This book examines, at a high level, what happens when a well intentioned financial innovation spins out of control and is used for nefarious ends.
Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a CatastrophePublisher: Simon & Schuster
Length: 304 pages
Author: Gillian Tett
Publication date: 2009-05
I blame This American Life.
In May 2008, around the time when Bear Stearns, AIG, and the Brothers Lehman were dominating the headlines, This American Life collaborated with NPR News on an episode called “The Giant Pool of Money”. The show aimed to explain the economic crisis in plain language (I knew they were on the right track when they promised to say the name “Alan Greenspan” only once), and it was ultimately successful enough to spawn not only a sequel (“Another Frightening Show About the Economy” in October 2008, just in time for the election) but also a regular free podcast, Planet Monday, which featured original participants Alex Blumberg, Adam Davidson, and David Kestenbaum, in addition to their crack team of reporters, Laura Conaway and Chana Joffe-Walt, and their beloved producer, Caitlin Kenney.
I mention them all by name because, technicians and guests aside, this seems to be the whole crew. They are a small group, though well connected enough to sit down with Secretary of the Treasury Timothy Geithner.
Planet Monday is looser and hipper than This American Life. They regularly speak with world-class economists about current events, but they also play their light-saber apps on the air. I’ve listened to every episode since the show debuted in September 2008, including the one on which Gillian Tett talked about her new book, Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe. Were it not for that brief segment in which Tett made her book sound like the page-turning exposé it isn’t, I never would have thought to even pick it up, much less commit myself to writing about this book that is so clearly over my head.
Like I said, I blame This American Life.
In fairness, it may not be completely over my head. If you asked me to provide the big-picture summary, I’d say something like, “Fool’s Gold examines what happens when a well intentioned financial innovation spins out of control and is used for nefarious ends”, and I don’t think I’d be too far off. Give me a quiz about the finer points, however, and I’d be unlikely to pass.
The fault hardly lies in Tett, who covers global markets for the Financial Times and who was honored in March 2009 as the Journalist of the Year by the British Press for being “consistently in front of the curve as the world’s economy went into meltdown”. Tett’s training in social anthropology makes her something of an outsider to the world of finance, which serves her well. In the trickier moments, she resorts to easily understandable similes to communicate her point.
Consider the example she uses to explain the concept of “correlation” as it applies to the interconnectedness of loans: “Trying to predict correlation is a little like working out how many apples in a bag might go rotten. If you watch what happens to hundreds of different disconnected apples over several weeks, you might guess the chance that one apple might go rotten -- or not. But what if they are sitting in a bag together? If one apple goes moldy, will that make the others rot, too? If so, how many and how fast? Similar doubts dogged the corporate world”. No wonder the guys and gals at Planet Money took notice.
But there’s no getting around that Tett is writing about a community that is thick with jargon. Open the book at random, and you’ll likely find a line or two like this: “Banks repackaged mortgage-based bonds in ever-more-creative ways. The best known product was a CDO of asset-backed securities, or CDO of ABS. This was usually (but not always) filled with mortgage-linked bonds. In a sense, then, CDOs of ABS were like CDOs of CDOs. They had an added layer of complexity to add more leverage”. See what I mean? This is reading of the buckled-down variety.
A glossary provides some measure of assistance -- with definitions for terms like “Basel Accord”, “BISTRO (broad index secured trust offering)”, and “Gaussian Copula” -- but all too often I found myself having to look up the words that were used in the definition. For example, a “leverage ratio” is “most commonly used to describe the ratio between equity and debt, or earnings and debt, in relation to a CDO or company”, but what’s a “CDO” again, and how does this apply?
To Tett’s immense credit, I’m with her, more or less, line for line, but when I close the cover, it’s back in the ether (and heaven help the inexpert reader who puts the book down for 24 hours before picking it back up again). In this way it’s kind of like reading Heidegger.
But if part of the unique challenge of reading Fool’s Gold is keeping up with the specialized world of its subject matter, then so too is the book guilty of the same kind of flaw that often hounds the financial world, for just as Wall Street is frequently blamed for putting profits above people, Tett’s book settles for a story about mortgage-backed bonds, credit-default swaps, and multi-tiered tranches without focusing due attention on the people who were affected by the system. This is a shame, too, because the beginning sets up a cast of characters with whom I wouldn’t mind spending more time (the “tribe” of the book’s subtitle).
The opening scene of a young international group of business people on a retreat in Boca Raton lays the groundwork for a book that is as rich in character as it is in policy, and the stuff at the top about the degree to which J.P. Morgan aimed to be true to their motto of “first class business…in a first-class way” says more about the struggle to balance financial acumen and personal honor than anything that follows in the remaining, more-detailed 250 pages. Unsurprisingly, this opening scenario that introduces wealthy youth is what Tett highlighted on the podcast, and when she subsequently gets bogged down in the minutiae -- and when she, in turn, bogs me down -- I can’t help but feel like a victim of the ol’ bait and switch.
I hesitate to even level this criticism at Tett because I recognize that I am commenting on the book she didn’t write rather than the one she did. But for every subprime mortgage that failed there was a family suffering financial hardship, and for all of the billions lost that the book catalogs, the human impact is sorely lacking.
I’ve never been especially fond of affixing numbers to these reviews. I’m of the Roger Ebert camp that prefers that you get what you need from the review itself rather than the number at the bottom of the page, though I admit to a fair amount of scrolling down myself. I am even less confident about this particular score.
There is a wonkish readership out there for whom this book will appeal greatly. But for the rest of us -- for those of us who turn to some topical reading as a way to better understand the headlines -- I suggest some entry-level courses before you dive into this grad-level book.
This is no knock on Gillian Tett. Clearly, she knows her stuff. The problem is that, for the casual-to-curious reader, she’ll tell you more than you ever wanted to know.