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3 - The 2007–2008 Financial Crisis

Published online by Cambridge University Press:  05 April 2024

Paul Embrechts
Affiliation:
Swiss Federal University (ETH), Zürich
Marius Hofert
Affiliation:
The University of Hong Kong
Valérie Chavez-Demoulin
Affiliation:
Université de Lausanne, Switzerland
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Summary

The 2007 – 2008 financial crisis has been the subject of many articles, books, movies and even a theater play. We take you for a walk along Wall Street, pointing at some aspects of the story that touch our personal experiences and interests. We look critically at some of the main underlying causes. Besides political blindness, we highlight the unbridled growth of power of relatively small groups of investment bankers and how these brought financial institutions to (and in some cases beyond) the edge of bankruptcy. We expose some of the over-complicated financial instruments together with their astronomical volumes traded. We also look more critically at the role played by quants (financial engineers) in general and mathematicians in particular. What is the truth behind “The formula that killed Wall Street”? An important aspect concerns early warnings not heeded to. In summary, this is a chapter on greed, power, complexity, volume and stupidity.

Type
Chapter
Information
Risk Revealed
Cautionary Tales, Understanding and Communication
, pp. 24 - 42
Publisher: Cambridge University Press
Print publication year: 2024

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