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.
on 9 September 2009
The book's content is less ambitious that its titles suggests. It is about how a team of derivative experts at J.P. Morgan contributed to the development of the securities, including credit default swaps and options, which led to the financial crisis. That's reasonably interesting, but it's a fairly narrow perspective on what happened. The collapse of Lehman is covered in a few pages. She doesn't even mention that the major banks were manipulating Libor. At points it sounds like she is writing to protect her sources. There is a lot about what a great CEO Jamie Dimon is at JP Morgan chase. She says the JPM team shouldn't be blamed for other banks misusing the derivatives they created. I've never heard anyone blame them for it.
There are a few mistakes: the internet bubble of 1999 was equity driven, not debt fueled. She uses acronyms too often, and there are no anecdotes explaining why the subprime default rates were so high. Indeed, she is very light on what happened in the subprime sector. The corruption there could have really livened up her book, and illuminated the causes of the crash. I learnt more about the crisis from the introduction to Niall Ferguson's Financial History of the World.
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.
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.
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.
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.
on 17 February 2013
This is a good technical and historical account of the events leading up to the financial crisis of 2007 / 08 - and events thereafter. However, if fails totally in addressing / describing any criminal or moral fault (the title is misleading) - giving me the impression that she has been sponsored by the banking fraternity. Matters that are not even mentioned are: "The Fed" is privately owned and, in fact, controlled by Wall Street. Also not mentioned is the extraordinary influence that Goldman Sachs has in Government. No mention of the moral hazard of the banks being bailed out with public money, 100 cents on the dollar - absolutely incredible. No mention of the disgraceful bonuses they continued to pay themselves WITH PUBLIC MONEY. Disgraceful - still needs to be addressed.
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.
on 19 June 2009
Hugely informative exposé of the way derivatives were distorted and abused on an inconceivable scale to generate huge profits and bonuses.
A thrilling read in many places, and in others, a sometimes difficult read (for a lay person) due to the complexity of the financial products covered. Through reliance on computer models that could not be verified, valuations inferred from insurance, and the establishment of offshore shell companies, along with a failure to properly assess or address the risks, the book investigates the recklessness that brought the western banking industry to its knees. It describes the development of a financial crisis in detail, making central the experiences of key characters in the US investment bank J P Morgan.
The original benign concept was to spread risk around the globe to those who were willing and able to take it. Yet, when the Midas touch of these opaque financial tools was found wanting (in the sub-prime mortgage arena) the short term credit markets collapsed and the banks themselves were found holding, or liable for, shed-loads of paper with a rapidly declining value. The book recalls how one bank had an eye-watering $560 billion of CDOs on its books.
Definitely a book for the reading list of anyone wanting to learn how the banking sector came close to collapse and why the world economy is now in recession.
on 29 September 2010
Gillian Tett's book reads easily and is informative to the layman. However, the account is one-sided and omits to mention many pertinent points. My guess is that the author, being a professional journalist, did not want to raise the hackles of the very people on whom she depends for an inside track. Therefore, there is little mention of the short term incentives (i.e. bonuses) of the bankers who are the 'heroes' of her story. These as much as anything were the driving force for the 'unrestrained greed' within the banking community. Nor is there enough talk about how bankers oppose transpareny as this would cut into their ability to charge exorbitant fees and huge bid-offer spreads... in short this is an account which does not dig deep enough into the reasons why...
on 2 December 2015
Really well researched for a journalist, shows excellent access to sector contacts and expertise. A little technical at times but quite readable and understandable. Best read in conjunction with the many books related to specific banking disasters in the crash, also alongside books from politicians - although as they match up only in parts it can be hard to separate perceptions from reality to get the story straight. Watch a few films on the crash too. It all makes sense eventually and this book is one of the most useful insights to the banking issues operating throughout.