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Fool's Gold: How the Bold Dream of a…

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was…

by Gillian Tett

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Thorough and in depth analysis of the underpinnings to the Great Reccession. Very technical (but well explained) most of the time. A couple of simple diagrams would have maybe helped to understand the mechanics of some of the more complex instruments described. Strong narrative and well researched. ( )
  Charlie-Ravioli | Jan 18, 2016 |
Account of how the financial world went into virtual meltdown in 2008, by FT journalist Gillian Tett. Useful background for one who has followed events pretty closely. No one cause and no one guilty group but more than enough blame to go round. Has the world learnt lessons, just possibly; has the crisis been resolved, not by a long chalk; could something similar happen again, almost a probability. The fallout from this tale of greed chasing fool's gold will resonate for decades. ( )
  DramMan | Jun 16, 2013 |
Another view of the collapse, focusing on the bankers at J.P. Morgan, who largely stayed out of the stupidest and riskiest decisions but were swept up anyway, in part because they’d played key roles in developing the derivatives that were so badly misused in recent years. ( )
  rivkat | May 8, 2011 |
Fool's Gold is a story of unintended consequences. It's a largely sympathetic account of a small group of J.P. Morgan traders who perfected the idea of credit derivatives in the mid-1990s and then convinced Congress they shouldn't be regulated. By using something called a credit default swap, they could separate the default risk from commerical loans (one of the biggest sources of risk in banking) and sell it to someone else. The institution guaranteeing the risk was paid a steady stream of relatively small fees for assuming a risk they basically didn't think would happen. J.P. Morgan convinced the regulators that this "innovation" meant banks should be able to lower their capital reserves. The dream was that the capital thus freed up would "turbocharge not only banking but the economy as a whole."

Tett portrays the Morgan traders as careful not to engage in deals with unknown or unquantifiable risk--their goal was to control risk not increase it. The problem developed when Morgan's competitors started using credit default swaps with subprime mortgage-backed securities with little or no understanding of their actual default risk and misplaced reliance on self-serving computer models and agency ratings. As one of the Morgan traders said, "Really this crisis is not to do with derivatives. It is about bad mortgage lending, bad risk managment policies, how the innovation was used."

As Tett points out, this disaster was self-inflicted. "Unlike many banking crises, this one was not triggered by a war, a widespread recession, or any external economic shock. The financial system collapsed on itself, seemingly out of the blue, as far as many observers were concerned." After taking the reader on a journey to the outer reaches of cyberfinance, Tett concludes that "If there is one element, above all, that is 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 of prudence, moderation, balance, and common sense." Amen to that!

Probably the main thing this book made me aware of is what's called "the shadow banking system." I wish I could succinctly and intelligently describe the shadow banking system but I just don't understand it well enough. What I got out of the book is that it's a vast, unregulated network of institutions that borrow and lend large amounts of money to each other that has developed over the last 20 to 30 years. It includes all the off-balance sheet shell companies that were created to hold investments such as collateralized debt obligations (CDOs) backed by subprime mortgages. When people started to default on their mortgages, the institutions making up the shadow banking system lost confidence in each other and credit seized up. The result was a bank run, or panic, by institutions (rather than individuals).

Tett's self-proclaimed purpose in this book is to explain why the crisis happened. Overall, she did a good job of doing that but there was still enough that I was confused about in the end that I'm deducting 1 star. Nevertheless, this is a well-written, informative and very interesting look behind the scenes of the current practice of banking and how it's changed radically over the last 30 years. Recommended--4 stars. ( )
  phebj | Oct 19, 2010 |
I've now read no fewer than seven excellent books detailing the financial atrocities of 2007-9. Each takes a different spin.

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. ( )
4 vote ElectricRay | Jun 1, 2010 |
Showing 1-5 of 9 (next | show all)
Gillian Tett's book Fool's Gold is an exceptional account of how today's financial world became in thrall to advanced mathematics.
added by jlelliott | editNature, Ehsan Masood (pay site) (Sep 10, 2009)
This is a fascinating and detailed look at the crisis, seen through the prism of the venerable investment bank JP Morgan, where many of the complex derivatives that helped bring the system down originated.
added by mikeg2 | editThe Guardian, Ruth Sunderland (Jun 7, 2009)
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Amazon.com Product Description (ISBN 141659857X, Hardcover)

From award-winning Financial Times journalist Gillian Tett, who enraged Wall Street leaders with her newsbreaking warnings of a credit crisis more than a year ahead of the curve, Fool's Gold tells the astonishing unknown story at the heart of the 2008 meltdown.

(retrieved from Amazon Thu, 12 Mar 2015 18:14:36 -0400)

Traces the relationship between a team of JP Morgan banking gurus and the current financial crisis, documenting their invention of a bold variety of allegedly risk-free investments that sparked a frenzy in the banking world and may have directly contributed to the market crash.… (more)

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