Index
A
access to capital, 23–24, 221–222
Acid Rain Program, 133–135
Acumen Fund, 166
Adams, John Quincy, 59
ADB (Asian Development Bank), 170
adjustable-rate mortgages (ARMs), 97
Advance Market Commitment, 207
advance purchase agreements for vaccines, 206–209
affordable housing solutions, 108–109
Africa, infrastructure development, 171
agency problems, 39–41
AIDS vaccine development, 206
AIG, CDS (credit default swaps) and, 78
Alexander the Great, 11
American Research and Development (ARD), 68
American Stock Exchange, 67
Ameriprise Financial, history of, 66
Anderson, Harlan, 68
arbitrage, 45
ARD (American Research and Development), 68
Aristotle, 17
ARMs (adjustable-rate mortgages), 97
Asian Development Bank (ADB), 170
Asian Financial Crisis of 1997–1998, 170
asset bubbles, 216
asset prices, sustainability of, 103
asymmetric information, 39–41
B
back-end plans, as antitakeover technique, 76
Bank of America, history of, 65
Banker’s Trust, 62
Barbary Company, 13
Bayer Healthcare AG, 205
Bayh–Dole Act of 1980, 197
Becker, Gary, 152
biodiversity banking, 141–142
biodiversity value, 123
biomedical development finance
capital structure, 188–193
current business model, 185–187
donor bonds, 209–210
financial innovations, types of, 187
funding sources, 193–204
CEFF, 197
collaborative development, 196
credit enhancement strategies, 201–204
CRO-linked financing, 197
designated funds, 197
incubators, 197
projected royalty streams, 195
public equity and venture capital, overcoming limitations of, 199–201
traditional funding, 193–195
university partnerships/private equity/public-sector investing, 197–199
nonprofit pharmaceutical companies, 210
public–private partnerships, 204–209
social change via, 223
Black, Fischer, 44
Black–Scholes model, 44–46
formula for, 225
in history of corporate finance, 70
bond-warrant units in history of corporate finance, 71–72
bonds
covered bonds, 106
defined, 6
donor bonds for vaccine and treatment development, 209–210
for food security, 173–174
high-yield bonds in history of corporate finance, 70–71
zero-coupon bonds in history of corporate finance, 73
Boyle, Phelim, 46
Brandeis, Louis, 220
Brown, Gordon, 207
Bugg-Levine, Antony, 167
building and loan societies in history of housing finance, 88
Burton, Ellison, 133
Bush, George H. W., 130
Bush, George W., 153
business cycles, origin of theory, 63
business failures, financial innovation in, 63
business finance. See corporate finance
C
call options, 45
cap, in cap-and-trade, 132
cap-and-trade
in environmental finance, 123
in pollution markets, 132
Acid Rain Program, 133–135
for carbon emissions, 135–137
capital
democratization of access to, in history of corporate finance, 65–66
history of, 10–12
Capital Asset Pricing Model (CAPM), 43–44
in history of corporate finance, 69
capital market, housing crisis solutions in, 106–107
capital structure
of biomedical development funding, 188–193
in corporate finance, 55–57
in financial innovation, 221
in history of corporate finance, 69–74
of railroad industry, 60
capital structure models, 27–29
Black–Scholes model, 44–46
formula for, 225
in history of corporate finance, 70
CAPM (Capital Asset Pricing Model), 43–44
Modigliani–Miller capital structure propositions, 27–36
Monte Carlo methods, 46
uncertainty in, 28
capitalism, history of, 13–16
CAPM (Capital Asset Pricing Model), 43–44
in history of corporate finance, 69
carbon emissions cap-and-trade system, 135–137
cash flow model for SRFs, 126
catch-share programs, 138–140
CBOE (Chicago Board Options Exchange), 38
CDM (clean development mechanism), 137
CDOs (collateralized debt obligations), role in housing crisis, 98
CDS (credit default swaps)
in history of corporate finance, 77–79
role in housing crisis, 100
CEFF (committed-equity financing facilities), 197
cellphones, access to, 158–159
charter amendments, as antitakeover technique, 75
Chase National, 62
Chicago Board Options Exchange (CBOE), 38
Chicago Climate Exchange, 136
China
as development finance example, 175–178
infrastructure development, 170
Clean Air Act, 133
clean development mechanism (CDM), 137
climate change, cap-and-trade system to avoid, 135–137. See also environmental finance
clinical trials, phases of, 192
CLTs (community land trusts), 108
CLTV (combined loan-to-value ratio), 104
CMOs (collateralized mortgage obligations), 93
Coase, Ronald, 122
coinage, history of, 11
collaborative development for biomedical development funding, 196
collateralized debt obligations (CDOs), role in housing crisis, 98
collateralized mortgage obligations (CMOs), 93
combined loan-to-value ratio (CLTV), 104
commercial paper, origin of, 60
committed-equity financing facilities (CEFF), 197
commodities, standardization, 16
commodity-linked securities in history of corporate finance, 73
community land trusts (CLTs), 108
competition among prescription drugs, 190
complexity of financial products, 217–219
Comptom, Karl, 68
conservation. See environmental finance
conservation project funding
debt-for-nature swaps, 129–132
SRFs (state revolving funds), 124–129
contract research organization (CRO)–linked financing, 197
convertible bonds in railroad industry, 60
convertible debt, 40
capital structure and, 55–57
history of
Alexander Hamilton, role of, 57–59
capital structure innovations, 69–74
CDS (credit default swaps), 77–79
creative destruction (finance and technology), 63–64
credit scoring, 77
democratization of capital, 65–66
investment banking, 61–62
LBOs (leveraged buyouts), 75–77
nineteenth century innovations, 59–61
private equity, 74–75
venture capital, 66–69
social change via, 222
corporate governance, antitakeover techniques, 75–77
covered bonds, 106
creative destruction in history of corporate finance, 63–64
credit
defined, 21
history of, 10–12
leverage and, 219–220
credit default swaps (CDS)
in history of corporate finance, 77–79
role in housing crisis, 100
credit enhancement strategies in biomedical development finance, 201–204
credit scoring in history of corporate finance, 77
crisis. See financial crisis of 2007–2009
CRO-linked financing, 197
Curb Exchange, 67
D
D&O (directors and officers) insurance, 204
Danish mortgage model, 107
Dannone, Grameen Bank and, 162
de Soto, Hernando, 17
debt
convertible debt, 40
relationship with returns, 33–34
relationship with risk, 34–35
debt-equity ratio
in corporate finance, 55–57
Modigliani–Miller capital structure propositions, 29–36
debt-for-nature swaps, 129–132
debt-reduction methods, 64
DeLong, Bradford, 62
Demirguc-Kunt, Asli, 159
democratization of capital in history of corporate finance, 65–66
designated funds for biomedical development funding, 197
development finance, 149, 152. See also poverty
China and India examples, 175–178
economic growth and, 157–160
for food security, 172–175
history of, 153–157
for infrastructure development, 169–172
infrastructure needed for, 152, 157–160
microfinance
history of, 160–161
Muhammad Yunus, 162–163
for SMEs
financial innovations, 166–169
limitations of, 162–166
social change via, 223
terminology changes, 154
Dickson, Peter, 14
Digital Equipment, 68
directors and officers (D&O) insurance, 204
diversification, CAPM (Capital Asset Pricing Model), 43–44
donor bonds for vaccine and treatment development, 209–210
Doriot, George, 68
double-bottom-line investing. See impact investing
Draper, Gaither, and Anderson (venture capital firm), 68
Drinking Water State Revolving Fund (DWSRF), 128
drug pipelines, selling to pharmaceutical companies, 195
DWSRF (Drinking Water State Revolving Fund), 128
dynamic trading, 45
E
earnings per share (EPS), calculating, 30
East India Company, 13
economic development. See development finance
economic growth, development finance and, 157–160
education in developing world, 152
EIB (European Investment Bank), 198
emerging markets, 154. See also development finance
Endangered Species Act, 142
environmental finance, 117, 120
for conservation projects
debt-for-nature swaps, 129–132
SRFs (state revolving funds), 124–129
externalities, 120–122
innovations in, 123–124
in pollution markets, 132
Acid Rain Program, 133–135
carbon emissions cap-and-trade, 135–137
property rights and, 122
in public goods markets
biodiversity banking, 141–142
catch-share programs in fisheries, 138–140
wetlands mitigation banking, 141–142
social change via, 223
EPS (earnings per share), calculating, 30
equity
debt-equity ratio
in corporate finance, 55–57
Modigliani–Miller capital structure propositions, 29–36
European Investment Bank (EIB), 198
European Union Emissions Trading System (EU ETS), 136
exchanges, 17
externalities in environmental finance, 120–122
F
failures. See business failures
Farlow, Andrew, 208
FDIC (Federal Deposit Insurance Corporation), origin of, 91
Federal Housing Administration (FHA), origin of, 91
Federal National Mortgage Association (FNMA), origin of, 91
Fenn, George, 74
FHA (Federal Housing Administration), origin of, 91
finance
history of, 5–7
as social construct, 5–7
financial crisis of 2007–2009, 1
corporate finance in, 51
financial engineering, 45
financial innovation. See also biomedical development finance; corporate finance; development finance; environmental finance; housing finance
advantages of, 2–3
in agency problems, 39–41
in asymmetric information, 39–41
in business failures, 63
capital access with, 23–24
capital structure. See capital structure models
explained, 8–10
financial crisis of 2007–2009 and, 215–217
history of, 2–3
in age of discovery, 12–13
in ancient world, 10–12
capitalism, 13–16
in incomplete markets, 37–39
information infrastructure for, 16–19
risk management in, 22–23
rules of
access to capital, 221–222
capital structure, 221
complexity of products, 217–219
leverage and credit, 219–220
positive social change, 222–224
transparency, role of, 220
for SMEs, 166–169
in taxes and regulations, 41–42
technology and, 63–64
in transaction costs, 39–41
financial services, accessing via cellphone, 158–159
First Bank of the United States, 59
First National Bank, 62
fisheries, catch-share programs, 138–140
Flint, Charles Ranlett, 62
flip-over plans, as antitakeover technique, 76
FNMA (Federal National Mortgage Association), origin of, 91
food security, financial innovations for, 172–175
foreclosures, Genesee County Land Bank example, 110–111
foreign aid. See development finance
forwards, 18
fundamental analysis, 23
funding sources for biomedical development, 193–204
CEFF, 197
collaborative development, 196
credit enhancement strategies, 201–204
CRO-lined financing, 197
designated funds, 197
incubators, 197
projected royalty streams, 195
public equity and venture capital, overcoming limitations of, 199–201
traditional funding, 193–195
university partnerships/private equity/public-sector investing, 197–199
futures, 17–18
risk sharing, 38
G
Gabaix, Xavier, 21
Gates, John W., 62
GAVI (Global Alliance for Vaccines and Immunization), 210
Genesee County Land Bank, 110–111
GIIN (Global Impact Investing Network), 167
Ginnie Mae, 92–93
GlaxoSmithKline Biologicals (GSK), 206
Global Alliance for TB Drug Development, 205
Global Alliance for Vaccines and Immunization (GAVI), 210
Global Impact Investing Network (GIIN), 167
global warming. See climate change; environmental finance
Goldstein, John, 167
Grameen Bank, 160
Dannone and, 162
green finance. See environmental finance
greenhouse gases cap-and-trade system, 135–137
growth. See economic growth
GSK (GlaxoSmithKline Biologicals), 206
Guaranty Trust, 62
H
Hale, Victoria, 210
Hamilton, Alexander, 57–59
Hardin, Garrett, 121
healthcare finance. See biomedical development finance
HEFI (home equity franctional interest security), 109
Hickman, W. Braddock, 70
high-yield corporate bonds
history of, 15
in history of corporate finance, 70–71
history
of corporate finance
Alexander Hamilton, role of, 57–59
capital structure innovations, 69–74
CDS (credit default swaps), 77–79
creative destruction (finance and technology), 63–64
credit scoring, 77
democratization of capital, 65–66
investment banking, 61–62
LBOs (leveraged buyouts), 75–77
nineteenth century innovations, 59–61
private equity, 74–75
venture capital, 66–69
of development finance, 153–157
of finance, 5–7
of financial innovation, 2–3
in age of discovery, 12–13
in ancient world, 10–12
capitalism, 13–16
of housing finance, 86–95
increased demand for, 89–92
savings and loan crisis, 92–93
securitization, 93–95
of microfinance, 160–161
HIV/AIDS vaccine development, 206
home equity fractional interest security (HEFI), 109
Home Owner’s Loan Corporation, 91
homeownership statistics, 96
Homestead Act, 88
Hoover, Herbert, 90
hostile takeovers. See LBOs (leveraged buyouts)
housing bubble
avoiding in future, 103–105
as cause of 2007–2009 financial crisis, 19–22
explanation of, 95–103
housing finance, 85
history of, 86–95
increased demand for, 89–92
savings and loan crisis, 92–93
securitization, 93–95
housing bubble
avoiding in future, 103–105
as cause of 2007–2009 financial crisis, 19–22
explanation of, 95–103
private capital in, 110–112
social change via, 222
humanitarian needs, financial innovations for, 172–175
I
IAVI (International Aids Vaccine Initiative), 206
IFFIm (International Financing Facility for Immunisation), 174, 210
IFQs (individual fishing quotas), 139
impact investing, 166–167
imperfections. See market imperfections
incentives in housing finance, misalignment of, 104
income bonds in railroad industry, 60
incomplete markets, 37–39
incubators for biomedical development funding, 197
India
as development finance example, 175–178
infrastructure development, 170
individual fishing quotas (IFQs), 139
individual transferable quotas (ITQs), 139
industrial companies, investment banking and, 61–62
infrastructure development, financing for, 169–172
infrastructure for financial innovation, 16–19
initial public offerings (IPOs), 68
for biomedical development funding, 194
insurance with options, 45
interest rate derivatives, history of, 15
internal cash flow, 52
International Aids Vaccine Initiative (IAVI), 206
International Financing Facility for Immunisation (IFFIm), 174, 210
investment banking in history of corporate finance, 61–62
investment-grade bonds, high-yield bonds versus, 71
IPOs (initial public offerings), 68
for biomedical development funding, 191, 194
ITQs (individual transferable quotas), 139
J—K
Jackson, Andrew, 60
Jansen, Robert, 159
Jarrow, Robert A., 38
Jefferson, Thomas, 58
Jensen, Michael, 39
joint stock companies, history of, 12–13
JSE Securities Exchange, 168
junk bonds. See high-yield bonds
Kane, Edward, 42
Kennedy, John F., 153
Kildee, Dan, 110
Krugman, Paul, 100
Kyoto Protocol, 137
L
Laibson, David, 21
land acquisition with SRFs, 128–129
land banks, 109
Genesee County Land Bank, 110–111
LAPPs (limited access privilege programs). See catch-share programs
LBOs (leveraged buyouts) in history of corporate finance, 75–77
Levant Company, 13
leverage, credit and, 219–220
leveraged buyouts (LBOs) in history of corporate finance, 75–77
Levine, Ross, 159
Liang, Nellie, 74
limited access privilege programs (LAPPs). See catch-share programs
Lincoln, Abraham, 88
Lintner, John, 43
loan-to-value (LTV) ratio, 104
lotteries in history of corporate finance, 58
Lovejoy, Thomas, 130
LTV (loan-to-value) ratio, 104
M
M&A (mergers & acquisitions) among biotech companies, 195
malaria vaccine development, 207
Mandela, Nelson, 149
market failure in environmental finance, 120–122
market imperfections
agency problems, 39–41
asymmetric information, 39–41
incomplete markets, 37–39
role in determining capital structure models, 35–36
taxes and regulations, 41–42
transaction costs, 39–41
Markowitz, Harry, 43
Marshall Plan, 153
MBS (mortgage-backed securities)
covered bonds versus, 106
history of, 15
McCaw Cellular, 73
MCI, 72
MDGs (Millennium Development Goals), 155
Meckling, William, 39
medical financing. See biomedical development finance
mergers & acquisitions (M&A) among biotech companies, 195
Merrill, Charles, 66–67
MFIs (microfinance institutions), 161
microcredit, limitations of, 156
microfinance
history of, 160–161
Muhammad Yunus, 162–163
microfinance institutions (MFIs), 161
Milken Institute, xi
Millennium Development Goals (MDGs), 155
Mint Act of 1792, 59
mission-related investing. See impact investing
mobile technology, access to, 158–159
Modigliani–Miller capital structure propositions, 27–36, 69
monetary policy as cause of 2007–2009 financial crisis, 20
Morgan, J.P., 61–62
mortgage-backed securities (MBS)
covered bonds versus, 106
history of, 15
mortgages. See also housing finance
origin of, 88
securitization of, 104
shared equity, 108–109
subprime mortgages, 97–98
types of, 96
Muscovy Company, 13
mutual savings banks in history of housing finance, 88
Myers, Stewart, 40
N—O
National Institutes of Health (NIH), 189
natural resources. See environmental finance
New Zealand catch-share program example, 140
nonprofit pharmaceutical companies, 210
O’Brien, John, 109
O’Hara, Maureen, 38
Obama, Barack, 153
Olson, Kenneth, 68
OneWorld Health, 210
options, 18
Black–Scholes model, 44, 46, 225
explained, 45
Monte Carlo methods, 46
risk sharing, 38
originate-to-distribute model, 93, 96
originate-to-hold model, 93
OTC (over-the-counter) markets, 18
ownership, evidence of, 17
P
Padoa-Schioppa, Tommaso, 207
payment-in-kind (PIK) in history of corporate finance, 72–73
pharmaceutical companies, selling drug pipelines to, 195
pharmaceutical R&D financing. See biomedical development finance
PIK (payment-in-kind) in history of corporate finance, 72–73
PIPEs (private investments in public equity), 194
pollution markets, 132
Acid Rain Program, 133–135
carbon emissions cap-and-trade, 135–137
poverty statistics, 149–151. See also development finance
preferred stock plans
as antitakeover technique, 76
in railroad industry, 60
prescription drugs. See also biomedical development finance
clinical trial phases, 192
competition sources, 190
private capital in housing finance, 110–112
private equity
for biomedical development funding, 197–199
in history of corporate finance, 74–75
private investments in public equity (PIPEs), 194
ProCredit, 168
projected royalty streams for biomedical development funding, 195
property rights, 17
environmental finance and, 122
Prowse, Stephen, 74
public credit system, origin of, 58–59
public equity, overcoming limitations of, 199–201
public goods markets
biodiversity banking, 141–142
catch-share programs in fisheries, 138–140
wetlands mitigation banking, 141–142
public–private partnerships for vaccine and treatment development, 204–209
public-sector investing for biomedical development funding, 197–199
put options, 45
Q—R
Quota Management System, 140
R&D financing. See biomedical development finance
railroad industry
capital structure of, 60
reorganization of, 61
rating agencies, 105
ratings, role in housing crisis, 98
real estate bubble. See housing bubble
real estate finance. See housing finance
Regional Greenhouse Gas Initiative (RGGI), 136
regulations
financial innovations in response to, 41–42
need for, 105
Reinhart, Carmen, 19
relationship banking, 61
remittances as part of development finance, 168
reserve model for SRFs, 126
return on equity (ROE), calculating, 30
returns
Modigliani–Miller capital structure propositions, 29–36
relationship with debt, 33–34
RGGI (Regional Greenhouse Gas Initiative), 136
risk, relationship with debt, 34–35
risk management
in biomedical development finance, 200–201
CAPM (Capital Asset Pricing Model), 43–44
in financial innovation, 22–23
in history of corporate finance, 73
risk sharing
with futures, 38
in incomplete markets, 37
with options, 38
risk-sharing finance facility (RSFF), 198
ROE (return on equity), calculating, 30
Rogoff, Kenneth, 19
Roosevelt, Franklin, 91
Root Capital, 167
Ross, Stephen, 41
royalty streams for biomedical development funding, 195
RSFF (risk-sharing finance facility), 198
S
S&L (savings and loan) crisis, 92–93
Sandor, Richard, 135
Sanjour, William, 133
savings and loan crisis, 92–93
Scholes, Myron, 44
Schumpeter, Joseph, 63
SEAF (Small Enterprise Assistance Funds), 169
Second Bank of the United States, 59
securities, standardization, 16
securitization
covered bonds versus, 106
in history of housing finance, 93–95
of mortgages, 104
security, defined, 7
shared equity in housing, 108–109
shared-equity mortgages, 109
Sharpe, William, 43
Shiller, Robert, 22
Small Enterprise Assistance Funds (SEAF), 169
SMEs (small and medium-size enterprises), 156
financial innovations for, 166–169
limitations in financing, 162–166
social businesses, 162–163
social change via financial innovation, 222–224
social construct, finance as, 5–7
spreads in CDS (credit default swaps), 78
SRFs (state revolving funds), 124–129
standardization, 16
state revolving funds (SRFs), 124–129
statistics
biomedical research spending, 186
foreign aid, 155
microfinance, 160–161
poverty, 149–151
R&D productivity, 189
Stern, Nicholas, 135
stocks, popular ownership of, 66–67
subprime mortgages, 97–98
sulfur dioxide cap-and-trade system, 133–135
Summers, Larry, 8
Sunshine Mining, 73
Symphony Capital, 198
T
Tappan, John Elliott, 66
Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 42
taxes
financial innovations in response to, 41–42
role in determining capital structure models, 35–36
Taylor, John, 20
TB (tuberculosis) research, 205–206
TB Alliance, 205
technology, financial innovation and, 63–64
TEFRA (Tax Equity and Fiscal Responsibility Act of1982), 42
TFCA (Tropical Forest Conservation Act), 131
Thales of Miletus, 17
Third World. See emerging markets
thrifts. See savings and loan crisis
Toffler, Alvin, 62
trade, in cap-and-trade, 132
“trade-off” theory of capital structure, 36
tragedy of the commons, 121
transaction costs, 39–41
Transamerica. See Bank of America
transparency
in biomedical development finance, 200–201
role in financial innovation, 220
triple-bottom-line investing. See impact investing
Tropical Forest Conservation Act (TFCA), 131
trust as legal concept, 6
tuberculosis (TB) research, 205–206
Tufano, Peter, 60
Turner Broadcasting, 73
U—V
uncertainty in capital structure models, 28
underdeveloped countries. See emerging markets
university partnerships for biomedical development funding, 197–199
vaccine development funding, 204–209
Van Horne, James, 38
venture capital (VC)
for biomedical development, 193
history of, 66–69
overcoming limitations of, 199–201
private equity and, 75
Viacom International, 73
W—Z
water quality funding, 124–129
watershed ecosystem services, 123
wetlands mitigation banking, 141–142
World Bank Green Bonds, 172
Worm, Boris, 138
Yunus, Muhammad, 160–163