chicago's financial firsts

Chicago’s Financial Firsts©

The Firsts and Innovations of Chicago’s Financial Sector

©2014 by David Baeckelandt debendevan@hotmail.com

FinTech Chicago Mercantile Exchange

Monday, October 20, 2014

Financial Innovations (n)

“Financial Innovations, like innovations generally, are basically unforecastable improvements.”

- Merton H. Miller, “Financial Innovation: The Last Twenty Years and the Next “, Source: The Journal of Financial and

Quantitative Analysis, Vol. 21, No. 4 (Dec., 1986), pp. 459-471; Published by: University of Washington School of Business Administration Stable URL: http://www.jstor.org/stable/2330693 .Accessed: 31/07/2012 p.460

The New Yorker Magazine cover “A View of the World From 9th Avenue”

Morningstar Firsts

•  1st to offer robust fund research tools via CD-ROM to financial planners •  1st to assign “moat” ratings to stocks •  1st to integrate security, fund, portfolio, and market tracking research

to form complete research lens •  1st to assign Stewardship Grades to mutual funds •  1st to produce globally unified fund ratings and reports •  1st to measure which countries treat retail investors best in terms of

cost, choice, disclosure, protections Source: Don Phillips, Morningstar e-mail correspondence 8/8/12

Alternatives: Hedge Funds & Private Equity •  Alternatives – Hedge Funds •  Established in the early 1990s, Hedge Fund Research (“HFR”) Group is a global hedge

fund asset management firm and the largest distributor of hedge fund data. •  1993 - From its origins as a fund of funds manager, HFR launched the industry's first

database to standardize hedge fund reporting and categorization and to establish hedge fund indices.

•  1996 - Introduced the first transparent hedge fund investment platform, affording investors daily position-level reporting and independent third-party pricing.

•  1999 - Designed and launched the industry's first investable hedge fund index. https://www.hfr.com/?page=overview&nav=history&t=1134957903

•  Alternatives – PIPEs •  Although not supported by any hard, quantitative data yet, it appears that the first “toxic

converts” may have been created by Citadel, a Chicago-based hedge fund, in the Spring of 1995 for Celgene Corporation.

•  Alternatives – Private Equity •  GTCR, a private equity firm in Chicago, is the first to systematize (1960s) the

management-led buyout strategy that has become a feature 21st century capital. •  Hispania Capital, of Chicago, establishes the first Hispanic private equity fund (2003).

Equity Seat Rights (ESR) – Stadium Financing

Different from Personal Seat License (PSL) in the following ways •  Ticket price is built in •  Builds equity •  No price increases year to year •  No separate upfront fee •  Is transferable

Source: http://http://www.seatrights.com/esrpsl.php

MCD & CAT Issue 1st RMB ‘Dim-Sum’ Bonds by Foreign Firms

Caterpillar to issue yuan bond By Robert Cookson and Hal Weitzman, FT.com November 24, 2010 -- Updated 0627 GMT (1427 HKT) •  Caterpillar is marketing a two-year Rmb1bn bond to institutional investors in Hong Kong -

Becomes the first foreign industrial multinational to issue debt in the Chinese currency •  Caterpillar, the US-based manufacturer of earth-moving equipment, is marketing a two-year

Rmb1bn bond to institutional investors in Hong Kong, becoming the first foreign industrial multinational to issue debt in the Chinese currency.

•  The issue, which is only the second by a multinational to date, dwarfs a Rmb200m issue launched by McDonald's in August. The deal will give momentum to the nascent offshore market in renminbi-denominated debt which financiers hope will become an important fundraising route for companies with operations in China.

•  The interest rate on Caterpillar's corporate bond will be determined according to interest from Wednesday's marketing effort. McDonald's three-year note was quickly oversubscribed and secured a 3 per cent coupon.

•  McDonald's became the first multinational company to sell renminbi bonds in Hong Kong in August, after China lifted a series of restrictions on the use of the currency outside the mainland.

•  .

163 Year Bonds?!

Difficult times – falling membership rosters and limited bank lending – compelled social clubs to develop creative solutions to their financial problems.

The 1st 100+ year bonds for

a social club!

-James D. Nowlan, Glory, Darkness, Light: A

History of the Union League Club of Chicago, (Evanston, IL: Northwestern University Press, 2004), pp.130;209-211

Chicago’s Financial Firsts Historical Background

•  Real Estate •  Infrastructure •  Exchanges/Futures/Options •  Personal Finance •  Banking •  Investment Banking •  Insurance •  Regulatory/Legal •  Intellectual/Investment

“The typical man who grows up here must be an enterprising man. Each day as he rises he will exclaim, ‘I act, I move, I push.’”

-  Rene-Robert Cavelier sieur de La Salle at the Portage of Chicago, 1673 Quoted in Alex Kotlowitz’ Never a City So Real (New York: Crown, 2004) p. 12

The Spirit of Chicago Attracted Entrepreneurial Risk Takers…

Chicago Became for French America the Link Between Canada & Louisiana

Dearth of Beaver Pelts in the East Compel French Canadian Voyageurs to Search Further

Along North America’s Waterways

• Iroquois raiding parties move further west • Wipe out the Illinois tribe in the 1680s

Beaver Pelts Used to Make Felt Hats

=

•  10x return on sale of beaver pelts!

LaSalle in 1673 (& Others): the Chicago Portage Was an Ideal Site For Settlement

Chicago’s Financial Firsts •  Real Estate •  Infrastructure •  Exchanges/Futures/Options •  Personal Finance •  Banking •  Investment Banking •  Insurance •  Regulatory/Legal •  Intellectual/Investment

The Chicago Portage LaSalle Saw in 1673 Looked Thus:

“I wouldn’t give six pence an acre for the whole of it.” - Major Stephen H. Long, Surveyor of the Illinois & Michigan Canal route in 1823, referring to the area now known as Chicago’s ‘Loop’. [Quoted in “100 Years of Land Values” – Chicago Title & Trust Advertising brochure, 1933]

“The opening of the Erie Canal, in 1825, and of the Oswego Canal four years later, had provided a continuous water route from New York, through the Great Lakes, to the west, and Chicago was the logical terminus of that route.”

- F. Cyril James, The Growth of Chicago Banks (Volume I: The Formative Years, 1816-1896), (New York: Harper & Brothers, 1938), p.71

A canal at Chicago would make Illinois “the seat of an immense commerce; and a market for commodities of all regions.”

Niles Weekly Register August 6, 1814 quoted in Nature’s Metropolis: Chicago and the Great West by William Cronon (NY: W.W. Norton & Co., 1991) p. 33

“What a route!” its editor exclaimed. “How stupendous the idea!” Niles Weekly Register August 6, 1814 quoted in Nature’s Metropolis: Chicago and the Great West by William Cronon (NY: W.W. Norton & Co., 1991) p. 33

“The removal of American Indians to the west of the Mississippi, the desire of

Easterners to resettle in the Old Northwest, and President Andrew Jackson’s financial policies in the 1830s combined to create the largest land speculation bonanza in U.S. history.”

Robert G. Spinney City of Big Shoulders: A History of Chicago (DeKalb: University of Northern Illinois Press, 2000), p.32

The Great Indian Council for the Treaty of Chicago 1833

Chicago’s Speculative Bubble

“In 1833, they [the government land office] sold the square mile of school lands denoted by the government, an area that corresponds roughly to the present business district [the Loop] of Chicago, for the sum of $38,700…In 1834, the Chicago real-estate boom began in earnest, and the sale of Canal lands on long credits, in 1835…By the summer of 1836, when [President Andrew] Jackson’s Specie Circular called a halt to the speculative mania throughout the west, the total value , at the prices then current, of the land in the present city limits of Chicago had reached a total of $10,500,000, an amount sixty times as great as its total value in 1830.”

-  F. Cyril James, The Growth of Chicago Banks (Volume I: The Formative Years, 1816-1896), (New York: Harper & Brothers, 1938), p.103

“The mid-1830s saw some of the most intense land speculation in American history, with Chicago at the center of the vortex.... Lots that had sold for $33 in1829 were going for $100,000 in 1836. Such prices bore no relation to current economic reality. Only wild hopes for the future could lead people to pay so much for vacant lots in a town where the most promising economic activity consisted of nothing more substantial than buying and selling real estate.” Nature’s Metropolis: Chicago and the Great West by William Cronon (NY:

W.W. Norton & Co., 1991) pp. 29-30

“Prices of lots valued in Chicago in 1836 at a thousand dollars suddenly fell to the specie value of three years before – perhaps fifty dollars; while the note that the last speculative buyer had given remained $1,000, as before. Widespread ruin was the consequence.” History of Chicago by Alfred T. Andreas (Chicago, 1884; Reprint

Arno Press: NY, 1975) Vol. I, p. 138

Chicago Real Estate

•  Chicago had several mini-booms and busts in real estate – 1852-57, 1863, after the 1871 Great Chicago Fire to 1873, and in the 1890s and in the 1920s and was again concentrated on Chicago.

Chicago’s Reputation for Real Estate Innovation Was Global

“Chicago’s reputation for real-estate booms was such that Berlin in the euphoria of victory over France in 1870-71 indulged in real-estate

speculation to the extent that it was called ‘Chicago on the [river] Spree’.”

Charles P. Kindelberger Manias, Panics, and Crashes:

A History of Financial Crises 4th Ed. (NY: John Wiley & Sons, 2000) p. 111. Quote is from Fritz Stern Gold and Iron: Bismark, Bleichroeder, and the Building of the German Empire (London: Allen & Unwin, 1977), p. 161

Chicago’s Financial Firsts •  Real Estate

•  Infrastructure •  Exchanges/Futures/Options •  Personal Finance •  Banking •  Investment Banking •  Insurance •  Regulatory/Legal •  Intellectual/Investment

“As regards Chicago, everything has changed mightily since you left.

“Property has depreciated monstrously. It often happens that property which sold for hundreds, even thousands, is not now worth even ten dollars. Those too who were the richest when you left are of the poorest now.”

First Chicago mayor William Butler Ogden in a letter dated January 25, 1841. Original in the

Chicago Historical Society Archives. [Quoted in “100 Years of Land Values” – Chicago Title & Trust Advertising brochure, 1933]

First Chicago Mayor William Butler Ogden in 1841

Public-Private Infrastructure

•  The very first publicly-offered company in Chicago was an infrastructure play (William B. Ogden’s water supply company in the 1830s).

•  The second public company Galena-Chicago RR was transportation •  “Between 1855 and 1861 city and state legislators passed laws allowing

three companies to build and operate horse-drawn streetcars. The Chicago City Railway Company ran them on the south side and the North Chicago City Railway and the Chicago West Division Railway Company took the areas their names suggested. Each company got a 25-year monopoly on the business in the neighborhood it was allotted.”

•  Why? Chicago’s municipal charter did not grant it the home rule powers to either run a municipal transit system or to incur the debt to build such a system

- Robert Loerzal, “Privatize Public Transit?”, Chicago Reader, Thursday, June 10, 2010, pp. 17-24 (p.17)

19th Century Chicago More Opportunity Than California?

William Swain of upstate New York, with three companions, embarked for the California gold fields in mid-April, 1849. When he disembarked at Chicago for the next leg of the journey, he stopped to look up a family friend.

“When I told him I was going to California for gold, he laughed and asked me if I had enough money to get back with. He advised me – and urged me – to put the money I had into land in Chicago and go home again.”

H.W. Brands, The Age of Gold: The California Gold Rush and the New American Dream, (New York: Anchor, 2002), p.129

Chicago Lies Astride The Subcontinental Divide

The Illinois & Michigan Canal

“The Canal made Chicago….The first plat of Chicago was made by the Canal Commissioners; the first sale of lots in Chicago was made by the Canal Commissioners. Chicago was made by the Canal as clearly and positively as western towns have been made…by the advent of the railroads.” Chicago Daily Tribune May 13, 1900 p.37

1st Federal Grant for Infrastructure

•  “When the [Chicago] City Council heard the first local proposal for streetcars in 1854, the United States was in the middle of a railroad boom. Stephen Douglas, by then a U.S. senator, had led the way in 1850 as Congress gave away 2.6 million acres of federal land to the state of Illinois, which signed it over to the Illinois Central Railroad Company. In return the railroad agreed to give the state 7 percent of its gross receipts. It was the first time the federal government had given away land to help a private company build a railroad.”

- Robert Loerzal, “Privatize Public Transit?”, Chicago Reader, Thursday, June 10, 2010, pp. 17-24 (p.18)

Chicago’s Geographic Importance

“Chicago’s role as the most important inland port of North America in large measure springs from the decision to construct the canal connecting Lake Michigan with the Illinois River. The more immediate outcome of that decision was the platting of the area at the junction of the branches of the Chicago River in 1830 to make possible the sale of lots to finance the canal. Having developed as the major port in the Midwest, the settlement then attracted other transportation modes: the railroads in the last half of the nineteenth century, the highways in the twentieth, and, finally, the air carriers, culminating in the development of Chicago O’Hare International Airport.”

Harold M, Mayer, “The Launching of Chicago: The Situation and the Site,” pp. 3-13 in Rosemary K. Adams, ed., -  A Wild Kind of Boldness: The Chicago History Reader, (Grand Rapids: William B. Eerdmans, 1998), p.13

Chicago’s Financial Firsts •  Real Estate •  Infrastructure •  Exchanges/Futures/Options •  Personal Finance •  Banking •  Investment Banking •  Insurance •  Intellectual/Investment

Chicago’s Exchanges’ Leadership

•  More exchanges than any two cities in the world •  Largest Trading Complex in the World (CBOT/CBOE/CSX/NSX). •  1st all-electronic exchange (NSX) •  #1 in Derivatives Globally •  1st Modern Futures and Options Exchanges •  1st IP Exchange •  1st Carbon/Climate Exchange/Environmental Futures Exchange

Illinois became a bread basket

Mechanical Innovation Links to Financial Innovation

“Innovations in transportation and shipping were accompanied by the increasing availability of land, as well as improvements in mechanized farming. In 1831 Cyrus McCormick invented the reaper. Within three years the mower and the threshing machine appeared, to be followed in 1836 by the combine [and by 1837 by John Deere’s self-scouring plough]. In 1850 the time required to harvest one acre of wheat had been cut from twenty-seven hours to eleven and a half…. From 1873 to 1882, wheat acreage in the United States rose from 29 million to 41 million, production from 368 to 555 million bushels.”

Jonathan Lurie, The Chicago Board of Trade, 1859-1905: The Dynamics of Se;f-Regulation (Chicago: University of Illinois Press, 1979) , p.23

“

Which Strengthened Chicago’s Place As the World’s Granary

And the Meatpacker to the World

1848 – The Year of “Firsts”

“We can itemize the key events of 1848 in one of those lists of Chicago’s ‘firsts’”.

-  1st Telegram received in Chicago (January 15th ) -  The Galena & Chicago Union Railway Company construction begins for the

first 32 miles of line (March 1st ) -  The Chicago Board of Trade established at 101 S. Water Street by Messrs

Ogden, Hubbard, Kinzie, et.al. (March 15th ) -  1st Telegraph message from New York (relayed via Detroit) to arrive in one

day (April 6th ) -  The Illinois & Michigan Canal officially opens (April 16th ) -  1st ocean-going steamship arrives from Montreal (June 27th ) -  1st stockyard (built at Madison & Ashland) & 1st grain elevator (Sept) -  1st locomotive (the Pioneer) arrives by ship (October 10th ) - William J. Cronon, “To Be the Central City: Chicago, 1848-1857,” pp. 14-23 in Rosemary K. Adams, ed., A Wild Kind of Boldness:

The Chicago History Reader, (Grand Rapids: William B. Eerdmans, 1998), p.15

Chicago Board of Trade Est 1848

“A group of Chicago merchants formed the Chicago Board of Trade to develop a set of codes and rules for buying, weighing and grading the prairie gold [i.e., wheat and corn] that flowed to Chicago as the great terminal market of middle America, and for arbitrating commercial disputes which arose as a result of this trade in grain.”

John H. Stassen, THE COMMODITY EXCHANGE ACT IN PERSPECTIVE A SHORT AND NOTSO-REVERENT HISTORY OF FUTURES TRADING LEGISLATION IN THE UNITED STATES, 39 Wash. & Lee L. Rev. 825 (1982), http://scholarlycommons.law.wlu.edu/wlulr/vol39/iss3/3 , p.827

The Chicago Board of Trade - Firsts

•  1st Modern Futures Exchange in the World •  1st to standardize bulk criteria for trading •  1st to standardize weights and grades •  1st to establish industry broker examinations •  1st to offer forward contracts •  1st to organize other exchanges in new

instruments •  1st to offer financial futures contracts •  The largest trading complex in the world

Why Did Derivatives Flourish in Chicago?

“Futures trading, like banking, is an institution that developed as a contribution to efficiency of a relatively free competitive economy. A primitive form of futures trading emerged spontaneously in various market centers at least as early as 1850. Only in the grain trade at Chicago, however, was the demand for hedging commercial risks then strong and persistent enough to permit this unconventional form of trade to survive the fluctuations in speculative interest, overcome conservative opposition, and live through the stormy period of experimentation necessary to put it on a firm footing. When that had been accomplished at Chicago, the new form of trading was soon adopted at other market centers and for commodities other than grains.”

-Working, "Futures Trading and Hedging," cited in B. Goss & B. YAMEY, THE ECONOMICS OF FUTURES TRADING 68-69 (1976). [hereinafter cited as Goss & Yamey]. See also Hoffman, supra note 5, at 29

Pork Bellies Led to Financial Futures

Pork-belly futures led to development of financial futures

The Chicago Mercantile Exchange started trading futures contracts for frozen pork bellies in 1961, and although the market was slow to take off, eventually the contract became the exchange's most actively traded. The success of the contract helped the CME develop futures for a variety of financial products, including bonds, stocks and currencies. "Financial futures were spawned out of the belly of the hog," former Chairman Jack Sandner once said. The CME recently delisted frozen-pork-belly futures and options. Canadian Business (8/11)

Not All Financial Innovations at the CBOT Were Limited to Abstract Ideas!

1st in Hedging – Chicago Produce Exchange in 1874

“The creation of a permanent futures exchange in 1874 – the Chicago Produce Exchange, the ancestor of today’s Chicago Mercantile Exchange – created a home for ‘hedging’ in the U.S. commodity markets.” – Niall Ferguson, The Ascent of Money: A Financial History of the World, (New York: Penguin Books, 2008), p.227

The Chicago Stock Exchange – 1st

•  1st Exchange to initiate dual listings (NY & Chicago) in late 1880s

•  1st Exchange to trade NASDAQ stocks (1980s) •  1st Exchange to offer unlisted trading privileges •  1st Exchange to offer remote facility pricing •  1st Exchange to automate execution system •  1st Exchange to automate the delivery system •  1st Exchange to list a new railroad issue in 100 years

(Pioneer Railcorp in 1993)

The Chicago Mercantile Exchange

The Chicago Butter and Egg Board, founded in 1898, was a spin-off entity of the Chicago Board of Trade (CBOT). In the year 1919, it was re-organized as the Chicago Mercantile Exchange(CME). Roots of the Chicago Butter and Egg Board are traceable to the 19th century. Initially, the Chicago Butter and Egg Board traded only two types of contracts, butter and eggs. Over several decades, it evolved into the Chicago Mercantile Exchange (CME or the "Merc") which now trades futures contracts and options contracts on over 50 products, from pork bellies to eurodollars and stock market indices.

Chicago Mercantile Exchange - Firsts

•  1st futures contracts on frozen stored meats •  1st futures contracts on non-storable commodity •  1st foreign currency futures •  1st contracts settled in cash rather than physical •  1st international links between futures exchanges •  1st US financial exchange to demutualize •  1st publicly traded US financial exchange •  Largest futures exchange in the US •  Owns and operates the largest futures clearing house in

the world

CME Firsts (#2)

“In 1964, CME launches a live cattle contract, the first live commodity to make a successful market.”

“Under the leadership of Leo Melamed, CME launches the International Monetary Market (IMM), a futures market in seven foreign currencies. The era of financial futures instruments is born.”

“CME pioneers foreign currency trading with the creation of the International Monetary Market.”

“In 1986 [Nobel Laureate Merton H.] Miller designates financial futures as ‘the most significant financial innovation of the last twenty years’.”

http://www.cmegroup.com/stories/#!1-industry-growth Source: http://www.cmegroup.com/stories/#!1-leo-melamed-birth-financial-futures

CME – Bankruptcy 1st!

CME wins approval to launch corp. bankruptcy futures From the Crain's Chicago Business Newsroom Nod comes over objections from Chicago Board Options Exchange February 02 15:52:00, 2007 By Ann Saphir ----- (Crain’s) — The Chicago Mercantile Exchange got federal regulatory approval to become the first U.S. exchange to offer contracts that let investors bet on the likelihood of corporate bankruptcies.

The approval came over the objections of the Chicago Board Options Exchange, which argued the contracts are too closely tied to individual companies to be considered futures contracts. The CBOE is planning similar contracts of its own.

The CME will begin by offering three so-called credit event futures contracts that pay out in the event of bankruptcies at the Tribune Corp., Centex Corp., or the Jones Apparel Group Inc. Prices of the contracts will fluctuate based on traders’ views of the likelihood of corporate failure, with the price increasing as collapse looms. Contracts offering investors similar insurance currently trade in the off-exchange $26 trillion credit-default swap market, the fastest-growing segment of derivatives trading. A CME spokesman declined to provide a target date for the launch of the new products.

CBOE – 1st

•  1st Options Exchange in the world •  1st Exchange to establish an industry •  1st to introduce options on broad-based indices •  1st to establish an educational options institute •  1st electronic customer order book •  1st major benchmark index option

Electronic Exchanges

•  NSX (1st all-electronic exchange, from 1995 to 2006 based in Chicago) is #3 Stock Exchange. (NSX also first in competing specialist system, automated exchange interface, electronic audit trail)

•  #1 ECN – Archipelago (1/3 of all OTC trades in US stocks; now merged with the NYSE)

•  “OneChicago, LLC, the all-electronic exchange for trading Single Stock Futures (SSF), a synthetic stock lending and financing tool, has launched the trading of SSFs on the Exchange Traded Funds ("ETFs") of PowerShares QQQ and the iShares Russell 2000. These listings will add to OneChicago's growing roster of SSFs on ETFs, which includes the DIAMONDS Trust Series 1 and the Sector Select SPDR Fund.”

Source: http://newsmail.plansponsor.com/cgi-bin1/DM/y/eBgRf0OjTH60CBD0JCav0EG

CCX & CCFE 1st Carbon Exchange & 1st Carbon Futures Exchange

“Chicago Climate Futures Exchange® (CCFE®) operates the leading U.S. marketplace for environmental derivatives, financial instruments with underlying values based on tradable environmental assets.”

“Chicago Climate Exchange is North America's largest and longest running greenhouse gas emission reduction program. From 2003 through 2010 CCX operated as a comprehensive cap and trade program with an offsets component. In 2011 CCX launched the Chicago Climate Exchange Offsets Registry Program to register verified emission reductions based on a comprehensive set of established protocols.”

IPXI 1st Intellectual Property Exchange

“Intellectual Property Exchange International, Inc. (IPXI) is the world's first financial exchange that facilitates non-exclusive licensing and trading of intellectual property (IP) rights with market-based pricing and standardized terms. The result is an exchange that operates under two core principles: transparency and efficiency. The initial product traded on IPXI is a Unit License Right (ULR) contract. For more information, visit the ULR Contracts page. The process starts with analysis designed to give the marketplace confidence in the quality of all patents listed as ULR contracts. Then, tapping a wealth of capital markets experience, IPXI undertakes the licensing process in a manner similar to a public equity offering for a corporation by utilizing a detailed Offering Memorandum and a Roadshow, including potential purchaser one-on-one meetings. Once an Initial Offering has been priced, IPXI maintains a Secondary Market which provides ULR purchasers and sellers an opportunity to realize liquidity through resale and trading.” Source:http://www.ipxi.com

The “Chicago School” Gone Wild?

“The larger ‘Chicago School’ pushed to the forefront…[However] a few enthusiasts proved embarrassing…One such [idea, in the 1930s] was Chicago law professor-turned-federal appeals court judge Richard Posner’s suggestion of a market for babies to make it easier for couples to adopt.”

-Kevin Philips, Wealth and Democracy: A Political History of the American Rich, (New York: Broadway Books, 2002), p.335

Chicago’s Financial Firsts •  Real Estate •  Infrastructure •  Exchanges/Futures/Options

•  Banking •  Investment Banking •  Personal Finance •  Insurance

Chicago – 1st to Adopt the Greenback As Legal Tender

“In all monetary history there are few incidents more fascinating than this one. By the formal and spontaneous action of

the business community, Chicago obtained a sound and uniform currency a full year [May 16, 1864] before Congressional action attained a similar ideal for the country as a whole.” Whom to thank? “’The [Chicago] Tribune and the Chicago Board of Trade started the ball, which, gaining strength as it rolled, finally

crushed out the last remnant of illegitimate banking’ in Chicago.” F. Cyril James, The Growth of Chicago Banks (Volume I: The Formative Years, 1816-1896), (New York: Harper & Brothers, 1938), p.361

First Chicago Bank – 1st For Women & Pensions

•  In 1882 became the first bank to open a Women’s Banking Department to focus on female customers

•  In 1899 became the first bank to establish a pension plan. (Merged with NBD Bank in 1995 (First Chicago NBD) and then with Bank One in 1998 which is now

part of JP Morgan Chase Bank) - Source: http://en.wikipedia.org/wiki/First_Chicago_Bank accessed August 7, 2012

The First Securities Subsidiary of a Bank

The National Currency Act of 1864 authorized nationally chartered banks to invest in US Government debt. It also implied that they could invest in corporate and municipal debt. Later, (in 1902) the Comptroller of the Currency allowed them to underwrite new issues – but not invest in them. As a result, in 1903, James B. Frogan, the President of the First National Bank of Chicago. established a state chartered bank, called the First Trust and Savings Bank (capital $1,000,000) to hold its corporate securities. The stock of the First Trust and Savings Bank was 100% owned by FNB Chicago and its directors were interlocking. Since the latter bank was state chartered it did not have to comply with National Bank regulations. This plan became known at the “Chicago Plan” and was adopted a few years later by the New York City commercial banks.

Source: Fritz Redlich, Molding of American Banking, Hafner Publishing, 1951, page 389-392

U.S.’Bank Clearing System Created in Chicago

In 1909, Charles McKay, the Transit Manager (person in charge of routing the check clearing system) at the First National Bank of Chicago (the second largest in the U.S. at that time) proposed a numerical classification system for bank checks. By 1912 this system was adopted by the American Banking Association. Costs dropped dramatically for banks around the country (and globally).

Source: Fritz Redlich, Molding of American Banking, (New York: Hafner Publishing, 1951), p. 185. See also Key to

Numerical System of the American Bankers Association..., Volume 1 By Rand McNally and Company, American Bankers Association (1911).

Chicago Clearing House

“Chicago bankers also led the way in creating a system of preventing panics through the Chicago Clearing House. James B. Morgan of [the] First National Bank [of Chicago] initiated the new clearing system in 1905 and ran it effectively. ”

-  Larry E. Schweikart, “Banking, Commercial”, pp.61-64, entry in The Encyclopedia of Chicago, James R. Grossman, et.al., ed., (Chicago: University of Chicago Press, 2004) p.62

Chicago’s Financial Firsts •  Real Estate •  Infrastructure •  Exchanges/Futures/Options •  Personal Finance •  Banking

•  Investment Banking •  Insurance •  Regulatory/Legal •  Intellectual/Investments

N.W. Harris & Co. “N.W. Harris & Co., which some

consider the nation’s first true investment bank, was founded in Chicago [in 1882].

Specializing in utility company issues,

within a decade it spawned branches in New York and Boston. The Chicago office was absorbed by what is now Harris Bankcorp in 1907, but the Boston and New York branches continued under the name Harris Forbes Companies."

The Deal Makers: Inside the World of Investment Banking (Garden City, NY: Doubleday, 1984) pp. 48-49

Norman Wait Harris “Probably no one individual in the United States Has done as much as Mr. N.W. Harris toward Placing bonds issued for municipal purposes in their proper light before the investing public.” Chicago Tribune April 27, 1895 pg. 8

N.W. Harris & Co. Norman Wait Harris decided: •  Commissions were too

small to pay for proper and thorough due diligence so NW Harris decided that he would not sell bonds on commission. He would purchase outright the bonds and resell them.

•  N.W. Harris would only

purchase bonds “after the most careful consideration”

N.W. Harris & Co. The things that made N.W. Harris the founder of modern investment banking were his rigorous and systematic procedures and policies. NW Harris: •  Undertook to establish true due diligence with technical and legal 3rd

party professionals – “disinterested experts” •  Admonished staff to: “Look for the weak points”. •  Established a “Chinese Wall” between underwriting and sales to

prevent any appearance of conflicts of interest. •  Were “thorough and systematic” •  Examined tax implications •  Employed risk capital in underwritings •  Made a market for all their securities underwritten •  Undertook advisory mandates.

N.W. Harris & Co. That approach for municipals

called for thorough due diligence conducted by qualified experts.

“For this purpose only disinterested experts (engineers, accountants, attorneys, appraisers, etc.) of the highest character and ability are employed.”

[Forty Years of Investment Banking: 1882-1922 by

Albert W. Harris [Chicago, 1923] p.11].

Credit Rating System Harris and his organization also recognized that stricter state laws and regulations would serve both as a bulwark against the entrance into and survival of bucket shops in the investment banking industry and as a vetting process of weaker municipalities. In other words, by prescribing minimum standards under which municipalities were permitted to issue securities, Harris ensured that the credit rating of municipalities became more standardized across the country, giving investors greater confidence in the process and better insuring that credit worthy municipalities had access to capital.

1st Modern IPO – Sears Roebuck & Co

Sears Roebuck & Co.’s IPO – Template for 20th Century IPOs

In June,1906 Julius Rosenwald, Chairman at Sears, approached his cousin Sam Sachs about the possibility of financing a $5 million for the

construction of a large distribution warehouse for the rapidly expanding Chicago mail order retailer. At a time when public offerings were priced solely on the value of the firm’s assets, Sears’ net assets were less than $1 million, making a traditional IPO implausible. Together with Lehman Bros., Goldman Sachs went even further:

“The two firms underwrote a $10 million offering of preferred and common stock. The preferred shares would be backed by the net assets of the company And the common shares by its goodwill, a highly unusual concept at the time. Underwriters would sell the preferred stock to the public and retain the common shares for themselves…Michael Miliken would [later, in the 1980s] ‘pioneer’

the same practice.” - Lisa Endlich, Goldman Sachs: The Culture of Success, (New York: Touchstone, 2000), p.39

Harris & Municipals Spurred Innovation in Utilities Holding Companies – Samuel Insull’s Innovation – 1898 w/ merger between Commonwealth Electric and Chicago Edison Co to create

Commonwealth Edison in 1898 started integration. (McD91). - Established the Middle West Utilities Company in 1912 (Insull by Forrest McDonald [Chicago: U of Chicago Press, 1962] pp150-2)

“Perpetual Capital” Thru Open-End Mortgage •  First Open End Mortgage (1898 – Insull) – established “perpetual capital”. “Under this [perpetual] mortgage, Insull would issue half a billion in bonds before he was through.” (Insull by Forrest McDonald [Chicago: U of Chicago Press, 1962] pp.91, 92)

Insull’s Innovations Opened New Underwriting Opportunities for Utilities

•  a) 45 yrs term (most had 15 yrs til then); •  b) matured all at once instead of serially; •  c) annual depreciation reserve from earnings instead of a sinking fund (thereby protecting the investor by protecting the property against which the open mortgage is written against[1896 McD71-3]); •  d) bond covenants – issue to cover only up to 75% of actual plant for which already constructed. (Insull by Forrest McDonald [Chicago: U of Chicago Press, 1962] p.92).

Insull’s Banking Needs Made Chicago the Dominant Center for Investment Banking

The insatiable demand of Samuel Insull’s utilities empire for capital institutionalized what may have been the first known door-to-door securities salesmen. Teams of Insull’s employees were established and under the direction of the able Messrs. Gilchrist & Scheel (who came up w/ the idea to raise capital for the improvements of PSC of No.Ill) literally sold corporate preferred (and some common) stock door-to-door to customers and suppliers. Middle West: had more than 6000 shareholders in 1918;

54,000 in 1923;and almost 250,000 shareholders by 1928.

(Insull by Forrest McDonald [Chicago: U of Chicago Press, 1962] pp 203-4)

New York - Chicago Rivalry

“In the early 1920s, the Chicago financial community mounted a challenge to Wall Street. This was the tail end of a period in which Chicago’s leaders thought their city was destined to replace New York as the nation’s center of power. Chicago was more centrally located than New York, was growing more rapidly than its eastern rival, and was more ambitious.”

-  Robert Sobel, AMEX: A History of the American Stock Exchange 1921-1971, (New York: Weybright & Talley, 1972), p.41

Insull-Halsey Stuart

“Harold L. Stuart, head of the investment house of Halsey, Stuart & Co., was a leader in this movement…His ally in this was Samuel Insull, also of Chicago and the head of Commonwealth Edison Company, one of the nation’s largest utilities….They [Stuart & Insull] were out to prove that a large firm could succeed with the backing of Chicago financiers and without that of the New York Establishment. So Commonwealth Edison was not traded at the Big Board [NYSE].”

-  Robert Sobel, AMEX: A History of the American Stock Exchange 1921-1971, (New York: Weybright & Talley, 1972), pp.41-42

Placing Chicago Exchanges At the Top of The Rankings by the 1930s…

…Leading NYers to Ask in 1930: Will Chicago Absorb NY Exchanges?

•  1st Poison Pill defense & 1st Greenmail (Insull versus Cyrus Eaton) – Insull

Investments & Corporation Securities – the assumption of great debt on top of the cumbersome pyramid structure of course prevented the takeover but led – when NY bankers put the squeeze on Insull and the market took a down draft – to the collapse of the Insull empire.

Insull’s Downfall Affected Chicago for Decades – and Led to New Financial Firsts…

Chicago’s Financial Firsts •  Real Estate •  Infrastructure •  Exchanges/Futures/Options

•  Personal Finance •  Banking •  Investment Banking •  Insurance •  Regulatory/Legal •  Intellectual/Investments

As Chicago’s Population Grew… Historical population of Chicago

Census Pop. %± 1840 4,470 — 1850 29,963 570.3% 1860 112,172 274.4% 1870 298,977 166.5% 1880 503,185 68.3% 1890 1,099,850 118.6% 1900 1,698,575 54.4% 1910 2,185,283 28.7% 1920 2,701,705 23.6% 1930 3,376,438 25.0% 1940 3,396,808 0.6% 1950 3,620,962 6.6% 1960 3,550,404 −1.9% 1970 3,366,957 −5.2% 1980 3,005,072 −10.7% 1990 2,783,726 −7.4% 2000 2,896,016 4.0% 2010 2,695,598 −6.9%

Est. 2011 2,707,120 0.4% U.S. Decennial Census

So Did the Need for Personal Loans

The “first professional small loan lenders in the country appeared in Chicago” [The Encyclopedia of Chicago “Consumer Credit” p.202].

Simultaneously, Complimentary Financial Innovations in Lending…

“In Chicago, according to the recollection of one lenders’ lawyer, personal loans were made against the collateral of household furniture as early as1850 [ed: 1835]. Historians, however, have found no docu- mentary evidence of personal lending for profit until some twenty years later. The earliest known advertisement for a small loan service in an American newspaper appeared in the Chicago Tribune in November 1869. Getting right to the point: ‘Money to Loan in Small Sums on Short Time. Room 14. Major Block.’” James Grant Money of the Mind: Borrowing and Lending in America From the Civil War to Michael Milken (NY: Farrar Straus, 1992) p.77 end quote from Louis Robinson & Rolf Nugent Regulation of the Small Loan Business (NY, 1935) p. 39 as quoted in James Grant Money of the Mind: Borrowing and Lending in America From theCivil War to Michael Milken (NY: Farrar Straus, 1992) p.77

1st Installment Retail Bank Loans

Household Finance Co. A critical step in the expansion of consumer credit came in 1905. Household Finance’s founder Frank Mackey had opened his first small loan office in Chicago on Madison Street in 1885. “In 1905, Household Finance became the first cash lender to offer monthly installment terms.” [The Encyclopedia of Chicago “Consumer Credit” p.202]

1st Retailer Installment Loans

Spiegel & Sears “By 1906 Chicago’s leading

installment seller was the Spiegel House Furnishing Company. Spiegel boasted, ‘We Trust The People – Everywhere’, and their mail order department spread the gospel of small, easy payments from coast to coast. Spiegel’s example prodded Sears and other retailers to follow suit. The result was a credit revolution marked by ‘the installment plan’”

[The Encyclopedia of Chicago “Consumer Credit” p.202].

“Charge cards can be dated back to the early

1900s. In 1914, what seems purely as a customer service goodwill gesture, Western Union gave some of their prominent (preferred) customers a metal card to be used in deferring payments—interest free—on services used. One source said this card became known as ‘Metal Money.’”

http://www.internetbillingsystems.com/history.html Certificate: http://www.scripophily.net/weunteconewy.html

1st “Credit Cards” – Western Union Chicago

1st National Credit Cards

“There’s no question that Hertz changed the way the world gets from one point to another. It also changed the way the world would pay for services and goods. In 1926 – long before credit-by-card became a way of commercial life – Hertz issued its first national Credential Card. This precursor of tomorrow’s charge card allowed Hertz customers to pick up a car in one location and use their Credential Card to pay for it in another. The card was the cornerstone of a national network – a consumer service that also worked to Hertz’ advantage. As John D. Hertz explained, ‘Agents will be able to eliminate the risk of renting vehicles to unknown persons’.”

-  Geoffrey Precourt, Hertz: Going The Extra Mile, (New York,1993), pp.58-59 Hertz was also the 1st to set up rental car facilities at airports;the 1st airport:

Chicago’s Midway Airport in 1932.

Growing Access to Credit Set the Stage for Retail Investors in WW1

•  The First World War’s financing required innovative ideas. A group of young, wealthy Chicagoans formed a group with government support to sell WW 1 Liberty Bonds during paved the way (Liberty Bonds – 4 minute men) 1917 – from 200,000 to 20,000,000 bond holders between 1917 and 1927.

[Chicago Tribune ]

Insull-Halsey Stuart – 1st “Mass-marketers”

of bonds

“To finance his growing empire, Insull borrowed a lesson from his wartime experience and concluded that he could sell bonds directly to his customers. To do this he set up security sales departments in each of his major companies and turned to Harold L. Stuart of Halsey, Stuart & Co., who thought that bonds could be mass-marketed through small outlets to a great untapped supply of buyers awakened to securities by having bought war bonds. Stuart earned Insull’s respect and all his business, selling as much as $200 million worth of bonds in one year [and $2.3 billion over the 10 plus years of their close association.] Insull loved this radical new approach because it bypassed the Wall Street bankers he despised, who had always been wary of utility bonds.”

- Maury Klein, The Change Makers: From Carnegie to Gates, How the great Entrepreneurs Transformed Ideas Into Industries, (New York: Henry Holt, 2003), p.157

Household Finance Co. The stock market crash of 1929

following the stock and real estate market booms in the 1920s made many consumers aware of the

need for a more disciplined approach to personal finances.

HFC formally established the first “Consumer Education

Department” – headed by a southern social justice worker by the name of Burr Blackburn - and issued their groundbreaking 32 page booklet “Stretching The Dollar: Money Management For Households” in 1931. Ultimately HFC issued more than 23 million booklets.

1st Financial Planner

Household Finance Co. Household Finance of

Chicago was the first financial firm to create a standardized financial regimen for retail investors.

More than a dozen years

before Merrill Lynch claimed to have created the ‘first’ financial planning advertisement

Household Finance Co. Using worksheets the booklet demonstrated a ‘scientific’ method for balancing a family budget for a family of five to live comfortably (in 1931) on a monthly budget of $150.

Household Finance Co. The booklet sparked copycats and received acclaim. The New York Times even reviewed this free, marketing tool: “There is nothing new in the plan, but it is so clearly explained and

comes at such an appropriate time that the booklet should be of value to every couple anxious to get along. It takes into account the needs and pleasures of the present without neglecting the security of the future… It wisely emphasizes family health, and strongly recommends the admission of children into the family financial councils.”

[Quoted in Herman Kogan’s Lending is Our Business: The Story of Household Finance Corporation (Chicago: Lakeside Press, 1965) p.60]

One of “The Most Influential Ads” in U.S. History

“Appeared in the fall of 1948…consisted of six thousand words of small print….The total number of responses exceeded three million, and those returns translated into millions of prospective customers for the firm’s eager brokers. His subsequent aggressive campaigns…set new standards for brokerage firms and other enterprises in the financial services sector.”

-  Merton H. Miller, “Louis Engel: The Man Who Brought Wall Street to Main Street,” pp.385-392, in Donald H. Chew, Jr., Ed., http://www.crsp.com/50/images/engel.pdf Accessed October 18, 2014

In May, 1949: “Only 5 percent of [American] Families Think Common Stock is a Wise

Investment”

“The results [of a survey] show that most people don’t invest in stocks because the subject is entirely unfamiliar to them….What are the chances of making money in stocks? Nobody knows for sure.”

“Buy Stocks If: The Man Who Brought Wall Street to Main Street,” pp.25-28, in W.M. Kiplinger, Ed., Changing Times: The Kiplinger Magazine, May, 1949 – Online version accessed via Google Books http://www.crsp.com/50/images/engel.pdf Accessed October 18, 2014, pp.26-27

Chicago’s Financial Firsts •  Real Estate •  Exchanges/Futures/Options •  Personal Finance •  Banking •  Investment Banking

•  Insurance •  Regulatory/Legal •  Intellectual/Investment

Insurance

Chicago’s 1st insurance agent was Gurdon Hubbard

State Farm 1st to offer insurance to servicemen (Meyers & Ekern) 1917 1st Mutual Automobile Insurance Co. (State Farm) 1922

State Farm “[George J.] Mecherle [founder of State Farm in 1922] was an innovator in the

field of insurance. He started the idea of good driver discounts on policy premiums. His idea of charging six-month premiums instead of the customary annual lump sum was good for farmers who could pay smaller amounts during the planting season and it was good for his company because they could make quicker adjustments to changes in the market price if competition undercut them. another helpful innovation was to give support to agents in the field by having the home office do the paperwork and free up the agents to do what they did best and sell or renew policies. Still another was a one-time membership fee that helped State Farm cover the cost of acquiring new policies. Eventually, the farm bureau did endorse State Farm services and this was a tremendous advantage over competing companies. Only one year after being founded, State Farm had sold policies in 46 rural Illinois counties.”

Source: http://illinoisreview.typepad.com/illinoisreview/2006/11/illinois_hall_o_19.html

State Farm Unique approach to carving out a less-risky demographic & offering lower rates a)  Deductible of $10, b)   MOC not SOC, c)  Excluded risky urban areas like Cook County!

State Farm

•  In the 1955 book, "The Farmer From Merna," a reference to Mecherle's earlier career, author Karl Schriftgiesser outlined a formula for success. He said State Farm invented a few ideas and borrowed others. Its blend, he said, definitely was original.

•  Those ideas included (in addition to the ones mentioned above) (a) centralized billing and claims, (b)  co-insurance payments on claims and (c) a simplified method of classifying cars and insurance rates for them.

Allstate “In 1931, the giant Sears, Roebuck & co, leapt into the insurance business with the

creation of Allstate Insurance Company, based on the novel idea of selling auto insurance policies by MAIL ORDER. Recipients of the Sears catalog could simply clip a coupon from the book, mail it in, and receive an auto insurance policy by return post….

In 1939 Allstate was the first company to tailor its rates to the characteristics of automobiles and their owners, such as make, mileage, and age….

The company introduced rate reductions for good drivers in 1939.” [The Encyclopedia of Chicago “Consumer Credit” p.419].

Chicago’s Financial Firsts •  Real Estate •  Exchanges/Futures/Options •  Personal Finance •  Banking •  Investment Banking •  Insurance

•  Regulatory/Legal •  Intellectual/Investment

FJW-ID Chief, Intelligence Unit, Bureau of Internal Revenue, Washington, D.C. Dear Mr. Irey: The Capone investigation is going steadily ahead. Not as fast as I would like to have it, but the evidence in the case against Al has been strengthened since my last letter to you. I sent you a copy of an affidavit made by the Reverend H.C. Hoover, by which we established through admissions made by Al Capone to him that he (Capone) was the owner of the gambling establishment of which we have the book records reflecting a net profit of $574,000, during a period of twenty-four months. I am enclosing a copy of a statement made by Chester Bragg, prominent real estate dealer in Cicero, in which he states that Al Capone admitted to him that he was the owner of this establishment. I am enclosing a copy of a report made by David A. Morgan, investigator for the West Suburban Ministers and Citizens Association, of Cicero, and Berwyn, relating to a raid made by him and others on this gambling establishment, May 16, 1925. We have secured further evidence relating to the transactions of Louis Lipschultz, who was indicted on March 15th. We have a new witness, Lawrence Pedigo, who states that he purchased alcohol from Louis Lipschultz in the years 1927 and 1928, valued at $60,000. We have cancelled checks which he made payable to Lipschultz, and which bear Lipschultz's endorsement, covering about $20,000. We have bank records by which we trace the entire $60,000 from Pedigo into the hands of Louis Lipschultz. This witness states that Lipschultz informed him that he worked for Al Capone. He stated further that several of the shipments of alcohol which he secured from Lipschultz were analyzed by a chemist in Rock Island, Illinois, and that it was necessary for him to return the shipments to Lipschultz because the alcohol was poisoned alcohol and he did not dare to sell it to his patrons. We have secured further evidence relating to Sam Guznik, who was indicted for the years 1927 and 1928. The new evidence relates to the year 1929, and a new indictment covering the three years is to be returned by the grand jury within a day or two. I was anxious to get an additional special agent started, promptly, on some new angles of the Capone case, and you wired instructions that Special Agent Sullivan be assigned. It was necessary for him to complete some work on the police cases, and he has not been available until this afternoon. I have some leads which may establish income to Capone from houses of prostitution, and Agents Sullivan and Malone are starting out this afternoon on that angle. I believe that this angle will warrant careful investigation, because in the event that we an show the connection of the taxpayer with this particularly disreputable business, we would probably be assured of a conviction in the event such evidence is brought before the jury. We also believe that if such evidence is presented, the court would, no doubt, inflict a heavier sentence than would be inflicted if the income related only to gambling. Regards, Special Agent.

The 1st? Tax Fraud Conviction: Al Capone

- Annually, Al Capone earned $50 million 1920s-1930s - Owed the IRS $215,830 when convicted in 1931

Innovation Because of Glass-Steagall

“By a curious irony, the vast structure of financial regulation erected throughout the world during the 1930s and 1940s, though intended to, and usually successful in throttling some kinds of financial innovation, actually served to stimulate the process along other dimensions.”

-  Merton H. Miller, “Financial Innovation: Achievements and Prospects,” pp.385-392, in Donald H. Chew, Jr., Ed., The New Corporate Finance: Where Theory Meets Practice, (New York: McGraw Hill Irwin, 2001), 3rd Ed., p.387

A ‘Chicago Plan’, proposed by University of Chicago academics in 1933, advocated a strict policy of dollar for dollar reserves against deposits and although not adopted as proposed, led to the 1935 Banking Act whose principles – restricting bank assets and limiting taxpayers’ liability from Federal Deposit Insurance – were lifted from the Chicago Plan original proposal.

http://ideas.repec.org/p/lev/wrkpap/76.html

Arthur Andersen

Arthur Andersen •  “Think Straight Talk Straight” •  1st true accountant, 1st true accounting professor •  Created modern accounting profession •  Arthur Andersen – Northwestern University (Kellogg) professor – 1st true

dedicated accounting firm established 1913 •  Created the 1st training school for accountants

Insull & Andersen’s Accounting Firsts Samuel Insull •  a) 1st to tailor accounting principles to an industry – utilities •  b) pioneering work in the evolution of cost accounting for which he has

never received full credit (McDonald 107) Arthur Andersen •  1st to systematize the methods and service of an accounting firm •  1st to offer consulting services in addition to auditing •  AA’s Spacek’s constant agitation for higher standards led to the

establishment of FASB •  1st corporate accounting forensics case (Insull) and treat stock options •  Also, 1st firm to ever be accused in a financial fraud case of being

“knowingly… corrupt” [http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=US&navby=case&vol=000&invol=04-368]

•  There is good reason to support the “proposition [of] Samuel Insull’s influence in [the] creation of the Federal Securities and Exchange Act”.

– Stewart H. Holbrook, The Age of the Moguls, (Garden City, NY: Doubleday & Co., 1953), p.244

•  Holding Co. Act of 1935 & other SEC Regs (Chicagoans headed FDIC, IRC, and #2 at SEC when these agencies were established in the 1930s)

Futures & the CFTC

“Congress buried among the 1974 amendments to the Commodity Exchange Act an expanded definition of the term "commodity" to include literally anything, with one exception, which was or might in the future be the subject of futures trading. As a corollary, Congress awarded the new CFTC exclusive regulatory jurisdiction over futures trading in any of these "commodities." Congress expressly intended to accommodate the creation of new futures markets in federal or federally-insured debt securities, free of any SEC meddling.

“Thus, in a few words, Congress expanded the Commodity Exchange Act to embrace not only

all agricultural futures (including previously unregulated agricultural commodities such as coffee, cocoa and sugar), but also silver and gold, petroleum products, Government National Mortgage Association certificates, and U.S. Treasury bonds, bills, and notes. The one exception was and is onions, the sole item in this universe which under present law cannot be a ‘commodity’.”

- John H. Stassen, THE COMMODITY EXCHANGE ACT IN PERSPECTIVE A SHORT AND NOTSO-REVERENT HISTORY OF FUTURES TRADING

LEGISLATION IN THE UNITED STATES, 39 Wash. & Lee L. Rev. 825 (1982), http://scholarlycommons.law.wlu.edu/wlulr/vol39/iss3/3 , pp.833-834

•  ERISA – Illinois Rep. John Erlenborn, credited with ‘fathering’ ERISA legislation that established the regulatory framework for how modern pensions are structured, regulated and managed.

ERISA – Modern Pension Legislation From an Illinoisan

Nobel Laureates in Economic Science

George Stigler– “George Stigler was one of the great economists of the twentieth--or any other--century.” — Milton Friedman’s tribute to George Stigler

– History of Economic Thought – Price Theory – Economic Theory of Regulation

“Stigler is best known for developing the Economic Theory of Regulation, also known as capture, which says that interest groups and other political participants will use the regulatory and coercive powers of government to shape laws and regulations in a way that is beneficial to them. This theory is a component of the public choice field of economics. He also carried out extensive research in the history of economic thought.”

- Wikipedia http://en.wikipedia.org/wiki/George_Stigler and Milton Friedman’s tribute to George Stigler: http://www.nap.edu/

html/biomems/gstigler.html , July 30, 2012

Chicago’s Financial Firsts •  Real Estate •  Exchanges/Futures/Options •  Personal Finance •  Banking •  Investment Banking •  Insurance •  Regulatory/Legal •  Intellectual/Investment

Investment Theory Starts with… The Chicago Tribune(?!)

“Alfred Cowles created the first relatively accurate long-term index of total return to investing in common stocks.”

-  William N. Goetzmann / Roger G. Ibbotson “History and the Equity Risk Premium”, Yale School of Management October 18, 2005 http://www.econ.ucsb.edu/conferences/equity05/papers/Goetzmann.pdf August 14, 2012, p.8

“Alfred Cowles, 3rd was the founder of the Cowles Commission [a predecessor of CRSP, housed at the U of Chicago 1939-1955]. Cowles's primary concern in 1932 was to elevate economics into a more precise science using mathematical and statistical techniques.” http://en.wikipedia.org/wiki/Alfred_Cowles

“As its motto (Theory and Measurement) indicates, the Cowles Commission was dedicated to the pursuit of linking economic theory to mathematics and statistics….Cowles associates have won Nobel prizes for research done while at the Cowles Commission. These include Tjalling Koopmans, Kenneth Arrow, Gerard Debreu, James Tobin, Franco Modigliani. Herbert Simon, Lawrence Klein, Trygve Haavelmo, Leonid Hurwicz, and Harry Markowitz.” - http://en.wikipedia.org/wiki/Cowles_Commission

“CRSP”

“Beginning in 1960, CRSP, the Chicago Center for Research on Security Prices, headed by economists Lawrence Fisher and James H. Lorie, systematically began to collect stock prices and dividends from U.S. capital market history. Fisher and Lorie published the results of their study of returns to U.S. stocks in 1964, as “Rates of Return on Investments in Common Stocks” and in 1977 as a volume including returns to U.S. government securities as well.” - William N. Goetzmann and Roger G. Ibbotson “History and the Equity Risk Premium”, Yale School of Management October 18,

2005 http://www.econ.ucsb.edu/conferences/equity05/papers/Goetzmann.pdf accessed August 14, 2012, p.8

Chicago’s CFA Society The 1st •  Chicago’s CFA Society: The First Financial Analyst Society •  Analysts traditionally described as "statisticians" providing sales support

to brokers and focused on bonds. •  Analyst Raymond J. Sidney of Federal Securities Corp with a small

group of acquaintances including Hortense Freidman, gather to exchange ideas. Luncheon meetings evolve into a formal organization in 1925 with Sidney elected as the first president of the "Investment Analysts Club of Chicago."

•  For this first such U.S. group., membership limited to 100 who were not brokers, dues were $2/year with lunch at the Morrison Hotel costing 65 cents. Meetings begin to focus on individual stock ideas.

•  Outside speakers from leading local universities invited to discuss business conditions, with club thriving through the end of the decade.

Source Bill Gray, Presentation – “75 Years” – courtesy of Wendi Ruschmann , July 13, 2011 e-mail

“The Chicago School” of Economics

According to Economist Joseph Stiglitz,

The “Chicago School” provided the “intellectual foundation” for the “idea that markets are self-adjusting.”

— Stephen Moore, “The Man Who Saved Capitalism”, The Wall Street Journal, Tuesday, July 31, 2012, p.A13

“Chicago’s workshop system [i.e., inter-disciplinary cross-fertilization] was a major innovation in conducting economic research and in apprenticing students in research. It has been copied by many other economics departments – often at the instigation of Chicago graduates – and also by business schools and law schools. Although often successful, workshops elsewhere usually do not achieve the intensity of those at Chicago.”

– Gary S. Becker, in E.Shils, ed., Remembering the University of Chicago: Teachers, Scientists and Scholars, (Chicago, University of Chicago

Press, 1991), p.146 quoted in Johan Van Overtveldt, The Chicago School, (Chicago: University of Chicago Press, 2007), p.40

George Stigler, 1982 Merton Miller, 1990 Ronald Coase, 1991 Gary Becker, 1992 Robert Fogel, 1993 Myron Scholes, 1997 Eugene Fama, 2013

NOBEL LAUREATES Since Sweden’s central bank, Sveriges Riksbank, established the Nobel Prize in Economic Sciences in 1968, seven Chicago Booth faculty members have won the award.

The University of Chicago Firsts

•  • 1st to initiate a Ph.D. program in business (1920). • 1st to publish a scholarly business journal (1928). • 1st to offer an executive M.B.A. degree program (1943). • 1st to establish a minority relations program. • 1st to adopt computerized bidding for placement interviews and class registration. • 1st business school to have a Nobel laureate on its faculty (George Stigler, 1982) • 1st to offer an executive M.B.A. program in Europe and Asia.

•  MPT - Modern Portfolio Theory (and the active management of assets by money managers) is based upon Modern Portfolio Theory, 1st expounded by Harry Markowitz in 1952. A fundamental tenet of which is that a fully diversified portfolio will offer a chance for consistent returns with minimized risk.

•  Eugene Fama first articulated the Efficient Market Theory in 1972 which provided the rationale and basis for index funds and passive investing by stating that all known information is reflected in the price of stocks and therefore it is impossible to beat the stock market indices with regularity.

•  Myron Scholes created the first pricing model (Black Scholes Option Pricing Model) for derivatives that spawned the options industry.

Source: University of Chicago website

Chicago School Theory Created Modern Corporate Finance

“The past 40 years [i.e., 1960-2000] have witnessed remarkable changes in the theory and practice of corporate finance. Beginning with the work of Franco Modigliani and Merton Miller in the late 1950s, the evolution of the ‘modern’ theory of corporate finance into its present shape has both anticipated and responded to a wave of innovations in corporate practice.”

- Donald H. Chew, Jr., “Financial Innovation in the 1980s and 1990s”, pp.xiii-xxii in Donald H. Chew, Jr., ed., The New Corporate

Finance: Where Theory Meets Practice, (New York: McGraw-Hill Irwin, 2001), 3rd edition, p.xiii

“The modern theory of corporate finance begins with the well-known ‘irrelevance’ propositions formulated by Franco Modigliani and Merton Miller in the late 1950s and early 1960s.” - Donald H. Chew, Jr., “Financial Innovation in the 1980s and 1990s”, pp.xiii-xxii in Donald H. Chew, Jr., ed., The New Corporate Finance: Where Theory Meets Practice, (New York: McGraw-Hill Irwin, 2001), 3rd edition, pp.xv-xvi

Harry Markowitz & MPT

“In 1952, Harry Markowitz published his famous model of portfolio selection which explicitly linked investment return and risk.”

- William N. Goetzmann and Roger G. Ibbotson “History and the Equity Risk Premium”, Yale School of Management October 18, 2005 http://www.econ.ucsb.edu/conferences/equity05/papers/Goetzmann.pdf accessed August 14, 2012, p.8

Modern Portfolio Theory (MPT), “was invented in the 1950s by Harry

Markowitz. His book, Portfolio Selection, was an outgrowth of his Ph.D. dissertation at the University of Chicago.”

- Burton G. Malkiel, A Random Walk Down Wall Street, (New York: W.W. Norton , 1990), p.223

“That paper [Markowitz’ Ph.D. dissertation] was innovative on so many

levels, and ultimately so influential both theoretically and in terms of practicality, that it earned Markowitz a Nobel Prize in Economic Science in 1990.”

- Peter Bernstein, Against the Gods: The Remarkable Story of Risk, (New York: John Wiley & Sons, 1998), p.248

Nobel Laureate Milton Friedman

Milton Friedman – Monetarist “Inflation is always and everywhere a monetary phenomenon.” — Friedman, Milton. Inflation: Causes and Consequences. New York: Asia Publishing House

– The Economist obituary called Milton Friedman "the most influential

economist of the second half of the 20th century…[and] possibly of all of it."

“Mr Friedman revolutionised (sic) how economists and policymakers treated money and inflation.”

“Mr Friedman laid the foundation of modern theories of consumption.” “A Heavyweight Champ at Five Foot Two: The Legacy of Milton Friedman, a giant among economists". The Economist. November 23, 2006. Retrieved July 30, 2012.

Milton Friedman Saved Capitalism

“Next to Ronald Reagan, in the second half of the 20th

century there was no more influential voice for economic freedom world-wide than Milton Friedman. Small in stature but a giant in intellect, he was the economist who saved capitalism by dismembering the ideas of central planning when most of academia was mesmerized by the creed of government as savior.”

— Stephen Moore, “The Man Who Saved Capitalism”, The Wall Street Journal, Tuesday, July 31, 2012, p.A13

Economic Theories of Inflation - From Chicago

-  Triangle Theory – Robert S. Gordon (Northwestern University) -  Monetarist – Milton Friedman, et.al., (University of Chicago) -  Austrian School – Friedrich Hayek (University of Chicago) -  Rational Expectations Theory – Robert Lucas (University of Chicago)

Miller & Modigliani Sparked LBOs

“In short, the discounted cash flow valuation framework stemming from the Chicago school principle of ‘market efficiency’ …was being put to use daily during the restructurings of the ‘80s.”

- Donald H. Chew, Jr., “Financial Innovation in the 1980s and 1990s”, pp.xiii-xxii in Donald H. Chew,

Jr., ed., The New Corporate Finance: Where Theory Meets Practice, (New York: McGraw-Hill Irwin, 2001), 3rd edition, p.xvii

Fama’s Efficient Market Hypothesis

“Eugene Fama (1965) eloquently put into words what research studies had been showing for a number of years: investors cannot expect to earn more than the average market return over time. In other words, expensive computer models and professional investors will do no better than a widely diversified portfolio of randomly selected stocks. Under Fama's classification, the Efficient Market Hypothesis has three parts: a weak form (stock price changes are independent of one another), a semi-strong form (publicly-held information cannot be used to an investor's advantage), and a strong form (no information, either public or private, can be used to an investor's advantage).” Source: “Pioneers in Finance” http://campus.murraystate.edu/academic/faculty/lguin/FinancialHistory.htm

Fama-French Three Factor Model

“A paper by Eugene Fama, Robert R. McCormick Distinguished Service Professor of Finance, and former faculty member Ken French that introduced the Fama-French three-factor model was a breakthrough…. ‘It tied together previous research about why one stock has a higher average return[s] than another,’ [David] Booth said. ‘The three-factor model says that the dimensions of return are risk, size, and financial health.’”

–Jennifer Vanasco, ““Putting Theory Into Practice” http://www.chicagobooth.edu/magazine/fall99/boothsinque.html

The 1st Index Fund?

“After graduation [from the University of Chicago], [Rex] Sinquefield was eager to take the risk of putting the theories he learned [at school] into practice, which he made clear when he interviewed with money managers and banks in California, New York, and Chicago. ‘I said, look, I want to try out these new ideas, I’m not interested in anything else. Every one of them told me I was crazy, nearly every one rejected me. Only American National was interested in experimenting,’ he said. ‘There’s some debate about this, but I think I set up the first S&P index fund in the galaxy in 1973. Wells Fargo thinks they did it–but in any case, both institutions pioneered index funds’.”

–Jennifer Vanasco, ““Putting Theory Into Practice” http://www.chicagobooth.edu/magazine/fall99/boothsinque.html

Timing and ‘Syzygy’?

“Being a successful entrepreneur is some part skill, some part luck,” [David] Booth said. But one element that’s critically important is timing. The ideas [underpinning DFA] presented 10 years earlier would have been too radical; 10 years later, would have been too late. I read an article by Milton Friedman that talked about syzgy, an astronomical term. When [the sun, earth, and moon] line up, which happens rarely, all kinds of weird things are supposed to happen. Being an entrepreneur is looking for syzygy, being sensitive to that moment when things come together, visualizing it, and acting upon it.”

–Jennifer Vanasco, ““Putting Theory Into Practice” http://www.chicagobooth.edu/magazine/fall99/boothsinque.html

They All Started the 1st Index Funds!

“John McQuown and David G. Booth at Wells Fargo and Rex Sinquefield at American National Bank in Chicago both established the first Standard and Poor's Composite Index Funds in 1973. Both of these funds were established for institutional clients; individual investors were excluded. Wells Fargo started with $5 million from their own pension fund, while Illinois Bell put in $5 million of their pension funds at American National Bank.”

Source: http://en.wikipedia.org/wiki/Index_fund#Origins

First Commingled S&P500 Fund

“American National Bank and Trust Company claims to have launched the first comingled Index fund, an S&P 500 Index Comingled Trust Fund in 1974.… [ANB’s] marketing materials at the time made the claim that American National Bank was the first.”

– Janna Sampson, e-mail correspondence, August 1, 2011

Roger Ibbotson & Rex Sinquefield

•  1st to show what historical LT returns were in equities, T-Bills, Treasuries, corporate bonds and inflation

•  1st to show the correlations between major asset classes •  1st to use historical returns for forecasting •  1st to use historical data to show the equity risk premium is constant •  1st to ignore macro-economic variables and focus on historic prices

&returns •  1st to measure returns from markets outside the U.S.

Ibbotson & Sinquefield

- Based on Capital Asset Pricing Model (CAPM)

- 1st to catalog monthly historical returns (1926-1974) for U.S. Equity, Fixed Income (long Corporates, long Treasuries & T-Bills), and Inflation (CPI) [first in The Journal of Business (1976) then with additions in Stocks, Bonds, Bills and Inflation, (1977 and subsequent years)

- 1st to show U.S. equity historical component returns (i.e., dividends and capital appreciation)

-  1st to state that T-Bills do not follow a ‘random walk’

Source:(SBBI ,pp.63-64)

Ibbotson & Sinquefield

-  1st to articulate a ‘risk premium’ for equities over a ‘risk free’ asset:T-Bills

-  1st to empirically demonstrate the

validity of a DCF model; -  1st to utilize the S&P 500 as a

proxy for the U.S. equity markets

Ibbotson & Sinquefield

“Research by Roger Ibbotson and Rex Sinquefield provided some of the first accurate calculations of the annual rate of return on U.S. asset classes over long investment horizons with specific measures of the equity and other risk premiums. These calculations have come into widespread academic and industrial use as inputs to research and investment decision making through numerous works that Ibbotson has produced.”.”

- William N. Goetzmann and Roger G. Ibbotson “History and the Equity Risk Premium”, Yale School of Management October 18,

2005 http://www.econ.ucsb.edu/conferences/equity05/papers/Goetzmann.pdf accessed August 14, 2012, p.1

Asset Allocation Determines Pension Plans’ Returns

Gary Brinson et al, in 1983 "established the first asset allocation fund of funds".

-Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, Determinants of Portfolio Performance, The Financial Analysts

Journal, July/August 1986.

**This article was the "first" to argue for the importance of asset allocation

in portfolio construction.

Abandoning Bretton Woods

“In the early 1970s, the U.S. government, with strong prodding from academic economists, notably Milton Friedman, finally abandoned the tie of gold to the dollar.”

- Professor Merton H. Miller, University of Chicago, “Financial Innovation: Achievements and Prospects”, pp.385-392 in Donald H. Chew, Jr., ed., The New Corporate Finance: Where Theory Meets Practice, (New York: McGraw-Hill Irwin, 2001), 3rd edition, p.386

Chicagoans’ Push For Macro U.S. Change Sparked Innovation

“The then Secretary of the Treasury was George Schultz, a former colleague and long-time friend of Milton Friedman. The Chairman of the Federal Reserve Board was Arthur Burns, another old friend [of MF]. With Milton Friedman’s blessing, both gave a cordial audience to Leo Melamed of the CME and at least a nihil obstat to his proposal for an International Monetary Exchange.”

- Professor Merton H. Miller, University of Chicago, “Financial Innovation: Achievements and Prospects”, pp.385-392 in Donald H. Chew, Jr., ed., The New Corporate Finance: Where Theory Meets Practice, (New York: McGraw-Hill Irwin, 2001), 3rd edition, p.386, n2

Chicago & Innovation

Joseph Schumpeter once said that “what really matters for economic growth is innovation, the act through which these new ideas are successfully introduced to the market….Schumpeter’s dictum still holds – what really matters for economic growth is innovation. The continued health of Chicago business depends on its ability to attract innovators.”

- Louis P. Cain, “Innovation, Invention, and Chicago Business”, pp.415-417 in James R. Grossman, Ann Durkin Keating,

and Janice L. Reiff., eds., The Encyclopedia of Chicago, (Chicago: University of Chicago Press, 2004).

The Future of Financial Innovation in Chicago

“Financial innovations symbolize the profit-driven response to the changes in the economic, tax, and regulatory environment. As this environment changes, and as consolidation within the financial services industry intensifies competition, market participants will seek out new ways to conduct financial transactions more efficiently.The rapid pace of financial innovation therefore seems likely to continue”

- John D. Finnerty, “Financial Engineering in Corporate Finance: An Overview”, in Financial Management, Vol. 17, No. 4 (Winter,

1988), pp. 14-33 Published by: Blackwell Publishing on behalf of the Financial Management Association International Stable URL: http://www.jstor.org/stable/3665764 Accessed: 15/01/2009, p.31

The Future of Financial Innovation in Chicago (part deux)

“There’s a big role for Silicon Valley-style scorched-earth entrepreneurship on Wall Street right now, and the people most likely to innovate are newcomers to the industry who have no real stake in the portions of it that need scorching.”

-  Michael Lewis, “How Not to Lose Your Soul: A Handy Guide for Young Bankers”, in “Opening Remarks”,

Bloomberg Businessweek, no Vol./No. (September 29-October 5, 2014), pp. 16-17 Published by: Bloomberg - Accessed: 18/10/2014, p.17

A Grateful “Thank You” To:

Kim Augustyn, John Bilson, Gary Brinson, Bill Brodsky, Jeff Brown, Rich Carr, Paul Carbone, Lisa Ezrol Curran, Jeff Diermeier, Bryan Durkin, Mitch Fulscher, Steve Gollins, Michael Gorham, Tim Greive, Jason Henrichs, John Herzog, Merrillyn Kosier, Jim Malackowski, Steve Manus, Angie McKay, Michelle Moreno, David Nealis, Amar Parikh, Don Philips, Alex Rabinovich, Nick Ronalds, Wendi Ruschmann, Janna Sampson, Audrey Warner, Bob Watt, Lou Weisbach, Holly Weckler, and Janet Wilson

And my wife Patty and children Luke, Matt, & Katie