Fool's Gold: The Inside Story of J.P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe

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.NOTE: The title of this review is from Shakespeare's "Troilus and Cressida." In a crucial scene, the Trojans are debating whether Helen of Troy, whose kidnapping initiated the war with the Greeks, is worth keeping? The quotation I've used as a title is Troilus's assertion that yes -- we Trojans gave her the value she has, and that's what she's worth! and we're MEN, and we're going to fight to keep her. His brother Hector, tired of a seemingly endless war, isn't having it: "Brother," he says, "she is not worth what she doth cost the keeping . . ." It's a great moment in a great and disturbing play.

Tett has written an excellent book. However,she appears to have no understanding that the major conclusion of her analysis-that unregulated commercial and investment bankers deliberately collaborated in the creation of a massive speculative bubble ,based on the creation of collateralized debt obligations(CDO's), credit default swaps (CDS's),and other kinds of derivatives that were structured in such a way so that there was no transparency,in order to make a profit without production ,that collapsed and resulted in the most serious economic downturn for the USA and the world since the 1930's-had already been provided in greater detail by Adam Smith,John Maynard Keynes,Benoit Mandelbrot,and Nassim Nicholas Taleb long before her book was publisbed.No mention of these individuals occurs anywhere in her book.The reader is not provided with any historical background or perspective on the 400 plus year problem of banker financed bubbles that has been occurring regularly in all countries having a private profit maximizing banking system.The reader is not shown that this latest crash is just the most recent result of many,many past crashes resulting from banker financed speculative behavior.Only the names of the banks and bankers has changed over the centuries.This problem repeats with a regularity that is ergodic.The latest crash was completely predictable and preventable. Tett does an excellent job of demonstrating the speculator views of modern bankers.Her best example is Mark Brickell. Mark Brickell's views are ,and were, very representative of the J P Morgan bankers involved in the creation of the types of speculative financial assets that led up to the crash. He was a firm believer in the Efficient Market Hypothesis (EMH)created at the University of Chicago's economics and business departments by economists such as Merton Miller,Eugene Fama,and Milton Friedman.The claim here was that the time series data of all financial markets were normally distributed .There is not a shred of historical,empirical, or statistical evidence to support the EMH claim,which is the equivalent of claims made by Ptolomaic astronomers from the first through the 17th century,that the earth was stationary and the center of the universe.All goodness of fit tests show that the time series data is best represented by the Cauchy distribution.The time series data is not even remotely normally distributed.Tett fails to note that Keynes,in his 1921 A Treatise on Probability,had pointed out the special case nature of the Normal distribution.Benoit Mandelbrot has,since the late 1950's ,shown time and again that the data sets are not normally distributed.The same can be said of Nassim Taleb since the mid 1990's.It is interesting that E Fama did his dissertation under Benoit Mandelbrot in the mid 1960's.He concluded that the probability distributions of the Dow 30,were, in the mid-1960's,all Cauchy.He then turned around and started claiming,directly contradicting the empirical and statistical analysis contained in his own dissertation ,that the time series data was normally (log normal) distributed.Tett's discussion of the use of the normal distribution as the basic foundation of banker models of risk takes place on pp.99-103.There is no mention of Keynes,Mandelbrot,or Taleb.However,her biggest omission is of Adam Smith,who was well aware of the dangers of banker induced bubbles. The first extensive discussion of the problem of banker induced speculative bubbles was contained in Adam Smith's The Wealth of Nations(1776).Smith's conclusion was that loans given by bankers to speculators would end up being "wasted and destroyed ". That is what has happened every time in the past , what is happening in the present,and what will happen again in the future unless the private banking industry is prevented from making loans to speculators and/or prevented from creating speculative ,debt based ,financial instruments in the future.

Ottimo resoconto con dettagli interessanti e ampiamente documentati. I dettagli tecnici sono ridotti al minimo e funzionali alla narrazione. Avvincente.

Very satisfied. Plus this is a very good book by a very good writer.

Leitura obrigatória para quem gosta de mercado financeiro.

Incredible how greed transformed a great idea into the ruin of millions of people and lots of countries. A great description of how the crisis formed and transformed into one the greatest failures of modern economy. It is very descriptive so it's a good read for non-versed financial individuals.

fascinating - and exemplifies how easy it is make mistakes even when using the most powerful statistical concepts if you don't keep your eye on the ball. I seriously wonder how far we are away from the next catastrophe - living on borrowed money is an another example of the background storey that caused the GFC. Plus of course the greed of traders who make their money and walk away unscathed.