Gary Giroux Blog

On Thursday, July 15, 2010, the Senate passed the Financial Reform (Dodd-Frank) bill (the usual 60-39 vote, with all but one Democrat voting in favor and most Republicans against) and it will be headed for President Obama’s signature.  Accolades from most Democrats, financial disaster predictions from most Republicans. 

The Wall Street Journal (“Grading the Bill,” July 16, 2010) asked 12 experts to rate the bill from A to F.  Interestingly, grades ranged from A to F with a couple of incompletes and a “wait-and-see.” 

Some of the key “votes:”

Henry Paulson, former Treasury Secretary, incomplete because of no solution to Fannie and Freddie and all the unknowns; 

Harvey Pitt, former SEC Chairman, F, because it makes a broken regulatory system worse and fixes nothing;

Peter Wallison of the American Enterprise Institute, F, for weakening financial institutions and ignoring the causes of the crisis.

Doulgas Elliot of the Brookings Institute, A-, because it makes the system substantially safer.

Nouriel Roubini, economics professor, C+, because the bill does not address the causes of the crash.

Bill Gross of PIMCO, D+, because lobbyists diluted what must be done; Gross also suggests that making former Fed Head Paul Volcker “dictator in chief” would have been a better idea.

Simon Johnson, economics professor, B, because the government can break up the big banks when they pose a “grave risk.”

Evaluation of the bill seems to follow political ideology more than the bill’s actual content.  In other words, the so-called experts are not much help.  With thousands of lobbyists descending on Congress to minimize the damage (while maximizing the complexity), it is hard to believe I could give the bill anything better than a C.  

The U.S. has a huge public debt, but how big?  Various pundits claim it’s a modest 50% or gigantic, well over 100% of GDP.  Which is it?  The Treasury Department is the obvious place to start, because Treasury manages the debt.  On May 7, 2010, the total public debt was $12.9 trillion, 88.4% of first quarter 2010 GDP ($14.6 trillion).  However, only $8.4 trillion was held by the public (57.5% of GDP), with the remaining $4.5 representing intra-government holdings such as the Social Security Trust Fund.

So, these are the obvious alternatives, 57.5% for national debt held by the public, or 88.4%, total public debt.  To really hyperventilate about the debt, one must forecast future debt.  The national debt is estimated to be $18.4 trillion for 2014, almost 100% of GDP (and rising).

Title:  The End of Wall Street

Author:  Roger Lowenstein

Rating:  (5)

ISBN:  978-1-59420-239-1

New York journalist Roger Lowenstein in a long-time writer on Wall Street and this book is a recent attempt to capture the strange story of the subprime meltdown—another financial scandal that should never have happened.  The coverage is relatively conventional, with chapters on Fannie and Freddie (plus a little land history); subprime; rating agencies; Lehman Brothers—with side trips on AIG, derivatives, and the CFT; incredible incompetence at Citigoup and Merrill Lynch; the crisis beginning with industry-wide worries and Bear hedge fund bankruptcies, rating agency downgrading of toxic CDOs; attempted action at federal agencies in 2007; problems at Citi and Merrill; then much of the book on the crisis year of 2008, which saw the collapse of Bear Stearns, Fannie & Freddie, Lehman, AIG, and Merrill Lynch.  The government response moved from hands-off to incredibly intrusive—called “socialistic” by critics, with the Fed providing trillions of dollars of liquidity and the Treasury, thanks to TARP, recapitalizing the major banks.  The final chapter, also called “The End of Wall Street,” considers Wall Street after the crash (although the “New Wall Street” looks like the “Old Wall Street” to me), including possible new regulations (still speculation on this point).  As a New York journalist, Lowenstein has a large cast of characters, mainly the usual suspects, but also a number a new ones. 

 This is one of the excellent books by journalists (e.g., Wessel’s In Fed We Trust and Sorkin’s Too Big to Fail).  Michael Lewis’ The Big Short is the best read, but does not provide the detail of Lowenstein (or many of the others).  Lowenstein is a good choice for a well-rounded perspective on the complexity of the subprime scandal.

People throw out various numbers for the unemployment rate.  Where do they come from and what do they mean?  It turns out that that Bureau of Labor Statistics calculates a bunch of numbers monthly.  The "official rate" of unemployment for January, February & March 2010 has remained at 9.7% and called "U-3," total unemployed as a percent of the civilian labor force (seasonally adjusted).  There are actually six unemployment numbers (U1, "persons unemployed 15 weeks ..." to U6, "total unemployed plus discourage workers, part-timers, etc."), at 16.5% for March, seasonally adjusted.  This is the often reported number for those claiming what terrible shape the economy is in.  Many unemployment numbers can be used—it just depends on the point you’re trying to prove.

The complete table from the BLS is:

Title:  The Big Short:  Inside the Doomsday Machine

Author:  Michael Lewis

Rating:  (5)

Michael Lewis’ books are always great reads and this is no exception.  One of the late arrivals about the subprime scandal, it is by far the best read and surprisingly informative.  Lewis takes a completely different angle from all the others, focusing on a few small traders that anticipated the collapse and bet against the real estate bubble.  John Paulson won big money fame for using credit default swaps to “short” subprime mortgages (making some $20 billion for his hedge fund), but he was relatively late on this trade.  He bet big and his timing was perfect.  Lewis tracks the earliest traders, all small timers usually with limited Wall Street experience, discovering the wackiness of the subprime market and figuring out how to bet against it.  Lewis describes the histories of their bets and how they did it, as well as considering the less-than-brilliant players on the other side.  He presents the evidence of the big-time Wall Street firms that didn’t get it.  They jumped into the structured finance of turning lousy mortgages into AAA bonds, including the piles of cash they made.  The banks maintained huge amounts for their own accountings—this is the part that’s a real puzzle.  Of course, the market crashed and the “shorts” made a fortune, while the banks lost big and either failed or were bailed out by the feds.  (The morons on the failing side also made a fortune for the most part, demonstrating the insidious world of investment banking and the compensation structure.  Morgan Stanley collateralized debt obligation trader Howie Hubler lost MS over $9 billion, the record trading loss on Wall Street, but kept million of dollars in compensation.)

 This is a must read for anyone interested in the subprime scandal.  It does help to have a working knowledge of the topic.  Lewis is great as turning an extraordinarily dull and complicated subject into a fascinating story.  He can also coin a phrase.  Consider this one:  “An investor who went from the stock market to the bond market was like a small, furry creature raised on an island without predators removed to a pit full of pythons” (p. 61).  Or consider these:  “Across Wall Street, subprime mortgage bond traders were long and wrong” (p. 198); “When banking stops, credit stops, and when credit stops, trade stops—The entire modern world was premised on the ability to buy now and pay later” (p. 222).

Title:  How Markets Fail:  The Logic of Economic Calamities

Authors:  John Cassidy

Rating:  (4)

ISBN:  978-0-374-17320-3

This book is primary a history of economic theory, with much of the focus on economic downturns.  Part I covers “utopian economics,” mainly the standard theory from Adam Smith, through the neo-classical economics of Alfred Marshall and others, to relatively modern theories of efficient markets and rational expectations.  This is mathematical model-based theory seeking the optimization of something (utility, profits, whatever), but suffering from the problem of unrealistic assumptions.  Part II is reality-based economics, considering many issues from social costs and market failures, to the psychology of how people actually make decisions.  Between the two parts, most of the major economic thinkers are discussed, from Pigou and Keynes to Kahneman and Tversky, along with real life example.  Part III describes the current crisis, with a modest analysis based on previously-described economic history.  Cassidy goes back to theories and specific incidents to describe “rational irrationality,” basically when a rational decision for an individual or firm (usually based on incentives) is irrational for the economy as a whole.  For example, individual savings during a recession cause greater macro problems.  Securitization in the finance markets caused mushrooming growth in credit with little regard for the borrowers’ ability to repay (but driving up short-term executive compensation), creating a nation-wide housing bubble.

This is a pretty good book, describing the development of economic theory, including the various controversies along the way.  But it could have been better.  The focus is general, with only limited development related to market failure or the causes of bubbles and business cycles.  I would have preferred the focus be specifically on these issues, based on the book’s title.  I’m particularly puzzled by the third part.  Almost all of it is descriptive, with relatively little analysis about market failures or economics in general, for that matter (and there are better and more complete books covering the subprime/ banking crisis).  Despite these shortcomings, I still found it a worthwhile read, well-written and packed with information.

Title:  Last Man Standing:  The Ascent of Jamie Dimon and JP Morgan Chase

Authors:  Duff McDonald

Rating:  (5)

ISBN:  978-1-4165-9953-1

This is a biography of one of America’s premier bankers, running a company that survived the subprime debacle in decent shape.  Dimon started with Sandy Weill after graduating from Harvard business school.  As number two, he was the operating and detail guy starting with Commercial Credit and through cost cutting and mergers (usually buying companies cheap when they had problems) and eventually created Citigroup when Weill’s Travelers merged with Citibank.  Weill was king of the hill and almost immediately fired Dimon.  Dimon started again, with Bank One in Chicago, using the same basic techniques of cost control, effective management, and acquisitions to create another powerhouse commercial bank.  Bank One was acquired by JP Morgan and Dimon eventually became chairman and CEO.    He went slow on acquisitions and Morgan stayed relatively conservative (unlike Citi and other big commercial and investment banks of the early 21^st century).  There was a good deal of criticism of Dimon at the time, since earnings did not grow as fast as the go-go banks taking immense risks, and Morgan’s stock price suffered.  When the subprime market crashed the go-go banks were in trouble and Morgan acquired Bear Stearns and Washington Mutual.  Morgan took losses in the crisis, but stayed rock solid, especially in comparison to most of the other big banks.  JP Morgan is now considered the premier bank in America and Dimon one of the great managers of the period.

This is an interest read, mainly the contrast between Dimon and the various dimwit leaders of the other major banks (for example, Jimmy Cayne at Bear, Dick Fuld at Lehman, Chuck Prince at Citi, or Stan O’Neal at Merrill Lynch).  The first part of the book talks mainly about Dimon and Weill creating a financial empire from scratch and the remainder primarily about Dimon starting at Bank One and rising to star status at JP Morgan.  Dimon was both a big picture guy and a detail guy.  Apparently, he didn’t move aggressively into a market until he understood it (derivatives, which became a big profit center at Morgan, was an example cited).  Much of the description of Dimon’s success (understanding markets, keeping a tight control on expenses, a conservative approach to capital and expanding into new markets) seems like common sense, but these were not practiced by most of the other banking CEOs.   

Title: This Time Is Different:  Eight Centuries of Financial Folly

Authors:  Carmen Reinhart & Kenneth Rogoff 

Rating:  (4)

ISBN:  978-0-691-14216-6

This Time is Different is a macroeconomic academic treatise on the history of financial crises, with a nifty title.  Mainly the authors analyze databases on 66 countries for the last 200 or so years, with some discussion of earlier periods and other countries.  Most of the analysis is based on banking crises and government debt, including debt and currency defaults, inflation, foreign exchange rates, housing and stock price bubbles, and so on.  The last quarter or so of the book discusses the recent sub-prime crises debacle relative to earlier financial crises.  I did not find this part of the analysis particularly useful, primarily because there are so many books on the subject.  Most of the data is presented as charts or tables.

This book is probably a brilliant analysis for the economics specialist.  For the rest of us, it would seem to be useful only for those particularly interested in the historical perspective of economic crises.  The information is unique and for those who love numbers, there are hundreds of charts and tables filled with data. (Note that an earlier version of the book is available for download as a NBER working paper.) 

Title: Sex, Death & Oysters:  A Half-Shell Lover’s World Tour

Author:  Robb Walsh

Rating:  (5)

ISBN:  978-1-58243-457-5

Houston food critic Robb Walsh goes on a five year odyssey to solve the mysteries of oysters.  I was hooked when I heard him at the Texas Book Festival over the Halloween weekend.  Prior to that, I had not given much thought to oysters, although the Gulf coast is not that far from home.  The sex connection is his view of the eating experience (and the oyster may be an aphrodisiac); however, oysters can kill people occasionally especially when eaten during the summer months.  As Walsh put it:  “Eating raw oysters is at once perverse and spiritual.”  The possibility of death did not deter Walsh from apparently eating thousands of raw oysters in North America and Europe (he also ate some Asian oysters that were conveniently grown in the Pacific Northwest).  Separate chapters (a dozen of them) are by location, beginning with Galveston Bay.  Along the way we learn some oyster basics, like different genus and species (all from the family Ostreidae), biology, seasons, and so on.  It turns out that oyster cultures (oyster harvesting techniques, government regulations, when and how local people eat the oysters, even oyster festivals) differ from location to location and especially from country to country.  Each new chapter seems to outdo the last in local characters and their stories.  At the top of my list was the Colchester Oyster Feast, started in the Middle Ages (1318) with all the pomp still present—guests, for example, are seated by social prominence, with the big shots at the high table with the mayor.  Somewhere along the way to London locals lost their taste for oysters (pollution from the Industrial Revolution didn’t help), but not the ceremony.

Anyone with even a remote interest in oysters should love this book.  The stories are great and you will learn a lot more than you even expected about all the amazing aspects of oysters.  A number of oyster and other recipes are presented throughout, as well as a list of oyster bars discussed in the book.

Title: Too Big to Fail:  The Insider Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves

Author:  Andrew Ross Sorkin

Rating:  (5)

ISBN:  978-0-670-02125-3

Andrew Sorkin is a journalist at the New York Times, with access to the major players to the recent financial meltdown.  He described the story in detail from just after the fall of Bear Stearns to the use of TARP money to pay out some $250 billion to the largest banks.  He has incredible detail on various meetings, personal perspectives on major players, and blow-by-blow accounts that led to Lehman’s bankruptcy, seizing Fannie and Freddie, bailing out AIG, and all the rest.  Sorkin presents this six month or so period basically in chronological order and really names names.  He interviewed some two hundred players and seemingly every one of them is in the book.

This book is well written and a masterpiece of journalistic diligence, filling a number of holes in the complex story that was failure and bailout.  The one problem I had with it is the gargantuan detail, just more information than I wanted to know about these events.  I would have preferred less detail and more analysis of the importance of these events.  Having said that, this book is a must read for the financial/political wonk who wants to know all the ins and outs of this crisis. 

Title:  Animal Spirits:  How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism

Author:  George Akerlof and Robert Shiller

Rating:  (4)

ISBN:  9780691142333

Nobel laureate George Akerlof and Yale Professor Robert Shiller are big guns of economics and continue to make significant contributions to the literature.  I was excited to see what they came up with, given the strange title.  I remember that John Maynard Keynes had used the term “animal spirits” in the context of what caused the Great Depression, but was unimpressed with the idea.  The Keynes quote is the starting point of this book, essentially challenging many of the basic tenants of economics.  Specifically, they focus on five constructs:  confidence, fairness, corruption, money illusion and stories and then have a series of essays showing these are important to actually understanding economic events including the subprime debacle.  The basic idea is that mainstream economics has either ignored these constructs or made assumptions (usually to fit econometric models) that don’t represent reality, which is better captured with a more “human-oriented” (often based on psychology) approach.  For example, in “Why Are Financial Prices so Volatile?” the authors challenge basic economic tenants of efficient markets and rational expectations with insights from psychology on how people react in these markets.  Some of the interesting concepts discussed are price-to-price feedback (which can lead to a bubble), the wealth effect that can drive consumption, and the leverage cycle connecting to relationship of asset prices to leverage.

This book is not an easy read and discusses a number of arcane economic concepts that most of the rest of us care little about.  It’s a bit on the dry side, although readable compared to literature that econ professors are capable of generating.  At times it seems to be written more as a challenge to other economists rather than the general reader.  Overall, I recommend the book for those with a fair understanding of economics and an interest in the ideas of two of its sometimes maverick leaders.

Title:  The Myth of the Rational Market:  A History of Risk, Reward, and Delusion on Wall Street

Author:  Justin Fox

Rating:  (5)

ISBN:  9780063598990

This book asks the earth shaking question:  “are markets rational?”  Okay, not everyone cares that much, but it is an important topic for anyone with market assets, such as stocks, mutual funds, a house, and so on.  The heart of the book concerns the “efficient markets hypothesis,” which states that prices (mainly stock prices) react quickly to all new information in an unbiased fashion.  This implies that you can’t beat the market.  Fox spends perhaps half the book describing the history and research demonstrating the hypothesis to be true.  Big events include Markowitz’ portfolio theory, Sharpe’s capital asset pricing model, Black-Scholes option pricing model, and Fama’s efficient markets.   Critics complained throughout that markets behave irrationally, with recent psychology and behavioral economics particularly persuasive.  The debate between the two camps makes the book really significant.  The book is mainly chronological with entertaining vignettes on the players (mainly academics and market participants) and discussions about why their contributions are important.   There is no clear-cut winner; markets seem to be mainly rational and efficient, but with plenty of exceptions.

 I found this book to be a great read, with good descriptions of many complex theories and concepts, without any math.  The descriptions were mainly successful, although sometimes too simplistic to really understand the concepts.  Anyone interested in the development of finance (particularly academic concepts associated with financial markets) should read this book.

Title:  House of Cards:  A Tale of Hubris and Wretched Excess on Wall Street

Author:  William Cohan

Rating:  (4)

ISBN:  9780385528269

This book is a detailed analysis of the fall of Bear Stearns, about 450 pages.  It is written in three parts.  The first part is the 2008 collapse of Bear and its acquisition by J.P. Morgan.  A big part of the story is the lack of trust by Bear’s short-term investors (e.g., the repo market) and counterparties, apparently driven by rumors.  Part II gives some history of Bear, with particular emphasis on leaders Cy Lewis, Ace Greenberg, and Jimmy Cayne.  How the firm survived so long with these people in power seems a mystery.  Part III covers more recent events, with a lot of coverage about the failure of two Bear hedge funds in 2007.  A puzzling Epilogue covers recent events, including the later failure of Lehman Brothers.

The book is generally pretty good about Bear Stearns.  Much of it I had no interest in, particularly personal details of Jimmy Cayne and others.  Cayne and Greenberg were bridge players and that seems Cayne’s number one accomplishment.  He left work early and often to play in bridge tournaments, which meant no one seemed to be in charge when Bear was making bad decisions on mortgage investments.  I would have preferred a more detailed analysis on the inter-workings of Bear and how investment decisions were made.

This is not my favorite book on the current financial debacle, but is worthwhile to those wanting a detailed analysis of one of the key players in the meltdown.

Title:  Scandal:  Amazing Tales of Scandals That Shocked the World and Shaped Modern Business.

Author:  Fortune

Rating:  (4)

ISBN:  9781603200097

This book is a series of 20 essays out of the pages of Fortune from the last 75 or so years.  Surprisingly, none of the essays cover the current sub-prime loan scandal.  The earliest essay is on the Swedish Match King, Ivar Kreuger, who killed himself when his empire collapsed in the early 1930s.  The most recent is an unusual piece about Bernie Madoff called “Madoff Does Minneapolis,” about Madoff ripping off people in Minnesota.  Beyond that, the essays cover a host of scandals, from McKesson & Robbins, to Billie Sol Estes, to Richard Scrushy.  Most of the essays were written shortly after the event and have more of a journalistic bend than history.  A short update is provided at the end of each.  They are generally well-written and some are quite interesting.  They cover some of the scandals, but not all and miss many of the most important ones entirely.  For example, there is no coverage of Ivan Boesky or Michael Milken.

This is not the book for readers interested only in the sub-prime debacle; there is no coverage.  This is somewhat surprising, because several good articles have appeared in Fortune on various important aspects—from bond ratings of mortgage debt obligations to understanding credit default swaps.  A reader interested in a variety of scandals may find the book interesting.

Title:  The Return of Depression Economics and the Crisis of 2008

Author:  Paul Krugman

Rating:  (4)

ISBN:  9780393071016

Paul Krugman is a Nobel-prize winning economist and a well-known columnist.  I expected this book to be about the latest sub-prime loan crisis, but despite the title such was not the case.  This is a second edition; the first was written after the various international lending and currency crises in the 1990s and that is still the primary focus of the book.  The major charters are on the Latin American loan crises, especially Mexico in the mid-1990s, the Japanese crisis that started about 1990 and was never entirely resolved, and the Asian currency crises in the late 1990s.  The last quarter or so of the book talks about several aspects of the current crisis, from an economicst’s point of view.  It is by no means complete, but does have an interesting perspective.

I have a number of issues with the book.  After reading it, I still don’t know what Krugman means by “Depression Economics.”  He has a separate section on this topic but this wasn’t much help.  He gives alternative economic perspectives on the various crises, but seldom comes up with definitive causes or solutions to any of them.  Plus, there is relatively little on the current crisis.  Having said all that, it is an interesting read on a variety of issues.  His perspective is different from most journalists and insiders writing about these issues and sometimes illuminating. 

If you are interested only in the current crisis, I would not recommend this book.  There is just too little coverage.  However, if you have a longer historical perspective and some interest in the various topics mentioned, this is a useful read. 

Title:  Panic:  the Story of Modern Financial Insanity

Author:  Michael Lewis

Rating:  (4)

ISBN:  978-0-393-06514-5

A new Michael Lewis book is always something to look forward to, like a snickers bar.  Since he writes non-fiction and has great stories as well as insight, it’s like a snickers that’s actually good for you.  I was somewhat disappointed by this recent effort because it is a book of readings on the current scandals and those of the recent past—not Lewis’ take on the whole mess.  Some of the essays are really good (especially those written by Lewis), some not.  Some are like mom leading you to the castor oil in the medicine chest, probably useful but not a pleasure.

Panic has four sections.  The first is the 1987 stock market crash, more or less a one day affair on October 19; the Dow dropped 23% that day, the single largest crash ever.  Mostly it was blamed on program trading for “portfolio insurance.”  That didn’t work out well in a crash.  The second is the currency collapses of Asian and Russian currencies.  This took down Long-term Capital Management, presumably the largest and best of the hedge funds.  It turns out that math models work for “normal events,” not the unexpected.  LTCM failed, but the world economy was rescued by a Federal Reserve-generated bailout.  The third is the dot.com collapse, with nary a mention of Enron.  For me, this was the least interesting section.  Finally, the current sub-prime housing collapse, the worst financial debacle sine the 1970s-80s (or even the Great Depression).  Of course, this is the most useful part.  A couple of these essays are particularly good:  Roger Lowenstein writes about how Moody’s rates subprime bond pools (the bond ratings are a major reason for the banking scandal).  Michael Lewis writes about Bear Stearns, with an interesting discussion on liquidity puts.   In total, there are over 50 essays;  perhaps a dozen of these are really good.

 I have to recommend the book for the Michael Lewis fans.  He probably wrote about 100 pages of the book.  He can offer great insight in a single sentence or paragraph.  Here is an example of why I like Lewis’ writing (p. 257):

A boom without crooks is like a dog without fleas. … Why do periods of great prosperity always wind up being periods of great scandals?  It’s not that it happens occasionally.  It happens every time.  The railroad boom makes the Internet boom look clean. … Is it possible that scandal is somehow an essential ingredient in capitalism?  That a healthy free-market economy must tempt a certain number of people to behave corruptly, and that a certain number of these will do so?  That the crooks are not a sign that something is rotten but that something is working more or less as it was meant to work?

Those really interested in economy panics/scandals of the last 20 years also should read this book. 

The Trillion Dollar Meltdown

Author:  Charles Morris

Rating:  (4)

ISBN:  978-1-58648-563-4

                This is a timely book on the current finance/economy meltdown.  It was written in late 2007, before the really bad events happened, but is still right on.  He predicted the 2008 events (generally, not the details) with accuracy and explained the causes as well as any other source I’ve come across.  Explaining these issues in some detail before most of the problems actually emerge is impressive.  The book is at its best when taking a historical perspective.  Most of the current issues deal with areas that have been festering for some time.  Note that he pegged the “trillion dollar meltdown” before this became obvious (and actually has a table showing $1.01 trillion in expected losses by category, pp. 130-1)).

Some of the current villains include structured financing, banks taking exceptional risks because they can be bailed out by the federal government, the excessive use of derivatives, short-term thinking by major players essentially from top to bottom in key organizations, the lack of appropriate government regulations when problems were obvious, institutions that were supposed to provide service and protections that became chief problems like Fannie Mae and Freddie Mac, and a few more.  These are all explained with at least some historical perspective.

This is a short book, so detailed analysis is not included.  A limitation of the book is that it was written before the major debacles hit (e.g., the NBER now asserts that we are in a recession that started in December 2007, essentially after Morris finished the book; all five major investment banks are no longer functioning independently as investment banks, although only Lehman Brothers was allowed to fail).  His take on these would have been useful.  For some reason, much of the last two chapters are off point.  Despite these limitations I would recommend this book for a thoughtful description of the recent financial panic.

 The Ascent of Money:  A Financial History of the World

Author:  Niall Ferguson

Rating:  (5)

ISBN:  978-1-59420-192-9

The Ascent of Money is essentially a series of stories related to the history of finance.  It is written in six chapters: money and credit, the bond market, the stock market, insurance, real estate, and international finance.  Mainly, it is several well-written stories representing vignettes from history.  Some are well-known like John Law’s Mississippi Bubble; others are not well known but quite interesting, such as the Scottish Ministers’ Widows’ Fund, perhaps the first insurance fund based on statistical analysis; a few I found puzzling, like discussing loan sharks in Glasgow or his journey into behavioral finance. 

Ferguson is a Scotsman and history professor at Harvard.  The book is written in conjunction with a British documentary series of the same name, which explains the focus on stories rather than a more comprehensive analysis of key historical events (and also several obscure British history events).  It has lots of useful information and some insight into various aspects of finance.  He even has some discussion of current events, including derivatives and the current financial meltdown.

I would recommend this book as an interesting read on broad financial issues using an historical context.  It is by no means comprehensive on the topic of financial history, but offers enough good stories and insight to make it worthwhile.

Title:  The Partnership:  The Making of Goldman Sachs

Author:  Charles D. Ellis

Rating:  (5)

ISBN:  978-1-59420-189-9

This is a detailed account of the 140 year history of Goldman Sachs, beginning with the original Marcus Goldman peddling mercantile paper from small businesses in New Jersey and New York City to Wall Street.  It is a long journey; early on, the Goldman partnership with son-in-law Samuel Sachs created what was essentially a commercial paper market (Goldman became the largest dealer in commercial paper before the start of the 20^th century) and then expanded into the other aspects of investment banking, including early forays into London through correspondent relations.   Many bankers (including J.P. Morgan) would not deal with “Jewish companies,” which relegated them to “Jewish firms” like Goldman Sachs.  This was a major factor in Goldman developing multiple lines of business including underwriting.  During the 20^th century, leadership moved away from the Goldman and Sachs families, beginning with Sidney Weinberg after World War I.  Brilliant leadership and excellent recruiting are Goldman hallmarks, but the company stayed a mid-level firm into late in the 20^th century.   The company did not go public until 1999.

Investment banks seem to blow themselves up periodically (they deal in financial risks and often take large principal positions, which can turn against them quickly).  During the 1920s Goldman created the Goldman Sachs Trading Corporation, a pyramiding scheme to play the stock market, which crashed along with the market in 1929 and beyond.  All the major banks had equivalent trusts, but Goldman’s was the largest.  They survived, but barely.  When Penn Central collapsed in 1970, Goldman underwrote most of the railroad’s commercial paper—the total amount much more than Goldman’s capital.  The commercial paper investors sued Goldman for reimbursement; Goldman lost most of these cases or settled for some fraction of face value.  Once again, the company survived, but with limited capital and a tarnished reputation.  Other lesser scandals involved certain individuals, like the insider trading scandal that took out Goldman partner Bob Freeman (Ellis makes a good case that Freeman was really a victim rather than a crook).   Recent leaders of Goldman include Bob Rubin (Secretary of the Treasury under Clinton), Jon Corzine (Senator and Governor of New Jersey), and Hank Paulson (current Secretary of the Treasury and major newsmaker).  By the 21^st century Goldman was the premier investment bank (Morgan Stanley would probably argue they are at least as good). 

Everything in banking turned topsy turvy with the bursting housing bubble and mortgage securities meltdown.  Goldman survived along with Morgan Stanley (although both converted to bank holding companies).  The three other major investment banks did not survive:  Lehman Brothers went bankrupt and both Merrill Lynch and Bear Sterns were acquired (by Bank of American and J.P. Morgan, respectively).  The last chapter has a short discussion about the mortgage market and how Goldman played it, which is quite interesting.  Goldman had other problems and major negative events are still possible, but the book is surprisingly up-to-date—roughly through early 2008.

Most of the focus of the book is on the people involved, with at least a short biography of all the major leaders over Goldman’s long history.  Ellis does cover strategy and major banking products and a bit about tactics used over the various time periods (I wish there had been more).  I feel I know considerably more about investment banking than I did.  The last chapter is particularly useful describing current events dealing with mortgages; the descriptions are short but insightful.  The downsides of the book are its complexity; there are at least a couple of hundred people described and chronology can be a bit difficult to follow.   This is a small price to pay for an excellent study of this important firm.  I view the book as required reading for anyone with an interest in investment banking and I recommend it highly.

The Chicago Mercantile Exchange started as the Chicago Butter and Egg Board.  Once the New Dealers subsidized daily products, there was no need for butter futures.  Looking for other business, the Merc developed onion futures in the 1940s.  Then in the mid-1950s traders cornered the onion futures market, driving prices toward Dutch tulips at the height of tulipmania.  Onion farmers experiended the euphoria and, instead of selling and making a killing, bought futures at sky high prices.  The bubble of course burst and the farmers lost big.  What to do?  Lobby their Congressmen and demand a ban.  Congress was forchcoming and onion futures were banned forever.  We can no longer speculate on onion prices.  Another idiotic federal law passed to apease irate constituents.

Book Review

Title:  In Fed We Trust:  Ben Bernanke’s War on the Great Panic

Author:  David Wessel

Rating:  (5)

ISBN:  9780307459688

David Wessel is economics editor for The Wall Street Journal and this book looks at the current financial meltdown from the perspective of the Federal Reserve.  He uses the term “Great Panic” for this period, apparently relating it to the Great Depression and the Panic of 1907.  Wessel covers the familiar territory mainly from the bankruptcy of two Bear Stearns hedge funds to mid-2009.  In addition there is a bit of history of the Fed, Ben Bernanke’s background as an academic with expertise about the Great Depression, and events leading up to the panic—all in less than 300 pages.  As a WSJ journalist he has great access and uses it to interview leading characters in the story, including Bernanke plus other fed officials as well as several business and government leaders.  This enriches the story and provides some interesting insight into why specific decisions were made—the $700 billion TARP fund, for example.

This is a well-written book on this important topic with unusually good insight and background material to make the analysis more understandable.  The only downside is it stops in mid-2009 (note: it’s really current), but the story is on-going.  The Great Panic may be over, but the financial outcomes are far from certain.

 Technical analysis is kept brief with relatively good explanations, so it is accessible to those without a master’s degree in economics.  I highly  recommend this book to anyone with an interest in this important episode.

A review for Ijustfinished.com:

`"A Colossal Failure of Common Sense:  The Inside Story of the Collapse of Lehman Brothers"

Author:  Lawrence McDonald

Rating:  (4)

ISBN:  9780307588333

Lawrence McDonald was a vice president in distressed debt and convertible securities trading at Lehman.  This is his story as a “third floor” trader.  The nasty stuff that led to Lehman’s bankruptcy took place with mortgages on the fourth flour and the incompetent leadership of CEO Richard (“King Richard”) Fuld and President Joseph Gregory on the thirty-first floor.  McDonald has no particular insight on Fuld (although a vice president of the firm, apparently he never met Fuld) and only limited discussion on how the fourth floor worked.  Having said that, it offers a good look at the inter-workings of firm trading.  Interestingly, the leaders in trading and investment banking became well aware of the problems with mortgage securitization as the market started to collapse and gave strident warnings to both the 4^th and 31^st floor people, all to no avail (and they usually left the firm shortly after).  The traders did analyze the problems and bet against the mortgage market by shorting the stock of mortgage finance companies and home builders and buying credit default swaps on various subprime bonds.  Being in distress debt, McDonald was active in this endeavor.  Another interesting part of the story is the mad rush into commercial real estate and leveraged buyout deals that Lehman jumped into at the top of the real estate bubble.  This is the part of the story that suggests that Fuld was out-of-touch and delusional. [Portfolio Magazine later named Fuld the worst American CEO of all time.]  McDonald was fired shortly after the Bear Stearns collapse and discusses Lehman’s collapse and bankruptcy as an outsider.

A Colossal Failure is McDonald’s story and he doesn’t get to Lehman until page 81 of the book.  Overall this is an interesting read from the unique perspective of a Lehman insider.  His discussion of the workings of mortgages and other elements that brought down the firm, however, don’t really have that insider perspective.  For all its limitations this is an interesting read and I recommend it to anyone interested in the details of the current subprime debacle.