, May 10, 2016
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“Swiss Move Roils Global Markets”, Wall Street Journal, Jan. 15, 2015

Humpage, O., T. Stehulak, and S. Milligan, “The Chinese Renminbi and the Fundamental
Trilemma”, Economic Trends, Federal Reserve Bank of Cleveland, Oct. 1, 2015.

“The Hottest Idea in Finance: Capital Controls”, Wall Street Journal, Feb. 4, 2016

5. Securitization

“MBS Basics”, Nomura Securities Fixed Income Research, March 2006 (on course web
site).

Frame, W.S., A. Fuster, J. Tracy, J. Vickery, The Rescue of Fannie Mae and Freddie
Mac, Journal of Economic Perspectives, 29(2), Spring 2015.

 “ Pressured to Take More Risks, Fannie Reached Tipping Point”, NY

Times, Oct 5, 2008 (optional on blackboard)

Cetorelli, N. and S. Peristani, “The Role of Banks in Asset Securitization”, Economic

Review, July 2012.

“SEC Charges Goldman Sachs with Fraud…,” Securities and Exchange Commission,
April 16, 2010.

“Abacus Deal: As Bad as They Come,” Wall Street Journal, April 20, 2010.

6. Money Markets

Dudley, W., Roush, J., and M. Ezer, “The Case for TIPS: An Examination of the Costs
and Benefits,” FRBNY Economic Policy Review, 2012.

“The Origins of Lehman’s ‘Repo 105’,” New York Times, March 12, 2010.

"Drysdale's Default ...," Wall Street Journal, May 20, 1982.

Risk-controlled Arbitrage Readings (depending on time, may be optional)

"At Franklin Savings: Capricious Regulation," New York Times, September 19,
1990.

Melia, M., “Not your typical S&L,” United States Banker, May 1988.

McCoy, C., “Many big S&L losses turn out to be due to big gamble,” Wall Street
Journal, Aug. 9, 1991.
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“Risk isn’t always controlled after all in Arbitrage plan,” Wall Street Journal,
Aug. 9, 1991.

“The Lie in Libor”, Bloomberg Markets, March 2013.

Hou, D. and D. Skeie, “LIBOR: origins, economics, crisis, scandal and reform”, The New
Palgrave Dictionary of Economics, 2013.

7. The Once and Future Financial System

Bohme, R., Christin, N., Edelman, B. and T. Moore, “Bitcoin, Technology, and
Governance,” Journal of Economic Perspectives, 29(2) Spring 2015.

Brainard, L., “The Use of Distributed Ledger Technologies in Payment, Clearing and
Settlement, Board of Governors of the Federal Reserve System, Speeches, April
14, 2016.

Popper, N., “Can Bitcoin Conquer Argentina?” New York Times, April 29, 2015.

“Do Cryptocurrencies Such as Bitcoin have a Future?” Wall Street Journal, March 1,
2015.

Gandel, S., “Citi Does Fintech”, Fortune, July1, 2016.

“The Future of Banking is in China”, Wall Street Journal, June 2, 2016.