J P Morgan (Subject)

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. ( )

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. ( )

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. ( )

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. ( )