Fool's Gold: The Inside Story of J.P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe (Anglais) Broché – 13 avril 2010
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Drawing on exclusive access to J.P. Morgan CEO Jamie Dimon and a tightly bonded team of bankers known on Wall Street as the "Morgan Mafia," as well as in-depth interviews with dozens of other key players, including Treasury Secretary Timothy Geithner, Tett brings to life in gripping detail how the Morgan team's bold ideas for a whole new kind of financial alchemy helped to ignite a revolution in banking, and how that revolution escalated wildly out of control.
The deeply reported and lively narrative takes readers behind the scenes, to the inner sanctums of elite finance and to the secretive reaches of what came to be known as the "shadow banking" world. The story begins with the intense Morgan brainstorming session in 1994 beside a pool in Boca Raton, where the team cooked up a dazzling new idea for the exotic financial product known as credit derivatives. That idea would rip around the banking world, catapult Morgan to the top of the turbocharged derivatives trade, and fuel an extraordinary banking boom that seemed to have unleashed banks from ages-old constraints of risk.
But when the Morgan team's derivatives dream collided with the housing boom, and was perverted -- through hubris, delusion, and sheer greed -- by titans of banking that included Citigroup, UBS, Deutsche Bank, and the thundering herd at Merrill Lynch -- even as J.P. Morgan itself stayed well away from the risky concoctions others were peddling -- catastrophe followed. Tett's access to Dimon and the J.P. Morgan leaders who so skillfully steered their bank away from the wild excesses of others sheds invaluable light not only on the untold story of how they engineered their bank's escape from carnage but also on how possible it was for the larger banking world, regulators, and rating agencies to have spotted, and heeded, the terrible risks of a meltdown.
A tale of blistering brilliance and willfully blind ambition, Fool's Gold is both a rare journey deep inside the arcane and wildly competitive world of high finance and a vital contribution to understanding how the worst economic crisis since the Great Depression was perpetrated.
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Certes, JPM s'est nettement mieux sortie de la crise que la plupart de ses concurrents. Le bon sens et la prudence qui leur ont permis d'y arriver m'avaient deja ete expliques par des gens qui y travaillent. Pourtant, ce livre n'insiste pas assez, a mon sens, sur le vigoureux lobby anti-regulation qu'a exerce Mr Dimon depuis le debut de la crise. Il porte de ce fait une responsabilite lourde pour les crises a venir.
Le livre est clair, se lit tres bien mais manque d'objectivite. Je me suis demandee a certains moments s'il n'etait pas un peu commandite... A lire donc mais sans oublier de completer sa lecture par d'autres plus critiques a l'egard du controle du secteur financier.
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Having fought the battles in the trenches over the past two years during the ongoing financial crisis, I have a deep appreciation for what Gillian Tett has accomplished in this book. It provides a comprehensive view of one corner of the financial markets - the one that caused so much of the wreckage over the past two years. While it will be a daunting task for any single writer to document the crisis we are still going through (given the multiple contributing factors/actors to this crisis), the author has done a great job producing a contemporary record on the credit derivatives market and its role in fueling the housing bubble leading up to the crisis.
Obviously, the author deliberately chose to exclude some critical episodes of the credit crisis (such as the SocGen trading scandal, the resulting ill-timed massive cut in Fed funds rate leading to the oil shock of 2008 that partially contributed to the inflation scare and added shock to the economy). She also chose to withhold judgment on policy responses during the early stage of the crisis and exclude the various "local" factors contributing to the subprime housing boom (think Hank Paulson and Ben Bernanke claiming the subprime crisis "being contained", think Barney Frank and his role in shielding Fannie and Freddie from proper oversight, think Clinton and Bush administrations' claim that homeownership was at "historical highs"). She may be right to do so as inclusion of these topics will obfuscate the focus on credit derivatives. An educated reader will want to keep in mind such background information as part of the mosaic of the financial crisis.
Without a full understanding of all the factors contributing to the crisis we find ourselves in, it would be tempting to find solutions that seem to eliminate the excesses of the past years only to sow the seeds for future problems. So-called "always fighting the last war". A simplistic solution to the credit derivatives abuse would be to ban it. A simplistic solution to the failed U.S. auto industry would be to subsidize it with taxpayer funds. A simplistic solution to the housing problem would be to mitigate mortgage foreclosures through taxpayer subsidies (as if everybody who bought a home deserves to live in that home or be a homeowners in the first place).
Gillian Tett was nominated as British Business Journalist of the Year not for this book, but her regular writings in the Financial Times. Her writings in the FT are insightful and timely. This book only reinforces her reputation as one of the best journalists in the field.
On a separate note not related to the book but the book reviews found on Amazon, I find it hard to believe that any review by people who haven't actually read the book is entertained on this site. Simply saying that "I heard this was a good book and I heard the author interviewed" is no qualification for one to write a book review. There is no prize to win from writing the first review, especially when it's only based on hear-say. Anyone who does that is doing the author and intended readers a great disservice, no matter how flattering the review is. Amazon should impose some minimal standard on such postings.
Pages 61 to 64 provide one of many examples. She concludes at the top of page 64, "Banks had typically been forced to hold $800 million in reserves for every $10 billion in corporate loans on their books. Now that could be just $160 million. The CDS concept had pulled off a dance around the Basel rules." Regulators and rating agencies aren't that naive! Three pages earlier she notes that the issuer of credit default insurance had to post $700mm of collateral, held as Treasuries, and that the Fed demanded that the issuer either had to have a triple AAA rating, i.e. the capacity to absorb losses greater than the $700mm it posted as collateral, or else the bank had to post an addition $160mm of reserves with the Fed, over and above the $700mm. The logic of this requirement is obvious, either way, someone, the bank or the insurer, had to post at least $800 of reserves. There is a popular belief that AIG posted no collateral but the truth is that while, it in part did not post liquid collateral, it in fact posted the value of its other businesses as collateral. The Fed, of course, took those businesses as collateral in exchange for posting liquid collateral.
Her descriptions of leveraged super senior on pages 96-98 are similarly muddled, incomplete and misleading, greatly overstating the extent to which sophisticated regulators, rating agencies and commercial paper investors failed to understand the issues surrounding these structures. It's akin to a beginning chess player interpreting the games of grandmasters by mistakenly assuming they are boldly trying to win pieces rather than much subtler truly winable advantages. Instead, capital markets are highly efficient. And regulators and rating agencies are far more knowledgeable than the popular press wants to admit. I would suggest going to: [...] and reading paragraph 1.3, "Incentives for the Protection-Buyer in a Leveraged Super Senior Transaction".
In the end, if the value of loans fall far enough, no matter how much you slice and dice the risk tranches someone must eat those loses. The slicing and dicing isn't necessarily the problem but rather the magnitude of the losses. And so, the story is woefully incomplete without also understanding the buying spree of Freddie and Fannie who, when they were not allowed to guarantee sub-prime and alt-a mortgages, instead bought 15-20% of the market with cheap quasi-government guaranteed financing, which drove up pricing. Brokers and banks couldn't have offered homeowners the ridiculous terms they did unless investors stood eagerly ready to buy on those terms. In large part, that buyer was Freddie and Fannie.
For its rendition of history, I would give the book 4; for the more important underlying argument, a 2; and so generously in total, a 3.
Gillian Tett's book Fools Gold covers the current financial crisis from its purported beginning in 1994 to the point at which most of us became aware of the systemic flaws in the global financial systems, with an inside look at the crisis from J.P. Morgan's version of the story.
The book begins by engagingly and sympathetically introducing us to the players on the banking and investment side of the equation; the team of collegiate, young, impassioned and idealistic folks at J.P. Morgan responsible for creating and marketing credit derivatives back in the early 1990's. It loosely follows the team, and more interestingly, follows the firm's evolution through the 1990's (with an admiring nod to Jerry Corrigan's concern regarding risk) and subsequent leaders (with a resounding `hurrah!' to Jamie Dimon and his `hands on' management style) and the industry excesses outside of JPM that, combined with a crisis in confidence in the financial markets, have created the worst financial crisis known since The Great Depression.
The book provides the reader with a relatively balanced look at the conditions, culture and tools that allowed a cadre of `quants' (quantitative analysts) to trump historically `sound' banking practices across the banking industry and which further allowed the subsequent derivative / analysts culture combined with unregulated banking and investment banking practices to prevail and flourish during the mid-1990's up to the current period (2009). To be fair, Tett's narrative indicates that at least at J.P. Morgan, the risk sensitive side of the equation held sway within policies of the firm. She provides the reader with a compelling understanding of how the desire to bolster shareholder profits in an unrealistic market led to decisions to embrace greater risk across the banking, investment and finance industry in spite of the ever more looming and unaccounted for 5% side of the 95% correlation, the so-called 'fat tail'(simplistically, what happens if more than anticipated % of US mortgage holders default?).
In summary, Ms. Tett provides an insiders view of JPM's creation of and internal struggles with the increasingly complex derivatives which the firm initially lobbied for, then marketed and finally shied away from due to the unknown risk the instruments presented. As such, the book is an insider's view and a noteworthy `first look' of the financial industry's corporate culture out of which the crisis came but by no means was the sole player in.
The author's background as a social anthropologist (she holds a PhD from Cambridge) provides a solid basis for her narrative, and the ending Epilogue holds alone enough material for a burgeoning Masters student who wishes to potentially dissect the financial excesses of society and the psychological bases which fuel them ...
This book is NOT a overview of the whole crisis. It is specifically intended to concentrate on the aspect above. It is written for those who are generally financially literate (e.g., typical readers of the Financial Times and Wall Street Journal), not for those who are already knowledgeable in credit derivatives and credit structured products (a more expert reader would want explanations at the level of the books by Janet Tavakoli). However, for the primary audience, more basic explanations of CDSs, Synthetic CDOs, Super Senior tranches, ABX indices, Conduits and SIVs etc -- all the specialised vocabulary that has been in the financial news in the last two years -- are quite sufficient and are more than adequate.
What I particularly liked, in addition to the very readable style, was the clarity of the overriding theme of corruption of the products with undiversified sub-prime mortgage assets, exaccerbated by excesses of leverage and shadow-banking vehicles to hold them; how an intelligent set of ideas was perverted in an environment encouraging greed at the expense of prudent risk-taking.
A highly informative book, well researched and written by Gillian Tett. Strongly recommended.
British broker Philip Augar covers the historical perspective; hedge fund manager and amateur philosopher George Soros looks to epistemology; former Federal Reserve Chairman Alan Greenspan provides a wide-ranging survey aimed more or less at self-exculpation; former Goldman Sachs chief and US Treasury secretary Hank Paulson breathlessly covers the regulator's perspective; New York Times journalist Andrew Ross Sorkin impressively covers the CEO's perspective and Michael Lewis writes from the perspective of those motley few who not only saw the crash coming (as we all did!) with hindsight, but bet on it happening ahead of time.
Now Gillian Tett, an excellent writer for the Financial Times, provides the credit structurer's perspective. Surveying the economic and intellectual environment which lent the tools and opportunity for these sub-prime backed products to get off the ground, Tett tells the story through the prism of the J. P. Morgan structuring desk from whose "BISTRO" transactions ("bank of international settlements total rip-off" indeed!) all of this started, but who still never fell for the mortgage-backed kool-aid which overwhelmed the rest of the market. The house of Morgan (Jean Strouse's reverent tome is well recommended) has a venerable tradition that even Goldman Sachs would envy; its performance over the last three years has burnished that reputation in a way that Goldman certainly ought to.
Tett's curiously titled book is, for the most part excellent, entertaining and novel. She does a better (and certainly more balanced) job of explaining the engineering of a CDO than Lewis (though in fairness, his is the only other entry to even have a go), and the J. P. Morgan angle is a clever narrative to lay over the goings on.
So much so that when Tett loses her focus on Morgan in the closing stages - her attention switches to the much larger field of conflict as the financial world blew up - the book suffers: Tett's treatment Bear, Lehman, AIG, and others is (of necessity) cursory, and those who are interested should seek out Sorkin's extraordinary survey, which is far more thorough.
Tett does pull it all back together again in her epilogue by re-focussing on the Morgan diaspora in a where-are-they-now summary, and she provides a stark and assertive personal perspective. Her background is social anthropology which she says (and I fully agree) provides a valuable perspective on how this could all have happened, and how it might happen again, that you won't find in Hayek or Friedman. But this is added as an afterthought rather than a spoke of the central thesis, which is a pity. For me that's the real story: the herd mentality, the group-think, the social and anthropological hierarchies that persist (and on which our financial and political institutions, frankly, are built) which tend to neuter the checks and balances which classical market theory says ought to be provided by the market. Curiously, George Soros gets closest to this, in his otherwise rather idiosyncratic (and a bit premature) book.
Tett's missed opportunity here is compounded when she misinterprets the metaphor of Plato's cave: The participants who look at only the shadows projected on the wall aren't at fault for failing to look at the "perfect forms" whose outlines create the shadows: Plato's point is they *can't* ever see them: it is the human condition to be stuck with the shadows. That ought to lead, therefore to a different conclusion: not that we should turn around to look at the projector - for that will surely blind us - but that we need at all times to maintain a healthy scepticism for what we are seeing. The fatal mistake is to suppose it is the truth.
If we can devise a way of building that impulse - a will to contingency, if you like - into our institutions, we'll be on the way to fixing this.
Fat chance, I suspect.