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Mea non culpa
on 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.