What We Still Have to Learn from the Credit Collapse (and Other Market Crises)

The Journal of Portfolio Management, Volume 45, No 1, Fall 2018

14 Pages Posted: 13 Mar 2019

Date Written: October 1, 2018

Abstract

This editorial, which mirrors Bruce Jacobs’s book Too Smart for Our Own Good: Ingenious Investment Strategies, Illusions of Safety, and Market Crashes, finds that “free-lunch” strategies and products that promise to increase returns while reducing risk can attract substantial investments and encourage leverage, especially when complexity and lack of transparency obscure the true sources of risk. But they also have the potential to induce sharp price swings that can destabilize markets and lead to crashes. The structured securitization of subprime mortgage loans, which first helped to inflate the housing bubble before triggering the implosion of the U.S. credit market, shares some important characteristics with strategies and products at the heart of prior crises, beginning with the 1987 stock market crash.

Keywords: financial markets, market crash, credit crisis, mortgage-backed securities, subprime, risk reduction, risk-shifting, free-lunch, leverage, portfolio insurance, arbitrage, non-linear, liquidity, tranching, Lehman Brothers, Long-Term Capital Management, securitization, options, systemic risk

JEL Classification: G, G01, G02, G18, G21, G23, G28

Suggested Citation

Jacobs, Bruce I., What We Still Have to Learn from the Credit Collapse (and Other Market Crises) (October 1, 2018). The Journal of Portfolio Management, Volume 45, No 1, Fall 2018, Available at SSRN: https://ssrn.com/abstract=3351321

Bruce I. Jacobs (Contact Author)

Jacobs Levy Equity Management ( email )

100 Campus Drive
P.O. Box 650
Florham Park, NJ 07932-0650
United States
973-410-9222 (Phone)
973-410-9333 (Fax)

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