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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 14 November 2017
Fact-filled, but not at the expense of telling a good story. I'd love an updated version to bring the story up to date in light of events since 2010. GT's book is up there with Michael Lewis's work (the master of the populist financial genre), Liar's Poker, The Big Short, Boomerng etc.
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on 18 December 2011
In 1994, J.P. Morgan, looking to create a market for credit derivatives, provided $4.8 billion of credit to Exxon and sold the credit risk to the European Bank of Reconstruction and Development. Thus, the modern Credit Default Swap was born. Gillian Tett's "Fool's Gold" traces the history of credit derivatives through the lives of the bankers at J.P. Morgan who created them and ends with their incredible destruction of financial markets in 2008.

"Fool's Gold" is divided in three parts entitled- Innovation, Perversion and Disaster. "Innovation" follows the J.P. Morgan team's attempts to purposely create new credit derivatives in 1994, convince regulators to allow them to exist and find a viable way to industrialize their production. "Perversion" follows the explosion of derivative operations in other banks through quasi-shell companies, the development of new derivatives (such as those linked to the sub-prime mortgage market) and the extent to which banks leveraged themselves to produce them. "Disaster" gives another account of the financial crisis through the perspective of JPMorgan.

"Fool's Gold" provides a detailed account of the history behind the financial instruments which ultimately brought the financial system to a halt in 2008 whilst simultaneously detailing the development of J.P. Morgan through 1994-2009 throughout its acquisitions and takeovers. It's well-written and does a fairly good job of explaining complex financial terms (although those new to finance might still struggle.) However, those wanting a more detailed explanation of the financial crisis itself or the sub-prime market might be disappointed as Tett's account is somewhat rushed.
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on 20 October 2017
How much bloody time do you think I have??????????
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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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VINE VOICEon 3 May 2010
The subtitle could have been: 'How the Unrestrained Greed of Everyone Else Corrupted J.P.Morgan's Dream, Shattered Global Markets and Unleashed a Catastrophe: How a Saintly Band of Bankers Rewrote the Rules of Finance and Unleashed an Innovation Storm that they can't be Blamed for.

If you were to take a walk past J.P.Morgan's mid-town offices, I wouldn't be surprised if you were to see employees from the PR Dept. handing out copies of this book to passers-by. Although it gives a fairly decent, if superficial, run through of events, it is hampered by its partial perspective - seen exclusively through the prism of a team of J.P.Morgan bankers who claim most of the credit for the financial innovations that ultimately wrecked the world economy, but little of the blame - which is, at least partly, dumped at the door of those dastardly regulators for not breaking up the party when it was in full swing and Chuck Prince was still dancing.

This small band of fun-loving, ambitious, and moreover, idealistic financial geniuses discovered that, if they could dice up various debt products and sell them on, and then 'insure' the risk of default by selling cover even to those not holding that risk - 'exposures could be transferred to the most efficient holders of that risk'. Alternatively, it could be transferred more efficiently to those unaware of what those risks really were - particularly if it could be rubber-stamped as AAA by agencies paid by the sellers of those products. At no point is there the suggestion of any awareness that dislocating the originators of loans from the risk of default might not be an unalloyed boon.

All that was needed was to convince the regulators that these new product markets could be self-policing. It didn't have to be a hard sell, given that the man they had to sell it to was Alan Greenspan - an admirer of Ayn Rand's peculiar brand of economic individualism, and a fervent believer in the ideal of free markets. His acolytes, drawn through the revolving door that connects Wall St. to the Treasury, via the Fed, didn't need much arm-twisting.

As a result mortgage brokers were able to pile up billions of dollars worth of junk (i.e. `sub-prime') loans and, with the rating agencies seal of approval, pass them on to `efficient' holders of that risk (otherwise known as mugs). Thus the short-term returns were divorced from the longer-term risk of default. Ironically, what did for the major players was holding on to the `super-senior' tranches because they were considered too risk-free to give the kind of returns investors were getting used to. Apparently, it didn't occur to the PhD/MBA-rich quants that a general fall in house prices would ripple through the whole sector and therefore wasn't in the models.

When the proverbial hits the fan, the recurrent refrain from the Morganites is: 'How could this happen?' - which is either disingenuous or naive in the extreme (Tett suggests the latter). 'Nobody knew how it happened' reels one innovator. And it is this blank incomprehension that highlights the paradox at the heart of the story. How bankers who preach the virtues of free markets, which depend on transparency could develop a system so hidebound with opacity that no-one had a clue what anyone else was doing. Unless the lip-service paid to free markets is simply a rationalisation of self-interest aimed at short-circuiting regulation while, in the real world, the emphasis is on creating asymmetries of information from which profits can be made: the more complex the products, the higher the returns. This helps explain the resistance to some kind of exchange which would have revealed a true market price, in favour of the over-the-counter contracts - and why nobody knew what anything was worth - even on their own books. The proliferation of off balance sheet SIVs simply complicated this process further - and all in the name of `free and open markets'!

Drawing an analogy, one Morganite complains that you can't blame the cars (financial products), when it is the drivers (individual bankers) who are at fault - but if the traffic regulations are inadequate, it's only a matter of time before there's a pile-up (which will involve the careful as well as the reckless). The idea that regulation actually benefits market participants by restricting the excesses of the boy-racers isn't entertained.

Astoundingly, though, the regulators get a good kicking for doing the bankers bidding! In fact, they are damned if they do and damned if they don't. When a failed attempt at knocking heads together to forestall a crisis comes to nothing, one participant chides the Treasury for having the gall to intervene: `If we were to bill the US Treasury for that wasted time, the bill would be huge', he notes of the failure of JPMorgan, Citi and BofA to create a superfund to stave off losses. Further down the line however, pontificating from the confines of the Davos ski resort/bunker, the company's CEO complains: `Where were the regulators?' in the style of a petulant teenager, standing amid the wreckage of his parents' house, wondering why they'd let him invite his friends to a party. For Gillian Tett, however, this epitomises his `courage to speak up and stand out'.

At points, the narrative descends into unintentional comedy, as we hear that the old-school bankers were too busy raising funds for the victims of Darfur to pick up on the more rapacious activities of their less enlightened colleagues. The protestations of shock and outrage and claims of ignorance - even as some JPM Old Boys make a killing out of the downturn - stretch credulity. It's a common fallback position from inside the industry: these brilliant individuals hand-picked and handsomely remunerated for their perspicacity suddenly turn into tongue-tied ingénues, perplexed by the machinations going on around them (even as the K-Street lobbyists fight any significant reform). Although the author does add a postscript, which accepts the likelihood of some kind of retrenchment, the overall impression is that a pure and idealistically driven effort to free the world of risk has been ignobly corrupted by a few unnamed miscreants - something that couldn't possibly have been foreseen.

While Tett spends some time charting the career of Blythe Masters, one of the few women to rise through the ranks, the name of Brooksley Born, another high-flying woman, whose warnings about the possible dangers of credit derivatives fell on deaf ears, is conspicuous by its absence. One suspects that would have undermined the narrative. I'll leave her with the last word: "I think we will have continuing danger from these markets and that we will have repeats of the financial crisis -- [they] may differ in details but there will be significant financial downturns and disasters attributed to this regulatory gap, over and over, until we learn from experience."

If you want a bankers-eye view of the crisis, rather than a critical analysis, this fits the bill.
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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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