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Fool's Gold
Shipped from UK, please allow 10 to 21 business days for arrival. Very Good, A very good, near fine copy in black cloth boards with a very good dust jacket. Gillian Tett
338 pages, Hardcover
First published January 1, 2009
About the author
Gillian Tett
8 books137 followersGillian Tett is a British author and journalist at the Financial Times, where she is a markets and finance columnist and U.S. Managing Editor. She has written about the financial instruments that were part of the cause of the financial crisis that started in the fourth quarter of 2007, such as CDOs, credit default swaps, SIVs, conduits, and SPVs. She became renowned for her early warning that a financial crisis was looming.
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Displaying 1 - 30 of 169 reviews
October 23, 2011
This is one of the drier accounts of the 2008 financial meltdown. Journalist Tett begins in the 1990s with the invention of the credit derivatives at J.P. Morgan that would fuel the massive buildup of toxic leverage a decade later. Somewhat paradoxically, by that time the venerable J.P. Morgan had merged with the commercial bank Chase to become JPMorgan Chase (the periods vanished in order to disassociate from the idea of Morgan, the man), led by the risk-averse Jamie Dimon. Dimon was never willing to immerse the company in the subprime CDOs (collateralized debt obligations) the way other banks were doing - his derivatives experts examined them closely and repeatedly but could never figure out a way to mitigate the risk connected to the CDOs' super-senior tranches. The result was that JPMorgan Chase lost out on the enormous short-term profits from these vehicles, but were saved in the long-term by their prudence.
The J.P. Morgan innovators watched in horror as their brainchild nearly brought down the whole banking system. "It's like you've known a cute kid who then grew up and committed a horrible crime," one of them noted. They felt that CDOs were undeservedly being blamed; it wasn't the instruments themselves that were at fault, but the people using and misuing them. In this observation they sounded a little like the NRA: "Guns don't kill people, people kill people." Technically it may be true, but it obscures more than it enlightens.
Dry isn't necessarily bad; it just means that Tett's strength is conveying the nitty-gritty technical details rather than painting a gripping, character-driven picture. The sections where she attempts narrative tableaux fall flat.
The J.P. Morgan innovators watched in horror as their brainchild nearly brought down the whole banking system. "It's like you've known a cute kid who then grew up and committed a horrible crime," one of them noted. They felt that CDOs were undeservedly being blamed; it wasn't the instruments themselves that were at fault, but the people using and misuing them. In this observation they sounded a little like the NRA: "Guns don't kill people, people kill people." Technically it may be true, but it obscures more than it enlightens.
Dry isn't necessarily bad; it just means that Tett's strength is conveying the nitty-gritty technical details rather than painting a gripping, character-driven picture. The sections where she attempts narrative tableaux fall flat.
September 15, 2009
I've done a fair amount of reading about the Panic of 2008, and Gillian Tett's "Fools Gold" explains the exotic investment instruments at the heart of the panic better than any other work I've read. A group of derivatives traders at J.P. Morgan created commoditized credit default swaps in the early 1990s as a way to move risk off the company's books, freeing up capital for lending and investment that otherwise would need to be held in reserve. Morgan made payments to AIG, which assumed the risk that Morgan's assets would go into default. Derivatives traders at other firms began assembling securities backed by subprime mortgages, trying to put together instruments that would be just risky enough to obtain returns but safe enough to obtain AAA ratings. They then paid AIG to assume the risk of the mortgages underlying those securities going bad. However, many institutions kept what they thought were the least risky of these mortgages on their own books, as they could not obtain much in the way of returns on the securities that they would back. The whole thing was unregulated by government, and the ratings agencies were easily bamboozled into turning poo into gold (as it turned out). As the cruddy mortgages went bad, AIG began to take on water. When the less risky mortgages went bad, the financial institutions themselves sank.
Interestingly, J.P. Morgan did not get into the business of mortgage backed securities. Morgan's mathematicians could not put together a risk model with the kind of integrity to which they were accustomed. First, they had no data on what could happen if real estate values ever declined. Second, they had no long-term data on default rates for the kinds of subprime mortgages that proliferated in the early and mid 2000s. Moreover, Morgan/Chase chairman Jamie Dimon pushed the concept of a "fortress balance sheet" containing rock-solid assets on which the bank could rely if things went to hell. Dimon pushed Morgan's derivatives traders to investigate getting into the business of mortgage backed securities a couple of times, but, consistent with the notion of a "fortress balance sheet," he accepted the traders' reasons for staying away from that business.
The book contains a brief account of the events leading to the Lehman Brothers bankruptcy that turned a situation into a panic, and concludes with Tett's cultural analysis of U.S. and U.K. investment houses.
Interestingly, J.P. Morgan did not get into the business of mortgage backed securities. Morgan's mathematicians could not put together a risk model with the kind of integrity to which they were accustomed. First, they had no data on what could happen if real estate values ever declined. Second, they had no long-term data on default rates for the kinds of subprime mortgages that proliferated in the early and mid 2000s. Moreover, Morgan/Chase chairman Jamie Dimon pushed the concept of a "fortress balance sheet" containing rock-solid assets on which the bank could rely if things went to hell. Dimon pushed Morgan's derivatives traders to investigate getting into the business of mortgage backed securities a couple of times, but, consistent with the notion of a "fortress balance sheet," he accepted the traders' reasons for staying away from that business.
The book contains a brief account of the events leading to the Lehman Brothers bankruptcy that turned a situation into a panic, and concludes with Tett's cultural analysis of U.S. and U.K. investment houses.
November 27, 2009
This is yet another book about the credit crunch and the Crash of '08, but it's one of the best. Gillian Tett tells the story of the crisis from the point of view of JP Morgan. Morgan was an early innovator in the derivatives market. Indeed Tett credits Morgan with creating the credit default swap market which eventually overwhelmed the financial world. But, having created the market, Morgan walked away from it when it was unable to develop any sort of reliable risk modeling. As a result, Morgan was able to survive the crisis in a much stronger position than its rivals.
Tett's reporting and analysis is excellent. The first third of the book, called "Innovation," is literally the best possible primer you could read on derivatives and the shadow banking system that developed in their wake. Her description of the events surrounding the crash is very good. Unlike virtually everyone else writing about these issues, Tett avoids heavy-handed finger pointing. This book is notably lacking in hysterical jeremiads, whether against Richard Fuld, Henry Paulson, Barney Frank, Tim Geithner, and anyone else you would care to name. This is also a very well written book. Despite covering a lot of esoteric and abstract material, it flows very well and reads very quickly. This is highly recommended.
Tett's reporting and analysis is excellent. The first third of the book, called "Innovation," is literally the best possible primer you could read on derivatives and the shadow banking system that developed in their wake. Her description of the events surrounding the crash is very good. Unlike virtually everyone else writing about these issues, Tett avoids heavy-handed finger pointing. This book is notably lacking in hysterical jeremiads, whether against Richard Fuld, Henry Paulson, Barney Frank, Tim Geithner, and anyone else you would care to name. This is also a very well written book. Despite covering a lot of esoteric and abstract material, it flows very well and reads very quickly. This is highly recommended.
July 24, 2017
If anyone doubts the value of a social anthropology PhD, then this book offers a great answer and rebuke. Tett, a financial journalist, had completed a PhD in anthropology and used those skills to understand the 'on the ground' culture of the bankers and financiers in the derivatives market. Tett probed a culture of extreme risk taking, excess and ridicule of regulators. Fascinating, she also probed the consequences of disconnecting finance capitalism - money exchange - from the people it is meant to serve.
The ruthlessness and carelessness will remain my memories of this book. Bright people who not only behaved irresponsibly, but laughed at the misfortunes and losses of others.
The ruthlessness and carelessness will remain my memories of this book. Bright people who not only behaved irresponsibly, but laughed at the misfortunes and losses of others.
January 31, 2011
Another crisis/bailout book, this one told mostly from the point-of-view of J.P. Morgan, which came out slightly less dirty than most everyone else once the dust settled. It’s interesting to learn how derivatives became the Frankenstein’s monsters of the financial industry – the Morgan folks who thought them up meant well, and to an extent they make a kind of sense (spreading risk around to lessen its negative effects), but when misused, they brought the house down.
Also, Jamie Dimon must be a ridiculously charismatic guy, since both Tett and Andrew Ross Sorkin write about him like he saved the world.
Unlike “The Big Short,” which is an amazing combination of potboiler and finance textbook, Tett’s book is both drier and less insightful, in some ways. She clearly gets the derivatives market, and she explains it competently, but in a book that is entirely focused on the CDO and CDS, I thought I would come away with a more solid understanding of how the darn things work. I know she didn’t want to write an actual textbook, but the stories she tells – of the meetings at the Fed in 2008, of Dimon taking over JP Morgan, etc. – are available elsewhere, in more accessible forms.
So, ultimately, if I hadn’t read a few other books on similar topics, I’d probably have liked this one more. And, in fact, if you only want to read one book about this stuff and still get most of the knowledge, this isn’t a bad place to start. It’s not thrilling, like Michael Lewis’ book, and it’s not comprehensive, like Sorkin’s, but it’s interesting enough and detailed enough to make do.
Also, Jamie Dimon must be a ridiculously charismatic guy, since both Tett and Andrew Ross Sorkin write about him like he saved the world.
Unlike “The Big Short,” which is an amazing combination of potboiler and finance textbook, Tett’s book is both drier and less insightful, in some ways. She clearly gets the derivatives market, and she explains it competently, but in a book that is entirely focused on the CDO and CDS, I thought I would come away with a more solid understanding of how the darn things work. I know she didn’t want to write an actual textbook, but the stories she tells – of the meetings at the Fed in 2008, of Dimon taking over JP Morgan, etc. – are available elsewhere, in more accessible forms.
So, ultimately, if I hadn’t read a few other books on similar topics, I’d probably have liked this one more. And, in fact, if you only want to read one book about this stuff and still get most of the knowledge, this isn’t a bad place to start. It’s not thrilling, like Michael Lewis’ book, and it’s not comprehensive, like Sorkin’s, but it’s interesting enough and detailed enough to make do.
January 1, 2011
Well-done account of the Global Economic Meltdown of the Year Eight as seen from inside J.P. Morgan. Tett focuses on the rise and collapse of the credit derivative market--- she is the FT's specialist on that ---and not on the subprime mortgages that attract so many other authors. Her angle here is that CDS and derivatives were designed by her main characters not as "financial weapons of mass destruction" but as perfectly legitimate instruments for dispersing risk and were employed with no clear direction by the major banks. Her explanation of markets and market instruments is clear and straightforward, and her account of the disasters at Bear Stearns and Lehmann is one of the best and most direct that I've read. Still, Tett's account does remain just a bit abstract--- a tale of technicians and their tools with very little emotional connection to what happened to the 'ordinary' economy in the late summer and autumn of 2008. She makes the case that "too big to fail" isn't a myth, since it does mean "too interconnected to fail", that allowing a general collapse of the big trading houses and banks would've imploded the economy in a way not seen since 1929/30, but she doesn't go much beyond a few sentences ("the local ATM stops giving out money") that give a ground-level view of the disaster so narrowly averted.
March 10, 2011
Excellent read. Good focus on the evolution of credit derivatives and how a small coterie of bankers at JP Morgan changed the world. I found this book a much more enjoyable read than Ms. Tett's columns at the FT. Given a chance to tell a story in depth and paint idiosyncratic portraits of eccentric bankers at work and at play, Ms. Tett's writing style and skills are given more space. Reading this book, one gets the sense of a Dr. Frankenstein type scenario where some financial engineers with good (albeit slightly greedy) intentions created a monster that overpowered its creators and went on to wreak global financial terror. It is ironic that the creators at JPM later more or less disowned their creation and had the good sense to cut back their subprime debt exposures unlike their hapless counterparts at Bear Stearns, Lehman Brothers, Merrill Lynch and Citibank. I confess to a bias in Ms. Tett's favor -- having heard her deliver a short talk in Singapore and observed her on televsion and media (she has a few striking cameos in the Oscar-winning documentary "Inside Job"), I find her quite attractive, witty and engaging. Another good reason to read on ....
September 30, 2011
Good sketch of some of the structural factors behind the GFC. Chief factors appear to be: (i) Excessive securitisation of inappropriate underlying assets, with risk retained on bank balance sheets -- key word is excessive, not derivatives -- with the residual super-senior risk being taken up by banks themselves onto balance sheet, without due recognition of fact that CDOs were not meant to be written on mortgages in the first place but on diversified corporate loans, let alone to the extent that they were; (ii) seizing up of the commercial paper markets that the SIVs were using to fund yield carry trades on AAA-rated CDOs, as the asset quality of these CDOs started to come into question. These trades started to falter when the subprime market began to falter in 2006 -- unfortunately the book (and most other analysis) is unclear on what led the subprime housing market to start faltering in the first place. Thus it describes the set-up, and the denouement -- but omits the catalytical turning point.
September 26, 2009
If you're like me, making sense of the economic implosion has been difficult. I am lucky if I can manage to keep my checking account balance. So, the whole world of "derivatives" and "complex investment vehicles" generally soars right above my head.
That is, until I stumbled upon Gillian Tett's book, Fool's Gold. Now, I am still no economic expert, but I feel like Tett has provided me with a primer to sort through the mess brought about by a small band of investment bankers that left a devastating trail of destruction through the livelihoods of many.
Fool's Gold tells the story of how a small group of investment bankers cooked up the investment scheme that ultimately led to the crash of 2008. It is not a pretty story. It is one filled with greed, arrogance and blind faith in the so-called "free market." Although the narrative sometimes gets bogged down in acronyms, it is worth the effort. Highly recommend for those of us who don't hang out on Wall Street.
That is, until I stumbled upon Gillian Tett's book, Fool's Gold. Now, I am still no economic expert, but I feel like Tett has provided me with a primer to sort through the mess brought about by a small band of investment bankers that left a devastating trail of destruction through the livelihoods of many.
Fool's Gold tells the story of how a small group of investment bankers cooked up the investment scheme that ultimately led to the crash of 2008. It is not a pretty story. It is one filled with greed, arrogance and blind faith in the so-called "free market." Although the narrative sometimes gets bogged down in acronyms, it is worth the effort. Highly recommend for those of us who don't hang out on Wall Street.
August 12, 2014
Is Wall Street motivated solely by greed, or do its bankers have humanity’s interests at heart? In this revealing account of the events leading up to the Global Financial Crisis, Gillian Tett sheds light on how investment bankers think, why they made the decisions they did, and how it all came unstuck.
Tett, anthropologist and editor of the Financial Times, explains how a small team at J.P. Morgan believed they were developing financial products that would reduce risk and help stabilise the global economy. As Tett explains, “…the bitter irony is that they first developed their derivatives ideas in the hope that they would be good for the financial system.” In helping their own careers and their bank’s portfolio, they thought that they could also help humanity.
- See more at: http://popanth.com/review/fools-gold-...
Tett, anthropologist and editor of the Financial Times, explains how a small team at J.P. Morgan believed they were developing financial products that would reduce risk and help stabilise the global economy. As Tett explains, “…the bitter irony is that they first developed their derivatives ideas in the hope that they would be good for the financial system.” In helping their own careers and their bank’s portfolio, they thought that they could also help humanity.
- See more at: http://popanth.com/review/fools-gold-...
December 23, 2018
This is a very readable account of how derivatives and other financial innovations were misused and led to the financial crisis of 2007-2008. I bought this book years ago based on its reviews, but just now finally got around to reading it. It helps to explain all the bank mergers & consolidations that occurred in the previous decade. I was well aware at the time they were happening, but I was pretty clueless why they were happening (ie. most were for survival purposes). I recommend this to anyone interested in understanding what happened and why Warren Buffett famously referred to derivatives as "financial weapons of mass destruction."
June 20, 2011
A very interesting read, with lots of details and a good flow; however, Tett's writing doesn't allow for the drama to come through, like in other contemporary business (failure) books. Worth a read.
July 4, 2016
British voters paid little attention to Jamie Dimon’s threat to relocate 4,000 JP Morgan jobs from London in the event of Brexit. But underneath the small print they might have missed the real concern – the world’s most prestigious bank relies on its London offshoot to nurture its Derivatives operations. In reality, England’s capital has been a welcome centre for American retail banks hoping to blur the lines between commercial and investment banking for the last five decades. Will that now change?
Gillian Tett’s story of how a team of innovative bankers at JP Morgan designed today’s Credit Default Swap (CDS) as a means of revolutionising finance and freeing up capital for other lending projects is a well-rehearsed tale that applies to all areas of science and industry. A passionate clique of idealists put their creative talents to use thinking up ways to make the world more productive. Building on the work of other pioneers, they have an idea: what if you can securitise the one thing banks most fear – the potential loan defaulter who forces you to keep capital reserves locked in a vault doing nothing? A concept is born, but much like the inventors of Zyklon B who saw their creation misused by the Nazis, so we have a similar situation with enlightened research applied by unenlightened practitioners. The end result is hubris and eventual catastrophe.
Though a contender for the most ridiculous sub-title in the post-2008 genre of crisis studies, Fool’s Gold may well be the first work to define the complexities of Derivatives in an intelligible language. As Tett explains, these financial products ‘provide a way for investors to either protect themselves, for example, against a possible negative future price swing, or to make high-stakes bets on price swings for what might be huge payoffs.’ She then goes on to give basic examples of Forward Contracts, Options and Swaps and furnishes us with a brief history of Derivatives from the establishment of the Chicago Board of Trade in 1849 to the ground-breaking currency Swap between IBM and the World Bank brokered by Salomon Brothers in 1981. A survey of this magnitude is no mean achievement, especially when condensed to less than ten pages.
Often, the finest books beg you to read one more paragraph until your eyes can no longer take the strain – Fool’s Gold is one of those works. Throughout these 313 pages, Tett’s writing is fused with prescient observation and a unique ability to explain opaque concepts to a wider audience – you want more. Her academic training as a Social Anthropologist may well be a blessing (though unusual for a financial journalist), but her grasp of history is just as important. A seminal event for her is JP Morgan’s 1994 CDS deal with Exxon Mobil and the European Bank of Reconstruction and Development (EBRD). British financier, Blythe Masters, gets the credit for achieving two complimentary goals with this landmark CDS by reducing capital holdings on her bank’s balance sheet and paying a third party to insure against a loan default.
From a modern perspective this is a moment that changed the world of Finance. Even today Exxon Mobil is the least likely candidate (other than Apple) to default on a credit line of $4.8 billion, and is the very definition of a triple-A asset. Why keep so much capital tied up when you can pay a third-party (EBRD) an annual fee to assume full liability in the event of default? JP Morgan can reduce their equity reserves, Exxon Mobil get their credit line and the EBRD earns an annual fee for keeping an ultra-safe asset on its books. Everything about this deal made sense: the EBRD was forbidden from investing in risky assets and was looking for a higher yield outside its usual portfolio of sovereign bonds; JP Morgan could maintain its loyalty to its client, Exxon Mobil, by not selling the loan to another party.
The term ‘Financial Engineering’ is now used scathingly and often substitutes for the word ‘alchemy’ when describing the sinister machinations of high finance, but it wasn’t always this way. The trouble begins when everyone catches on and applies a good idea to inappropriate concepts. As the JP Morgan team were later to realise – credit derivatives are not the problem, it’s the people that package them. Underwriting CDS contracts for bundles of mortgages containing both Triple-A and Subprime assets is the opposite of what Blythe Masters had in mind in 1994, but AIG took the idea to its logical conclusion and never imagined how this could bring them to the brink of bankruptcy twenty years later.
But Tett is not just content with writing a narrative of events. Like any academic she wants to know why things happened as they did. How did the US Federal Reserve and Bank of England allow OTC Derivatives to evolve into the financial WMDs that brought the world economy to its knees in 2008? What about the nature of financial innovation, where an idea is quickly imitated by competitors and margins are driven down as more participants flood the market? Is ‘creative destruction’ the engine that underpins the next crisis by forcing banks to adopt an ‘innovate or die’ mentality? Against this backdrop the author introduces every CEO’s nightmare – the hostile takeover bid from a rival bank, or, even worse, defenestration by disillusioned shareholders.
In keeping with every account of the 2007-08 banking crisis, Fool’s Gold is also not alone in highlighting JP Morgan CEO, Jamie Dimon, as a special talent on Wall Street. As in Andrew Ross Sorkin’s Too Big to Fail (2009), Dimon is portrayed as a boss with an unusual command of his brief, even to the point of challenging his traders and quants with poignant questions they would never expect from someone so high up. It may not be sycophantic, but Tett is gushing in her praise for the Rock Star of modern banking: ‘The JP Morgan Chase staff would have reason to be grateful that Dimon had arrived on the scene, and held true to his principles of risk management, even as most of the rest of the banking world broke free from all bounds of rational discipline,’ we are told. To be fair, the same might be said about Lloyd Blankfein of Goldman Sachs, but the world’s most envied (and hated) investment bank traded their way out of the Subprime mess in early 2007 by betting against the market with its own capital. Though not as glamorous, JP Morgan simply tightened its mortgage-lending criteria and didn’t ramp up its CDO trading desks when others were in overdrive, but it still took big hits on its balance sheet.
Many assumptions about the western financial system have collapsed since the fall of Lehman Brothers. The timeline of events from BNP Paribas’ decision to suspend three money market funds in August 2007 to Northern Rock’s nationalisation the following February are now considered seminal moments in the crisis. However, Tett prefers to use the collapse of US Investment Bank, Bear Stearns, in March 2008 as the climax to her book, seeing in this one event the first real sign that ‘unrestrained greed corrupted a dream, shattered global markets and unleashed a catastrophe.’
JP Morgan may have created the conditions for bringing CDS contracts into the mainstream, but the world of credit derivatives that grew out of it, including the proliferation of Collaterised Debt Obligations and other mortgage-backed securities, will always be remembered as a collective folly unsurpassed in the world of finance since 1929. But whether the house of Pierpoint Morgan should be off the hook is another question, and Tett is ambivalent enough to keep us guessing.
What we are left with is a superb account of how banking became an insular, proprietary pastime where the people supposed to be oiling the wheels of finance forgot about infrastructure projects and building factories. But, as Tett shows, the intentions behind that famous 1994 CDS deal had the fundamentals of banking at heart, namely how to release more capital to build the things we need to prosper as a civilisation.
How tragic that collecting easy fees and repackaging risk became an end in itself instead of the means to a better future. As Iain Fraser notes when quoting a banker in his seminal study of what went wrong at RBS: ‘We are investment bankers. We don’t care what happens in five years.’
Gillian Tett’s story of how a team of innovative bankers at JP Morgan designed today’s Credit Default Swap (CDS) as a means of revolutionising finance and freeing up capital for other lending projects is a well-rehearsed tale that applies to all areas of science and industry. A passionate clique of idealists put their creative talents to use thinking up ways to make the world more productive. Building on the work of other pioneers, they have an idea: what if you can securitise the one thing banks most fear – the potential loan defaulter who forces you to keep capital reserves locked in a vault doing nothing? A concept is born, but much like the inventors of Zyklon B who saw their creation misused by the Nazis, so we have a similar situation with enlightened research applied by unenlightened practitioners. The end result is hubris and eventual catastrophe.
Though a contender for the most ridiculous sub-title in the post-2008 genre of crisis studies, Fool’s Gold may well be the first work to define the complexities of Derivatives in an intelligible language. As Tett explains, these financial products ‘provide a way for investors to either protect themselves, for example, against a possible negative future price swing, or to make high-stakes bets on price swings for what might be huge payoffs.’ She then goes on to give basic examples of Forward Contracts, Options and Swaps and furnishes us with a brief history of Derivatives from the establishment of the Chicago Board of Trade in 1849 to the ground-breaking currency Swap between IBM and the World Bank brokered by Salomon Brothers in 1981. A survey of this magnitude is no mean achievement, especially when condensed to less than ten pages.
Often, the finest books beg you to read one more paragraph until your eyes can no longer take the strain – Fool’s Gold is one of those works. Throughout these 313 pages, Tett’s writing is fused with prescient observation and a unique ability to explain opaque concepts to a wider audience – you want more. Her academic training as a Social Anthropologist may well be a blessing (though unusual for a financial journalist), but her grasp of history is just as important. A seminal event for her is JP Morgan’s 1994 CDS deal with Exxon Mobil and the European Bank of Reconstruction and Development (EBRD). British financier, Blythe Masters, gets the credit for achieving two complimentary goals with this landmark CDS by reducing capital holdings on her bank’s balance sheet and paying a third party to insure against a loan default.
From a modern perspective this is a moment that changed the world of Finance. Even today Exxon Mobil is the least likely candidate (other than Apple) to default on a credit line of $4.8 billion, and is the very definition of a triple-A asset. Why keep so much capital tied up when you can pay a third-party (EBRD) an annual fee to assume full liability in the event of default? JP Morgan can reduce their equity reserves, Exxon Mobil get their credit line and the EBRD earns an annual fee for keeping an ultra-safe asset on its books. Everything about this deal made sense: the EBRD was forbidden from investing in risky assets and was looking for a higher yield outside its usual portfolio of sovereign bonds; JP Morgan could maintain its loyalty to its client, Exxon Mobil, by not selling the loan to another party.
The term ‘Financial Engineering’ is now used scathingly and often substitutes for the word ‘alchemy’ when describing the sinister machinations of high finance, but it wasn’t always this way. The trouble begins when everyone catches on and applies a good idea to inappropriate concepts. As the JP Morgan team were later to realise – credit derivatives are not the problem, it’s the people that package them. Underwriting CDS contracts for bundles of mortgages containing both Triple-A and Subprime assets is the opposite of what Blythe Masters had in mind in 1994, but AIG took the idea to its logical conclusion and never imagined how this could bring them to the brink of bankruptcy twenty years later.
But Tett is not just content with writing a narrative of events. Like any academic she wants to know why things happened as they did. How did the US Federal Reserve and Bank of England allow OTC Derivatives to evolve into the financial WMDs that brought the world economy to its knees in 2008? What about the nature of financial innovation, where an idea is quickly imitated by competitors and margins are driven down as more participants flood the market? Is ‘creative destruction’ the engine that underpins the next crisis by forcing banks to adopt an ‘innovate or die’ mentality? Against this backdrop the author introduces every CEO’s nightmare – the hostile takeover bid from a rival bank, or, even worse, defenestration by disillusioned shareholders.
In keeping with every account of the 2007-08 banking crisis, Fool’s Gold is also not alone in highlighting JP Morgan CEO, Jamie Dimon, as a special talent on Wall Street. As in Andrew Ross Sorkin’s Too Big to Fail (2009), Dimon is portrayed as a boss with an unusual command of his brief, even to the point of challenging his traders and quants with poignant questions they would never expect from someone so high up. It may not be sycophantic, but Tett is gushing in her praise for the Rock Star of modern banking: ‘The JP Morgan Chase staff would have reason to be grateful that Dimon had arrived on the scene, and held true to his principles of risk management, even as most of the rest of the banking world broke free from all bounds of rational discipline,’ we are told. To be fair, the same might be said about Lloyd Blankfein of Goldman Sachs, but the world’s most envied (and hated) investment bank traded their way out of the Subprime mess in early 2007 by betting against the market with its own capital. Though not as glamorous, JP Morgan simply tightened its mortgage-lending criteria and didn’t ramp up its CDO trading desks when others were in overdrive, but it still took big hits on its balance sheet.
Many assumptions about the western financial system have collapsed since the fall of Lehman Brothers. The timeline of events from BNP Paribas’ decision to suspend three money market funds in August 2007 to Northern Rock’s nationalisation the following February are now considered seminal moments in the crisis. However, Tett prefers to use the collapse of US Investment Bank, Bear Stearns, in March 2008 as the climax to her book, seeing in this one event the first real sign that ‘unrestrained greed corrupted a dream, shattered global markets and unleashed a catastrophe.’
JP Morgan may have created the conditions for bringing CDS contracts into the mainstream, but the world of credit derivatives that grew out of it, including the proliferation of Collaterised Debt Obligations and other mortgage-backed securities, will always be remembered as a collective folly unsurpassed in the world of finance since 1929. But whether the house of Pierpoint Morgan should be off the hook is another question, and Tett is ambivalent enough to keep us guessing.
What we are left with is a superb account of how banking became an insular, proprietary pastime where the people supposed to be oiling the wheels of finance forgot about infrastructure projects and building factories. But, as Tett shows, the intentions behind that famous 1994 CDS deal had the fundamentals of banking at heart, namely how to release more capital to build the things we need to prosper as a civilisation.
How tragic that collecting easy fees and repackaging risk became an end in itself instead of the means to a better future. As Iain Fraser notes when quoting a banker in his seminal study of what went wrong at RBS: ‘We are investment bankers. We don’t care what happens in five years.’
August 14, 2018
I could only afford to do a quick scan of the book as research for a school essay, but even so, I found this a deeply engaging journalistic account of the origins of the 2008 crisis. This is an account you read with a growing sense of horror - Tett takes you through the chronological process (starting from the 1990s to 2008) of how risks were rolled into more risks, disguised by ever more complex financial jargon with each rolling, until credit-based derivatives mutate into an epidemic that infected the whole financial system. She has an awareness that her reader may need help navigating the jargon of the financial world, and so makes an effort to break down and explain the terms in a simplistic manner. Tett follows specific individuals who developed the financial tools that facilitated the crisis, but while she fleshes out their individual motivations and personalities, ultimately we get the sense that it is the wider culture of finance, rather than individuals that should be blamed for the crisis.
I really like what Tett writes in the last few pages of the epilogue, in which she references how her training in social anthropology at Cambridge for her PhD helped her to make sense of the financial crisis. Tett herself has her reservations about social anthropology academia (which is why she chose to go into journalism instead), but at the end of this book she writes:
“... I realise that the finance world’s lack of interest in wider social matters cuts to the very heart of what has gone wrong. What social anthropology teaches its adherents is that nothing in society ever exists in a vacuum or in isolation. Holistic analysis that tries to link different parts of a social structure is crucial, be that in respect to wedding rituals or trading floors. Anthropology also instills a sense of skepticism about official rhetoric. In most societies, elites try to maintain their power not simply by garnering wealth, but also by dominating the mainstream ideologies, in terms of both what is said and what is not discussed. Social “silences” serve to maintain power structures, in ways that participants often barely understand themselves let alone plan...
In pointing out the cultural issues, I do not mean to suggest that tangible macroeconomic issues were not crucial too...
Yet what is also needed is a wider rethinking of the culture of finance. For too many years, bankers have treated “credit” as merely an isolated game of numbers. The roots of the word, though, come from the Latin credere, meanings “to believe”. That is a concept centered on wider social relations, which financiers forget at their peril. For if there is one element, above all, that is how needed to restore sanity to banking, it is that policy makers, bankers and politicians must adopt a more holistic vision of finance. In essence, what is needed is a return to the seemingly dull virtues or prudence, moderation, balance, and common sense.”
I really like what Tett writes in the last few pages of the epilogue, in which she references how her training in social anthropology at Cambridge for her PhD helped her to make sense of the financial crisis. Tett herself has her reservations about social anthropology academia (which is why she chose to go into journalism instead), but at the end of this book she writes:
“... I realise that the finance world’s lack of interest in wider social matters cuts to the very heart of what has gone wrong. What social anthropology teaches its adherents is that nothing in society ever exists in a vacuum or in isolation. Holistic analysis that tries to link different parts of a social structure is crucial, be that in respect to wedding rituals or trading floors. Anthropology also instills a sense of skepticism about official rhetoric. In most societies, elites try to maintain their power not simply by garnering wealth, but also by dominating the mainstream ideologies, in terms of both what is said and what is not discussed. Social “silences” serve to maintain power structures, in ways that participants often barely understand themselves let alone plan...
In pointing out the cultural issues, I do not mean to suggest that tangible macroeconomic issues were not crucial too...
Yet what is also needed is a wider rethinking of the culture of finance. For too many years, bankers have treated “credit” as merely an isolated game of numbers. The roots of the word, though, come from the Latin credere, meanings “to believe”. That is a concept centered on wider social relations, which financiers forget at their peril. For if there is one element, above all, that is how needed to restore sanity to banking, it is that policy makers, bankers and politicians must adopt a more holistic vision of finance. In essence, what is needed is a return to the seemingly dull virtues or prudence, moderation, balance, and common sense.”
November 1, 2018
I think Tett probably explained the financial creations involved in this account of the Banking mess that led to the "Great Recession" as efficiently and effectively as one can for general readers and I'm still pretty foggy on what it all means.
What is clear though, is that, as the subtitle indicates, the financial market was corrupted by greed (essentially underlining for those who needed to hear it that nothing human-made and run can be left to itself and assumed to be safe and able to self-regulate) and ended up just blowing itself up.
The account of what happened and who the major players were are is clear, even if the full nature of the tools involved was a bit beyond me. Tett does a good job of indicating how much leverage and risk was involved and how, inevitably, chasing phenomenal profits blinded everyone involved to the potential risks and the worst case scenario--the one that would never happen came along and torched the house. It certainly manages to show how difficult it is/would be to fairly apportion blame etc. to given individuals.
What eats at me is the naivete of so many people involved. The willingness to say that the worst case scenario is so unlikely we shouldn't have to be prepared for it, and that public figures were aware that was the assumption and let it go. I was under the impression that common-sense financial management being as prepared to cover the worst possible at all times, so that you can then safely make investments or take risks with the money that is left. I'm also disgusted by the levels of profit that are considered small and insufficient and reason to pursue unreasonable risk when they're so huge. We have businesses making profits of billions of dollars that are upset because someone else made a few billion more doing something stupid and getting lucky. At what point does a several billion dollar return on investment become inadequate returns? Granted I chose to become a teacher, and not just a teacher but a public school teacher, and not just a public school teacher, but a public school teacher in Colorado, and not just in Colorado but in the portion of the state which has the lowest average salaries in the region. But still...it seems there should be some sense of proportion. I'm reminded of Thoreau, who said that superfluous money can only be superfluities, and given that you don't need superfluities, there's no limit to how much you want because the need can't ever be satisfied...It all makes me really sad.
What is clear though, is that, as the subtitle indicates, the financial market was corrupted by greed (essentially underlining for those who needed to hear it that nothing human-made and run can be left to itself and assumed to be safe and able to self-regulate) and ended up just blowing itself up.
The account of what happened and who the major players were are is clear, even if the full nature of the tools involved was a bit beyond me. Tett does a good job of indicating how much leverage and risk was involved and how, inevitably, chasing phenomenal profits blinded everyone involved to the potential risks and the worst case scenario--the one that would never happen came along and torched the house. It certainly manages to show how difficult it is/would be to fairly apportion blame etc. to given individuals.
What eats at me is the naivete of so many people involved. The willingness to say that the worst case scenario is so unlikely we shouldn't have to be prepared for it, and that public figures were aware that was the assumption and let it go. I was under the impression that common-sense financial management being as prepared to cover the worst possible at all times, so that you can then safely make investments or take risks with the money that is left. I'm also disgusted by the levels of profit that are considered small and insufficient and reason to pursue unreasonable risk when they're so huge. We have businesses making profits of billions of dollars that are upset because someone else made a few billion more doing something stupid and getting lucky. At what point does a several billion dollar return on investment become inadequate returns? Granted I chose to become a teacher, and not just a teacher but a public school teacher, and not just a public school teacher, but a public school teacher in Colorado, and not just in Colorado but in the portion of the state which has the lowest average salaries in the region. But still...it seems there should be some sense of proportion. I'm reminded of Thoreau, who said that superfluous money can only be superfluities, and given that you don't need superfluities, there's no limit to how much you want because the need can't ever be satisfied...It all makes me really sad.
November 19, 2023
Gillian Tett's chronicling of the 2008 financial crisis delicately oscillates between informative and personable as a means of garnering a holistic purview of the competing forces that coalesced into a global catastrophe.
She employs a deliberate, informative account into the intricate interplay of the vast swaths of intentionally complex financial products, such as the SPV's, SIV's, Mezzanine CDO ABS's, in order to expose the motivations of the banks in obfuscating risk. She explicates the concepts in layman's terms, craftily analogizes the correlation of CDO default risk to a bag of apples to suggest the difficulty for bankers in assessing the probability of consecutive defaults.
Furthermore, she highlights several notable characters involved in JP Morgan's initial innovation of the credit derivative that ultimately spurred exploitation across the financial world, specifically in the realm of subprime mortgages. The reader can connect with the innovators such as Bill Winters and Blythe Masters, whose original intent was to mitigate the risk of credit transactions. Moreover, narrating the origins of financial legend Jamie Dimon adds clarity to JPM's incentives during the early 2000s, indicating that while the company that may have engendered the "weapon of mass financial destruction," they were relatively far from the scene of the crime once the dust settled.
Gillian Tett's anthropological lens is in full effect: suggesting that the conflation of human's rapaciousness, the Silo effect, detachment between the technologies employed and its impact on humanity, ignited such crisis. Awareness of human bias and the repercussions of our collective behavior has the opportunity to save us from self-inflicted disaster.
She employs a deliberate, informative account into the intricate interplay of the vast swaths of intentionally complex financial products, such as the SPV's, SIV's, Mezzanine CDO ABS's, in order to expose the motivations of the banks in obfuscating risk. She explicates the concepts in layman's terms, craftily analogizes the correlation of CDO default risk to a bag of apples to suggest the difficulty for bankers in assessing the probability of consecutive defaults.
Furthermore, she highlights several notable characters involved in JP Morgan's initial innovation of the credit derivative that ultimately spurred exploitation across the financial world, specifically in the realm of subprime mortgages. The reader can connect with the innovators such as Bill Winters and Blythe Masters, whose original intent was to mitigate the risk of credit transactions. Moreover, narrating the origins of financial legend Jamie Dimon adds clarity to JPM's incentives during the early 2000s, indicating that while the company that may have engendered the "weapon of mass financial destruction," they were relatively far from the scene of the crime once the dust settled.
Gillian Tett's anthropological lens is in full effect: suggesting that the conflation of human's rapaciousness, the Silo effect, detachment between the technologies employed and its impact on humanity, ignited such crisis. Awareness of human bias and the repercussions of our collective behavior has the opportunity to save us from self-inflicted disaster.
May 30, 2020
This was such a well done book. This wasn't the book I was expecting, however I am happy for that. I expected this to be much more focused JP Morgan and Jamie Dimon. What the book really is, is the technical explanation about the 2008 financial crisis.
I feel like this book better accomplished what The Big Short: Inside the Doomsday Machine tried to do. This broke down the history of credit derivatives and really explained how the financial system got to the point of the crisis, but unlike in The Big Short: Inside the Doomsday Machine you learn about every layer of the financial instruments used. From this book, you can learn anything you would really need to know about CDOs, CDSs, Mortgage Backed Securities, and derivatives. Now when you read this, you find exactly how JP Morgan played a part in everything. In one way this is the story of JP Morgan, but it really is a look at the bigger picture.
I feel like this book better accomplished what The Big Short: Inside the Doomsday Machine tried to do. This broke down the history of credit derivatives and really explained how the financial system got to the point of the crisis, but unlike in The Big Short: Inside the Doomsday Machine you learn about every layer of the financial instruments used. From this book, you can learn anything you would really need to know about CDOs, CDSs, Mortgage Backed Securities, and derivatives. Now when you read this, you find exactly how JP Morgan played a part in everything. In one way this is the story of JP Morgan, but it really is a look at the bigger picture.
April 16, 2024
I mistook this book for Liar's Poker when I started reading it and only realized that this was, indeed, not the critically-acclaimed Michael Lewis book when I was about halfway through. Nonetheless, Fool's Gold was an interesting read. I broadly knew what caused the financial crisis of the late 2000s from The Big Short, however this book gave the full origin story of the investment vehicles that were the catalyst and the folks who invented them.
A small group of derivative traders at JP Morgan created credit default swaps to free up liquidity for the bank in order to free up more leverage, leading to more profits. This vehicle spun into numerous other derivatives that competitors copied and used ubiquitously.
What I found most interesting was the projections on how the tranches may actually default. The "super-premium" (i.e. "very safe") tranche was filled with mortgages that were very unlikely to default. Even if one did default, the statisticians projected that the correlation between other mortgages in that tranche defaulting was very low (i.e. very low probability of multiple defaults). This proved to be very wrong.
A small group of derivative traders at JP Morgan created credit default swaps to free up liquidity for the bank in order to free up more leverage, leading to more profits. This vehicle spun into numerous other derivatives that competitors copied and used ubiquitously.
What I found most interesting was the projections on how the tranches may actually default. The "super-premium" (i.e. "very safe") tranche was filled with mortgages that were very unlikely to default. Even if one did default, the statisticians projected that the correlation between other mortgages in that tranche defaulting was very low (i.e. very low probability of multiple defaults). This proved to be very wrong.
September 24, 2017
I was pleasantly surprised by this book, as the rather hysterical sub-title had me worried. But the book is actually a balanced account of aspects of the development of markets that led to the crisis. In particular, it focuses on the J.P.Morgan team that played a pivotal role in the development of credit derivatives and the picture painted of that bank and that team is far from what I had expected from said sub-title. It's a well-written book and one of the best I've read in explaining in simple terms some of the causes of the crisis. There were a few explanations I thought weren't entirely right (for example, the definition of OTC) but I'm guessing it would be virtually impossible to combine simplicity of explanation with 100% precision.
Very well worth a read for an explanation of the crisis, for some of the history of J.P.Morgan and other banks, and for a glimpse behind the scenes at some of the market participants.
November 28, 2018
At first, all those financial instruments with fancy names like CDOs, CDO of ABS, CDS and etc. were so obscure and confusing. I had read a couple of books about the financial crises before I grabbed this book. And, honestly, this book is among the best books that depict and explain the crises of the last decade in a unique way. It concentrates in one bank which after the crises become the most powerful bank in the world, i.e. J.P. Morgan. In the 1990s, the bank started to use credit derivatives in their transactions and did it very well. However, as the house mortgages increased, including the soaring of subprime loans, and the increase of the housing prices in US, the banks started to use credit derivatives. But, they used them in the wrong way. The giant monster was created in the market, called CDOs, which eventually, damaged the economy of the world. However, it's the only failure of the banks, but also regulators.
February 25, 2018
While I admit I am a bit behind on my current event reading (this book was published in 2009), the effect of the mortgage meltdown is still with us and we are being set up again for another, similar situation. I have read multiple books on this time period, including Paulson's autobiography. I continue to believe not enough people went to prison for mortgage fraud. I also continue to believe Iceland did the right thing in letting their banks fail rather than bail them out (as we did, effectively teaching banks that consequences of their behavior will be born by the tax payers). Worse, we now have a president that wants to roll back the laws that corrected the problems brought about, roll back regulation and the power of regulators, and set us up for another massive cost to the tax payer. The effect is a giant corporate welfare system that continues.
July 12, 2017
This is a fantastic book about the creation of financial instruments that was misused, mainly due to greed, and resulted in the Global Financial Crisis of 2008.
The book gives the background of the people involved and the decisions made by staff at J.P. Morgan from the 1990s until 2008.
I found the book to be a good read, well paced although I knew what was coming at the end. It's that wreck just ahead but you still want to see it.
I did find the book to be pro J.P. Morgan so not too sure whether there is a bias.
I did enjoy it though and would recommend this book if you want to learn more about credit derivatives and financial risk (mis)management.
The book gives the background of the people involved and the decisions made by staff at J.P. Morgan from the 1990s until 2008.
I found the book to be a good read, well paced although I knew what was coming at the end. It's that wreck just ahead but you still want to see it.
I did find the book to be pro J.P. Morgan so not too sure whether there is a bias.
I did enjoy it though and would recommend this book if you want to learn more about credit derivatives and financial risk (mis)management.
April 6, 2020
A solid account of the financial crash of 2008 as well as its lead-up.
However, this may not be a book that you can expect to read seamlessly without at least some technical familiarity with financial instruments such as CDO's, CDS's, MBS's, Repos, Asset-Backed Commercial Paper and so on.
Having come into this book on the back of others like Crashed, The Big Short and The Ascent of Money, some explanations are not complete - particularly when it comes to the subject of Special Investment Vehicles. But the book remains as good as any out there as a guide to understanding what happened in 2008.
However, this may not be a book that you can expect to read seamlessly without at least some technical familiarity with financial instruments such as CDO's, CDS's, MBS's, Repos, Asset-Backed Commercial Paper and so on.
Having come into this book on the back of others like Crashed, The Big Short and The Ascent of Money, some explanations are not complete - particularly when it comes to the subject of Special Investment Vehicles. But the book remains as good as any out there as a guide to understanding what happened in 2008.
January 9, 2022
A well-written narrative of the years and factors leading up to the financial collapse in 2007-2008. Author does a great job taking a (seemingly) complex subject and finding ways to make it understandable through helpful metaphors and concrete examples. There are places where the author bends over a little too much to justify the actions of different bankers, and the lionization of Jamie Dimon is a little much. Don't read it for a thorough critique of a fundamentally flawed banking system, but do read it for a well-researched, easy to read explanation of the structured finance and banking world.
April 7, 2020
An interesting history of the development of credit derivatives, such as credit default swaps, and how they bombed out. Essentially, JP Morgan officials were looking for a way to reduce their 8 percent reserve requirement so that they could invest more of that and make more money in the process. They did this by developing insurance for financial assets called credit derivatives. Nobody knew that when the economy tanked, the insurance claims would be too much for the insurers to pay out by the trillions. Dumb move.
November 29, 2022
Excellent detail (like, d.e.t.a.i.l.) of the new financial instruments those young financiers came up with for Morgan Stanley in 1995 and how naive they were to think that other bankers wouldn't abuse the idea to make more money. But then Morgan Stanley (and Wells Fargo) don't fall into the rabbit hole like the rest of them. Bernie's ponzi scheme was around 60 billion. One bank was in trouble by over 400 billion because of all the leveraging. Tett steers away from the madness of regular people losing their homes. This was more about the true finance and what went wrong.
March 13, 2023
So I finally found my four-star GFC book. Mind, it was still a good read. Looking at the role of JPMorgan was enlightening, and the brief mention of copulas and the longer discussion of credit default swaps was nice.
But honestly the title would have fooled me. The book was less about the mistakes of a bank, but more of how oh look our bank was suuuuper prudent. Also also, oh no look at how they destroyed our baby. There wasn't even a satisfying retribution arc against JPM, it's all how they stood out in the end. Too positive for my taste.
Otherwise, still a good addition to the GFC canon.
But honestly the title would have fooled me. The book was less about the mistakes of a bank, but more of how oh look our bank was suuuuper prudent. Also also, oh no look at how they destroyed our baby. There wasn't even a satisfying retribution arc against JPM, it's all how they stood out in the end. Too positive for my taste.
Otherwise, still a good addition to the GFC canon.
September 28, 2018
The story follows a team from JPMorgan, who invented some of the credit derivatives that brought down the banks in 2008. They themselves never used then in conjunction with subprime mortgages, and they were apparently dumbfounded that anyone would do so.
It covers slightly different aspects compared with Michael Lewis's ' The Big Short', but fundamentally the story is the same — greedy bankers spot an opportunity and, while it was ok on a smaller scale, it eventually blew up in their faces.
It covers slightly different aspects compared with Michael Lewis's ' The Big Short', but fundamentally the story is the same — greedy bankers spot an opportunity and, while it was ok on a smaller scale, it eventually blew up in their faces.
October 14, 2017
It was interesting to read this dry, financial reporter's account after having read the Big Short. This one focuses on what the pros were doing. Big Short was what the idiots were doing. Main point of both books is that it was hard to tell the idiots from the pros so it fooled most everyone. In the end, caution won the day for JP Morgan, PNC and a few others. Sounds good to me.
July 25, 2018
This is a good read, with the strong, clear writing necessary to convey some complex ideas. I can't claim I caught every last nuance, but the overall picture was clear. I appreciated Tett using J.P. Morgan as the POV, giving me a point of reference and an anchor. This is the second book I've read on the banking crisis and it won't be the last. Fascinating stuff!
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