Chicago's Financial Firsts

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Information about Chicago's Financial Firsts

Published on October 23, 2014

Author: FinTEx


1. Chicago’s Financial Firsts© The Firsts and Innovations of Chicago’s Financial Sector ©2014 by David Baeckelandt FinTech Chicago Mercantile Exchange Monday, October 20, 2014

2. 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: .Accessed: 31/07/2012 p.460

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

4. 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

5. 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. • 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).

6. 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://

7. MCD & CAT Issue 1st RMB ‘Dim-Sum’ Bonds by Foreign Firms Caterpillar to issue yuan bond By Robert Cookson and Hal Weitzman, 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. • .

8. 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

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

10. The Spirit of Chicago Attracted Entrepreneurial Risk Takers… “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

11. Chicago Became for French America the Link Between Canada & Louisiana

12. 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

13. Beaver Pelts Used to Make Felt Hats = • 10x return on sale of beaver pelts!

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

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

16. The Chicago Portage LaSalle Saw in 1673 Looked Thus:

17. “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]

18. “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

19. 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

20. The Great Indian Council for the Treaty of Chicago 1833 “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

21. 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

22. “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

23. “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

24. 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.

25. 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

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

27. First Chicago Mayor William Butler Ogden in 1841 “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]

28. 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)

29. 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

30. Chicago Lies Astride The Subcontinental Divide

31. 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

32. 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)

33. 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

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

35. 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

36. Illinois became a bread basket

37. 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

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

39. And the Meatpacker to the World

40. 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, (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

41. 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), , p.827

42. 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

43. 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

44. 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)

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

46. 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

47. 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)

48. 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.

49. 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

50. 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’.”!1-industry-growth Source:!1-leo-melamed-birth-financial-futures

51. 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.

52. 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

53. 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:

54. CCX & CCFE 1st Carbon Exchange & 1st Carbon Futures Exchange “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.” “Chicago Climate Futures Exchange® (CCFE®) operates the leading U.S. marketplace for environmental derivatives, financial instruments with underlying values based on tradable environmental assets.”

55. 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:

56. 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

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

58. 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

59. 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: accessed August 7, 2012

60. 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

61. 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).

62. 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,, ed., (Chicago: University of Chicago Press, 2004) p.62

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

64. 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

65. 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

66. 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”

67. 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.

68. 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].

69. 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.

70. 1st Modern IPO – Sears Roebuck & Co

71. 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

72. 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)

73. “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)

74. 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).

75. 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)

76. 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

77. 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

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

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

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

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

82. 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

83. 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].

84. 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

85. 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]

86. 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].

87. 1st “Credit Cards” – Western Union Chicago “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.’” Certificate:

88. 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.

89. 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 ]

90. 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

91. 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.

92. 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

93. 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.

94. 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]

95. 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., Accessed October 18, 2014

96. 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 Accessed October 18, 2014, pp.26-27

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

98. Insurance Chicago’s 1st insurance agent was Gurdon Hubbard

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

100. 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:

101. 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!

102. 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.

103. 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].

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

105. 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

106. 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

107. 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.

108. 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

109. 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” []

110. • 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)

111. 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), , pp.833-834

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

113. 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 and Milton Friedman’s tribute to George Stigler: html/biomems/gstigler.html , July 30, 2012

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

115. 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 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.” “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.” -

116. “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 accessed August 14, 2012, p.8

117. 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

118. “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

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