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on 18 December 2013
This book analyzes the worldwide financial crisis of the first decade of the 21st century from the point of view of one of the major market participants who created and sold complex financial products, J.P. Morgan.

The elite and its ideology
As G. Tett rightly states, `in most societies, elites try to maintain their power not simply by garnering wealth, but by dominating the mainstream ideologies.' The ideology of the financial elite is `free markets'. Their gospel pretends `that market prices are always right' and that `markets can correct excess far better than any government.' This gospel was translated in deregulation (repeal of Glass-Steagall), in poor bank and mortgage regulations and also, importantly, in accountancy rules, like `mark-to-market.'

The magic formula: leverage
Monstrous leverage means `potential' monstrous returns (unfortunately, also negative ones) and potential monstrous bonuses for the top management.
But, how to create monstrous leverage in banks where the capital/asset ratio is limited? First, by creating new products like derivatives - CDSs (credit default swaps) and CDOs (collateral debt obligations) based on all sorts of credits and mortgages; secondly, by putting these products in off-shore and off-balance vehicles, like SIVs (Structured Investment Vehicles); thirdly, by financing long term loans with short term debt.
The Fed chairman was against the regulation of derivatives because he believed that they made markets more efficient. A maestro stroke.

Profit hunger
All over the world, banks could not get enough of CDOs and their fat profit margins. But, the number of households that could afford prime mortgages was limited. No problem, give those who can't afford it, `sub prime' mortgages and give every new CDO a slice of them as long as they can get a triple A rating from the rating agencies. The reasoning behind it was that the US housing market would in any case not go down.
When the holders of sub prime debt could not reimburse their loan anymore, the CDO market simply imploded. (Most) Banks were confronted with heavy losses. All became suspicious (where are the losses sitting?) and refused to lend cash balances to one another. Lehman Brothers went bankrupt. The government (the taxpayer) had to step in massively. `The altar of free-market ideals was ripped apart.'

No basic fairness
Millions of ordinary families have suffered shattering financial blows. On the other hand, the fat bonus regime for the top management came back, but only because governments stand firmly behind the financial system, although it is still, for most part, in private-sector hands.
This situation is `totally inconsistent with any vision of market capitalism and basic fairness. While taxpayers were (and are) shouldering the risks, bankers and bank shareholders were (are) receiving most of the gains.'

This book is a very worthwhile read.
One of the best books on the financial crisis is `The Big Short' by Michael Lewis with its perfect summary: free money for the capitalists, free markets for everyone else.
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on 4 April 2017
Oh dear, oh dear, what a mess! I lived through this period of history and now read a fantastic account of what was happening. It’s now 2017, so we’re looking at ten years on, and I’m not sure if any of the lessons of this crisis have been truly learned. It seems the problem has been ‘parked’ out of view on the taxpayers, to be paid down over generations, while banking continues to do as it wants. I came to this book having read John Kay’s ‘Other People’s Money’ and Owen Jones’s ‘The Establishment’. In particular, you can’t help asking Kay’s question: ‘What’s it all for?’ Gillian Tett does give a great and detailed account of the period, and without bias. I think given the complexity of the finance involved she goes a great job in breaking this down and making it accessible.
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on 18 April 2015
Informative, interesting and readable, one of the best books I've had the pleasure to read.
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on 15 June 2009
This is an enjoyable and extremely well written history of the credit derivatives market - as told by JP Morgan. Tett doesn't interview many other investmen banks or even bankers, which is bound to give this a very one sided view. And guess what? JP Morgan come out of the book smelling of roses (which is partially fair in as much as they were one of the few banks that have actually come out of the crisis strengthened).

It is also one of those books that helps to mystify derivatives creating the impression that their presence alone is a threat to the World order as we know it - though I believe this to be largely unintentional.

Though this is an excellent expose of the credit derivatives markets, the book does not deal with what actually went wrong and caused the crisis - Tett would have needed to interview other banks for that. It doesn't deal with the poor lending decisions that took place, the complete and utter failure of some of the major banks to understand credit, the breakdown of risk management functions, the failure of politicians to run economic policies based on credit card spending and regulators who were either incompetent or plainly asleep on the job. Unfortunately they don't make as good a story and are a little more complicated message to successfully get across
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on 18 October 2013
Virginia Woolf reminds us that we can only assess a book by reference to its category. If the work does not meet our expectations because we fail to identify its genre before we read it, then we cannot fairly assess it on its merits. Fool's Gold is actually a very boring read for people who, like me, are not interested in the personalities involved or their interactions. What I had expected was a more mechanistic approach, exposing the way in which the collapse of a bank through its exposure to unlimited liability in worldwide unregulated transactions, led to the crisis in western economies from which we are still struggling to emerge. The personalities involved seem at once arrogant, puerile and trivial. They attract distaste rather than curiosity and so reading about them is no pleasure. As to where they were educated, their activities show us how worthless these supposedly prestigious institutions are, and how pretentious their objectives. The principles of the instruments they devise for mitigating and sharing risk are, apparently, quite simple in principle, but couched in jargon, acquire mystique for some. Not for me.
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TOP 500 REVIEWERon 28 January 2016
Gillian Tett was very shrewd in focusing her account of the financial meltdown of 2007-09 on J. P. Morgan. JPM was one of the few banks that came out on the other side looking relatively good, and I surmise that it was because they had acted with a greater degree of restraint and responsibility that they were willing to have Tett tell their story, and I assume that she had a lot of access to almost all the players. At the same time, the focus on JPM didn't impede Tett from giving very clear explanations of key terms -- collateral debt obligations, asset backed securities, derivatives, credit default swaps, monoline insurance, leverage, capitalization, structured investment vehicles, and all the rest. She has a talent not just for clear explanations but for framing analogies that make the transactions understandable to non-experts like me. Of course, her focus on JPM means that we don't get inner views on the operations of, say, Merrill Lynch, Morgan Stanley, and Fannie Mae -- or the Federal Reserve or the Treasury, come to that -- but there are other books that will give you some of that. Sorkin's "Too Big To Fail" has the broader scope, but the downside of his broader approach is that the narrative is a bit diffuse and the character of individual actors less developed. No reason not to read both, however.

Tett's focus gives her a chance to shape an arching narrative, for at the beginning we see a group of young JPM bankers disporting themselves in south Florida and in effect inventing credit derivatives. At the end of the book, she brings us back to that group, now dispersed fifteen years later, and wondering what the heck happened. How did a strategy they developed with the aim of dispersing risk end up increasing it? That's the story Tett's telling, and it's clear that at the end she and the original bankers still believe that their invention was a good thing -- a tool, as one of them put it, but one that was used for purposes that the inventors never intended (or imagined, it seems), and purposes that might have been subverted with better regulation, better oversight, and more attention from the upper-levels of bank management to what the young guns were doing. More than the other books on the crisis that I've read, Tett gives me an understanding of the "shadow banking system" and its relation to the big banks. Especially chilling was the explanation of how some banks -- though not JPM -- encouraged the setting up of separate "structured investment vehicles" (SIVs) for off-the-books trading that enabled them to make a lot of money when the going was good with a "parent" bank that was in fact undercapitalized. There were capital requirements for investment banks (that is, a certain percentage of their assets had to be always available as capital just in case there was a "run" on the bank) and compliance was monitored by the Fed. However, there were no such requirements for SIVs, and because the SIV trades were not on the parent bank's balance sheet, the parent bank's capitalization appeared to be stronger than it was. If one wanted to be moralistic about it -- and why shouldn't one -- one could say that the deployment of SIVs enabled banks to evade capitalization requirements. However, when people started cashing in or seeking to sell because the value of their purchased instruments was dropping, the shadow SIV couldn't meet the demand and suddenly the parent bank was on the hook and losses started showing up on their balance sheets apparently out of nowhere. Soon, in many cases, the parent found itself short of capital too. So . . . what was the Federal Reserve to do? It's a great and sobering story.

An obviously related matter that is very well accounted for by Tett is the degree to which it became almost impossible to put a value on mortgage-backed securities. Sellers invented complex instruments that involved the bundling together of millions of dollars in mortgage debt, which were then sliced up as "collateral debt obligation" (CDOs) and sold in "tranches'" that carried, ostensibly, varying degrees of risk. But the models on which the risk assessments were made envisioned no collapse of house prices and the tide of foreclosures that followed. To complicate matters, new instruments had been developed that bundled CDOs -- CDOs of CDOs, aka "synthetic" CDOs -- and sliced and diced THEM -- and how THEIR values could be clearly established at such a distance from the original mortgages became a major problem. When banks didn't like the fact that the market value of their instruments was falling, it was awkward, to say the least, that they couldn't give a rationale for a higher value. When a bank admits that it doesn't know what its (supposed) assets are worth, then the panic is on . . .

The irony isn't just that an invention intended to reduce risk actually made it worse. There's the irony that many of these bankers who followed Alan Greenspan in believing that the markets always got prices right didn't like it when the market started devaluing what they were selling. People who believed that the government shouldn't get involved in financial matters -- for that would stifle "innovation" -- were asking the government, in the shape of the Federal Reserve, to enable them to achieve adequate capitalization -- and try not to call it a "bailout," please! -- that had been undermined by the "innovations" by which they set so much store. The innovators weren't the only ones to blame, of course -- mortgage lenders (many of them unregulated and unscrupulous), inattentive and greedy mortgage purchasers, ratings agencies that were financed by the very people they were rating, credulous insurance companies, and -- some would say, though Tett doesn't get into this -- the Federal Reserve itself for failing to act promptly -- all can take their shares of the blame. Tett was academically trained as a social anthropologist and her feel for the cultures of groups in banking and for the psychology of panicky investors gives her telling of this story an interesting human dimension. It's not just a matter of "baddies" and "goodies." Jamie Dimon and his team at JPM resisted the siren song of easy profits when everybody else was making gazillions, and Dimon was able, in a crucial meeting with the Fed and the Treasury, to high-mindely invoke civic responsibility -- but when Bear Stearns got in trouble and he saw a chance to gobble it up, he took it.
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on 8 May 2009
This is the first properly considered book about the financial crisis to be published. Gillian Tett is well known as a financial journalist (working for the FT in London). Accordingly, you might think this book has been rushed out to simply rehearse the emerging consensus view on the causes of the financial crisis. Not so! This is a very impressive volume. To start with - Gillian Tett knows the spider's web of complex structured products at the heart of this story well enough to be able to describe it simply. That is the mark of true mastery. What is best about this book, however, is the way it tells the human story. That is the story of the innovators at J.P. Morgan who created these products and realised at an early stage that they left behind a kind of nuclear waste that needed to be properly contained - particularly so in relation to derivatives based on residential mortgages (the default pattern of which was essentially unknowable until recently). Other banks didn't realise this (or didn't care) and just left that waste sitting on their balance sheets, or worse, shifted it to quasi-subsidiary vehicles where it was hidden and supported by short-term funding that quickly evaporated at the first sign of trouble. Ultimately, the book shows that financial innovation is not a problem per se - it's the use to which such innovation was put that created problems.

Overall - this is a very informative and interesting read which has clearly been in the planning for some time. A well considered book.
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on 19 November 2009
Gillian Tett is an assistant editor of the Financial Times and oversees the global coverage of the financial markets. So we can assume that she has a reasonably insight into the way financial markets work, a good nose for a story, and a certain skill with words. This book is evidence of the fact that she possesses all three qualities.
She follows the story of the recent bank meltdown by following the team in the investment bank J.P.Morgan. The initial chapters (part 1 entitled Innovation) lay a solid foundation in understanding the origin of derivatives. I found it a bit "slow", but still necessary background to parts 2 and 3. Part 2 - entitled Perversion - watches as the basic idea of derivatives is adopted by all the other banks, and in many cases "highjacked" to make increasingly complex products designed (at least initially) to re-package and distribute risk. Part 3 - entitled Disaster - described the fact that all the products had (still have?) a "common failure mode", an underlying correlation that simply put meant that risk was not in fact being distributed. Tett manages to take this complex situation and make it both understandable and interesting to the layman. She focuses more on the people working in the banking system, rather than simply creating a chronology of events. However I would have liked more facts and figures to support the overall story.
As an outsider what shocked me in this story was the fragility of all the models, and shortsightedness of both those developing them as tools and those blindly using them without understanding their limits. I have never had a high opinion of the intellectual capabilities of investment bankers, and this book amply supports my statement. However, even more shocking was the way both the banks ignored good practice and the regulators failed to do their job. Financial innovation is inevitable and good, but clearly banks were shortsighted and driven often by amoral greed. Regulators simply did not do the job we pay them for (and I include government as the ultimate regulator).
Overall, easy to read and an excellent description of the recent crisis.
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on 9 December 2011
I bought this book because I am always very impressed by Gillian Tett when she appears on Newsnight which she frequently does. So I was expecting a trenchant analysis of how bankers' greed caused the credit crisis and a laying bare of all the machinations which would switch on the lightbulb of true understanding. Sadly, I don't really think you get this, although the title leads you to expect that you will.

I could be wrong, but I see the hand of the publisher in this narrative. It concentrates on the personalities (or at least some of them, principally those at J.P. Morgan) behind the boom in derivatives, at the expense of the mechanisms. But even these personalities are only sketched with broad brushstrokes - we know little about the characters and nothing about their lives outside the bank. We don't know for example how big their bonuses were, although that might have been enlightening. The office politics of banking aren't particularly interesting and frankly, no one could care less when they lose their jobs in power struggles and takeovers. As a human interest story, it doesn't work.

But equally, it disappoints slightly from a technical analysis. This is because not only are derivatives beyond simple options often opaque - and this is the tale of the invention of the most opaque derivatives imaginable - but because banking itself is completely opaque to the layman (and one increasingly suspects, to bankers too). It would have been good to understand how banks actually make the prodigious sums they do and how the alchemy works whereby simple deposits of real money from people and businesses are multiplied many times over into stranger and stranger loans. The book tells us nothing about this. It is also not clear how the simple mortgages in one country, the US, came to represent trillions of dollars which infected the entire financial system.

Fools Gold, the title, implies huge criticism of the banking industry, but there isn't really that much criticism; the book doesn't maintain that the bankers were greedy fools. Indeed, in as much as they earned massive salaries and bonuses while they fiddled in the house they themselves had set alight, it is hard to see them as the real fools in this story. I think that Gillian Tett could do better than this, with a little less narrative and a little more explanation and criticism. She tells us about her studies in anthropology in the introduction but then doesn't use this prism throughout the book, sadly. So what we end up with is a good and readable book, but nothing like the definitive analysis of the banking crisis that we might have hoped for.
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on 4 July 2009
This is a gripping read from an author who is sure of her facts and can tell the true story of the banking crisis clearly and dramatically. Because she was one of the first to forecast financial disaster she has become a pundit on the subject and there is rarely a day when Gillian Tett is not on television or radio. Thanks to a useful glossary the reader is guided through the murky world of what Vince Cable dubbed "casino banking" with explanations of "Credit Default Swaps", "Mortgage-Backed Bond Security", the surreal sounding "Gaussian Copula" and the like. What started out as a well-thought out investment strategy turned into a glorified pyramid selling spree in order to generate bank profits, and therby bonuses. The author has a degree in anthropology and this gives the book a human interest beyond the world of high finance. Highly recommended for anyone wanting to understand the greatest economic trauma of our times.
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