Share via Email Surprisingly for an account of the masculine world of finance, this book is full of women. Apart from Gillian Tett herself, who has been the most prescient British financial journalist on the credit crunch, the most fascinating is Blythe Masters, a blonde, porcelain-faced Tilda Swinton lookalike who has the dubious distinction of having devised the first credit default swap. Tett, a senior journalist at the Financial Times, has several advantages as an author on this subject: she spent time in Japan, which underwent its own banking crisis and recession before this one; in the period running up to the collapse, she was covering credit markets, an area even most banking specialists viewed as obscure; and she has a doctorate in social anthropology, giving her an acute insight into banking tribes. As she says, in most societies elites try to maintain power not simply by garnering wealth but by ideological domination too - deciding what is talked about and what is not.
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Journalist Tett begins in the s with the invention of the credit derivatives at J. Morgan that would fuel the massive buildup of toxic leverage a decade later.
Somewhat paradoxically, by that time the venerable J. 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 This is one of the drier accounts of the financial meltdown. 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. Morgan innovators watched in horror as their brainchild nearly brought down the whole banking system. The sections where she attempts narrative tableaux fall flat. A group of derivatives traders at J. 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. Morgan did not get into the business of mortgage backed securities.
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 s.
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. 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. Morgan, which came out slightly less dirty than most everyone else once the dust settled. Its interesting to learn how derivatives became the Frankensteins 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.
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.