Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe | Date: 28 April 2011, 07:53
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Book Description
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http://www.amazon.com/Fools-Gold-Corrupted-Unleashed-Catastrophe/dp/1400142830
Editorial Reviews
From Publishers Weekly
Starred Review. At once a gripping narrative, an education in derivatives,
and a most lucid origin-story for the current financial meltdown, it's
no surprise the author of this volume is an award-winning Financial
Times journalist. Taking readers back to the invention of credit-derivative
obligations (CDOs) at J. P. Morgan in 1994, and the subsequent exponential
growth of that market, Tett (Saving the Sun) deploys a remarkable sense
of pacing, generating real suspense over rapidly inflating debt on bank
balance sheets; by the time Lehman Brothers fails, the book has become
a bonafide page-turner. Tett explains how credit derivatives seemed
a win-win for the financial world, freeing up capital, increasing profits,
and diversifying risk, but makes the missteps equally clear as the industry
hurtles toward a largely-unforeseen wave of loan defaults (the worst
since the Great Depression). Interestingly, J.P. Morgan was one of a
handful of banks sufficiently prescient to imagine this "perfect storm"
of simultaneous defaults, and so never became over-reliant on CDOs.
Ignoring the tacked-on, preachy epilogue (in which Tett advocates her
specialty, social anthropology, as a way to avert future such crises),
Tett's explosive, illuminating narrative is the one to read for anyone
confused by the present financial mess. --This text refers to the Hardcover
edition.
From The Washington Post
From The Washington Post's Book World/washingtonpost.com Ever wonder,
looking at your 401(k) account statement, what exactly happened last
fall, when the financial system nearly collapsed and trillions of dollars
of "wealth" evaporated? Gillian Tett's splendid book might be the explanatory
tonic you've been looking for. There are other good books that help
untangle the disaster of 2008, notably Mark Zandi's "Financial Shock"
and Charles R. Morris's "The Two Trillion Dollar Meltdown" -- both are
accessible works by experts who wrote for a general audience, but neither
is as engaging as Tett's. A writer for London's Financial Times, she
brings an unusual credential to financial journalism: a PhD in social
anthropology. Anthropologists, as Tett notes at the end of her book,
look for holistic descriptions of human cultures that "link different
parts of a social structure." She has done just that in "Fool's Gold,"
which illuminates a basic truth: Apart from natural disasters, the great
events that alter human history are, however complicated, the work of
human beings. In the end, economic forces, the tides of history and
such are just manifestations of human foibles, often encouraged by dysfunctiona-
l cultures such as the one on Wall Street. Tett's mouthful of a subtitle
implies that she found the tribe responsible for this crisis. She does
make a convincing case that a small group of J.P. Morgan investment
bankers, employees of the firm's swaps department, were among the smartest
and most creative proponents of the new financial tool called derivatives,
defined prophetically in 2003 by the investor Warren Buffett as "financial
weapons of mass destruction." But if these bankers, mostly young and
many with credentials in computer science and mathematics, dreamed before
others about the potential power of derivatives, they were hardly alone,
and they hardly deserve the blame for what happened. They do, however,
provide a rich cast of characters and a storytelling device that helps
make this book compelling fun to read. And Tett, a resourceful reporter,
got many of them to open up. There isn't room in a brief review to define
the terms and acronyms of the financial meltdown, but Tett does this
well, partly with a glossary at the back of the book. Better, she describes
the evolution of the derivatives called credit default swaps that contributed
so much to last fall's unpleasantness. The first of these worked out
by J.P. Morgan insured Exxon against the risk to its finances created
by a threatened fine of $5 billion for the Exxon Valdez oil spill. Blythe
Masters, the brilliant young woman who figured out how to do this, became
a J.P. Morgan star -- and very rich. At first Morgan made the most hay
from credit derivatives, briefly dominating this new financial market.
(Just how profitable it was Tett doesn't say, a disappointing and unusual
failing.) But the biggest money ultimately was made from derivatives
based on securitized home mortgages, a category poisoned by subprime
mortgages issued to U.S. homebuyers with dubious credit ratings during
the great housing bubble in the middle of the decade. J.P. Morgan opted
not to get into that market, a very smart expression of a cautious corporate
culture that ultimately saved the company from the disasters others
suffered. Though Tett never lectures or hectors, her portrait of the
way greed, hubris and sheer stupidity combined to put global capitalism
at risk of disaster is devastating. Different readers will find their
hair curled by different revelations. Those most effective in raising
my blood pressure involved the bank executives who presided over the
institutions most prone to wretched excess but who knew little or nothing
about the derivatives their associates were buying and selling. "As
the pace of innovations heated up," Tett writes, "credit products were
spinning off into a cyber-world that eventually even the financiers
struggled to understand. The link between the final product and its
underlying assets was becoming so complex that it appeared increasingly
tenuous. . . . Most financiers lacked the cognitive skills to truly
understand the connections in this new world." Oh yes, and "even regulators
seemed only vaguely aware of what the banks were really doing." My favorite
quotation of the whole sordid story came from Charles Prince, the hapless
chief executive of Citigroup, one of the most irresponsible banks. Prince
said in the summer of 2007, "As long as the music is still playing,
we are still dancing" -- dancing, a year later, right off a cliff. Not
everyone was so oblivious. Indeed, some banks, including Goldman Sachs,
shifted tactics in 2007 and began to bet heavily on a downturn in the
mortgage market, which soon followed. Timothy Geithner, then the young
head of the New York Federal Reserve Bank, now secretary of the Treasury,
presciently warned that the proliferation of new financial gimmicks
could have unforeseeable negative consequences, and specifically noted
the leverage -- borrowed money -- so freely used by the big banks. But
the head of the Federal Reserve, Alan Greenspan, "the maestro," was
the leader of the camp of optimists who truly believed that the wonders
of the free market would dissipate the risks created by the new financial
tools. While the music still played, the ideology of deregulation or
just no regulation continued to prevail. Only later, after "the whole
intellectual edifice . . . collapsed," in Greenspan's memorable phrase,
did he and some of his allies (though far from all) admit what he acknowledged
so poignantly last October: The meltdown had reduced him to a state
of "shocked disbelief." "I made a mistake," said the man who, when he
ran the Fed, had the legal authority but not the inclination to regulate
the behavior by banks that led to the disaster. Tett is an anthropologist,
not a psychologist; she doesn't provide satisfying explanations of the
personal motivations of her principal cha
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