Meet the Geniuses Who Lost Our Money

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By Robert Kaiser
Sunday, August 9, 2009


How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe

By Gillian Tett

Free Press. 293 pp. $26

Ever wonder, looking at your 401(k) account statement, what exactly happened last fall, when the financial system nearly collapsed and trillions of dollars of "wealth" evaporated? Gillian Tett's splendid book might be the explanatory tonic you've been looking for.

There are other good books that help untangle the disaster of 2008, notably Mark Zandi's "Financial Shock" and Charles R. Morris's "The Two Trillion Dollar Meltdown" -- both are accessible works by experts who wrote for a general audience, but neither is as engaging as Tett's. A writer for London's Financial Times, she brings an unusual credential to financial journalism: a PhD in social anthropology. Anthropologists, as Tett notes at the end of her book, look for holistic descriptions of human cultures that "link different parts of a social structure." She has done just that in "Fool's Gold," which illuminates a basic truth: Apart from natural disasters, the great events that alter human history are, however complicated, the work of human beings. In the end, economic forces, the tides of history and such are just manifestations of human foibles, often encouraged by dysfunctional cultures such as the one on Wall Street.

Tett's mouthful of a subtitle implies that she found the tribe responsible for this crisis. She does make a convincing case that a small group of J.P. Morgan investment bankers, employees of the firm's swaps department, were among the smartest and most creative proponents of the new financial tool called derivatives, defined prophetically in 2003 by the investor Warren Buffett as "financial weapons of mass destruction."

But if these bankers, mostly young and many with credentials in computer science and mathematics, dreamed before others about the potential power of derivatives, they were hardly alone, and they hardly deserve the blame for what happened. They do, however, provide a rich cast of characters and a storytelling device that helps make this book compelling fun to read. And Tett, a resourceful reporter, got many of them to open up.

There isn't room in a brief review to define the terms and acronyms of the financial meltdown, but Tett does this well, partly with a glossary at the back of the book. Better, she describes the evolution of the derivatives called credit default swaps that contributed so much to last fall's unpleasantness. The first of these worked out by J.P. Morgan insured Exxon against the risk to its finances created by a threatened fine of $5 billion for the Exxon Valdez oil spill. Blythe Masters, the brilliant young woman who figured out how to do this, became a J.P. Morgan star -- and very rich.

At first Morgan made the most hay from credit derivatives, briefly dominating this new financial market. (Just how profitable it was Tett doesn't say, a disappointing and unusual failing.) But the biggest money ultimately was made from derivatives based on securitized home mortgages, a category poisoned by subprime mortgages issued to U.S. homebuyers with dubious credit ratings during the great housing bubble in the middle of the decade. J.P. Morgan opted not to get into that market, a very smart expression of a cautious corporate culture that ultimately saved the company from the disasters others suffered.

Though Tett never lectures or hectors, her portrait of the way greed, hubris and sheer stupidity combined to put global capitalism at risk of disaster is devastating. Different readers will find their hair curled by different revelations. Those most effective in raising my blood pressure involved the bank executives who presided over the institutions most prone to wretched excess but who knew little or nothing about the derivatives their associates were buying and selling. "As the pace of innovations heated up," Tett writes, "credit products were spinning off into a cyber-world that eventually even the financiers struggled to understand. The link between the final product and its underlying assets was becoming so complex that it appeared increasingly tenuous. . . . Most financiers lacked the cognitive skills to truly understand the connections in this new world." Oh yes, and "even regulators seemed only vaguely aware of what the banks were really doing."

My favorite quotation of the whole sordid story came from Charles Prince, the hapless chief executive of Citigroup, one of the most irresponsible banks. Prince said in the summer of 2007, "As long as the music is still playing, we are still dancing" -- dancing, a year later, right off a cliff.

Not everyone was so oblivious. Indeed, some banks, including Goldman Sachs, shifted tactics in 2007 and began to bet heavily on a downturn in the mortgage market, which soon followed. Timothy Geithner, then the young head of the New York Federal Reserve Bank, now secretary of the Treasury, presciently warned that the proliferation of new financial gimmicks could have unforeseeable negative consequences, and specifically noted the leverage -- borrowed money -- so freely used by the big banks.

But the head of the Federal Reserve, Alan Greenspan, "the maestro," was the leader of the camp of optimists who truly believed that the wonders of the free market would dissipate the risks created by the new financial tools. While the music still played, the ideology of deregulation or just no regulation continued to prevail. Only later, after "the whole intellectual edifice . . . collapsed," in Greenspan's memorable phrase, did he and some of his allies (though far from all) admit what he acknowledged so poignantly last October: The meltdown had reduced him to a state of "shocked disbelief." "I made a mistake," said the man who, when he ran the Fed, had the legal authority but not the inclination to regulate the behavior by banks that led to the disaster.

Tett is an anthropologist, not a psychologist; she doesn't provide satisfying explanations of the personal motivations of her principal characters. Nor does she explain how rich they got, a frustrating shortcoming. Greed is the permanent backdrop to her story; the ridiculously luxurious lives of her principals are taken as simple facts. She shortchanges the role of governments and officials such as Greenspan. But these are all quibbles. She has written an irresistible book.

Robert G. Kaiser, associate editor of The Washington Post, is the author of "So Damn Much Money: The Triumph of Lobbying and the Corrosion of American Government."

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