41 of 47 people found the following review helpful:
4.0 out of 5 stars
Enlightening Account of WHY Wall Street Went Hog Wild with Leverage and Risk., June 15, 2010
This review is from: Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down . . . And Why They'll Take Us to the Brink Again (Hardcover)
In "Chasing Goldman Sachs", financial journalist Suzanne McGee takes us through the changes in the financial industry over the past few decades that transformed Wall Street "from quasi-utility to...profit-maximizing behemoth" whose appetite for leverage and risk nearly destroyed itself and played a key role in the continuing global financial crisis. The book's subtitle -"How the Masters of the Universe Melted Wall Street Down...and Why They'll Take Us to the Brink Again"- is perhaps hyperbolic, and I was pleased to find that McGee's analysis is more balanced and considered than that title might suggest.
First, the history: McGee explains how and why investment banks began to drift away from their core function of enabling capital to flow through the economy in the 1970s, leading to the pursuit of maximum profits irrespective of systemic risk in the 2000s. This includes the evolution of mortgage-backed securities, the deregulation of fixed commission structures, the transformation of banks from private partnerships into publicly traded companies, and refocusing their increasingly complex products to serve hedge funds rather than traditional investment firms. Goldman Sachs was the best and the brightest, which other banks tried madly to emulate, often without sufficient talent or risk management to do so.
Then, the financial crisis: McGee dedicates a chapter each to the "greed, recklessness, and negligence" that combined to create the "perfect storm" that almost brought the global economy to a halt and necessitated an infusion of $250 billion of taxpayer-sponsored liquidity. She explains the history of the executive compensation system whose incentive structures unfortunately encouraged "excessive risk-taking and shortsighted behavior." McGee tackles the limitations of risk management models. These have been discussed to death in more detail in other books, but she focuses on the human reasons that people were blind to risk. And she explores the role that the deregulatory climate in Washington played in enabling and encouraging the housing bubble.
Finally, McGee wonders what Wall Street will look like ten years from now, as boutique investment banks are cropping up to take over some of the functions of the big banks, who are still fighting regulation. This section is a bit repetitive and not as strong as the rest of the book. McGee observes that risk-taking to maximize profits for shareholders is as common today as it was five years ago, and she prescribes a change in "fundamental attitudes toward the financial system" as the only way to effect lasting change on Wall Street. It's difficult to tell people to make money in moderation, though, and it might be impossible when they are beholden to shareholders.
"Chasing Goldman Sachs" recounts Wall Street's role in the financial crisis in terms a layperson can understand. McGee is good chronicler of the history of the financial industry, and she explains why investment banks packaged, sold, and invested in risky CDOs and credit default swaps as well as their need to innovate and to profit in a world where traditional sources of revenue were either insufficient or no longer existed. She thinks things went wrong, however, when banks began to produce products that did not serve their clients well, relied to heavily on proprietary trading desks, maximized short-term profits at the expense of long-term stability, and mismanaged risk.
The credit and housing bubbles certainly showed up the flaws in both the culture and structure of modern investment banks. I wonder, though, what the outcome might have been had many of the loans that were sliced and diced in those CDOs not been fraudulent to begin with. The FBI warned of an "epidemic" of fraud in the mortgage industry in 2004, 80% of which they believed originated with lenders. My point is that blame for the financial crisis does not lie entirely with Wall Street. There was fraud all over the mortgage industry, and the Federal Reserve's pump of cheap money into the marketplace was ultimately what inflated the twin bubbles. McGee touches on these issues in her discussion of the Office of Thrift Supervision's culpability in the crisis, but her focus in on Wall Street shenanigans. The SEC charged Goldman Sachs with fraud as the book was going to press, so the author only addresses that issue briefly in her foreword.
[In compliance with FTC rules, I am disclosing that I received a free copy of this book from the publisher.]
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8 of 9 people found the following review helpful:
5.0 out of 5 stars
Investment Banks race to the top and bottom, July 13, 2010
This review is from: Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down . . . And Why They'll Take Us to the Brink Again (Hardcover)
Author Suzanne McGee has done a great job in this book showing her readers how investment banks obsessive pursuit to beat Goldman Sachs' return on equity lead to the financial crises. The author explains that Wall Street's core function is as an intermediary financial utility providing investors with ways to invest their capital in sound businesses. Unfortunately Wall Street morphed into being a self-serving, risk-taking machine for generating profits. These out sized profits helped inflate the stocks of the businesses in the financial sector and provided billions in bonuses for executives and traders that help make these profits. Investment banks drifted form making profits by serving clients and more from trading and investing for their own accounts along with creating innovative investments with little regard to the risk profiles of these new creatins. The madness really went to a new level with the huge profits that came from creating CDOs from bundled mortgages. The banks really gave way to the fiduciary responsibilities it had to its clients and just focused on profits which led to huge amounts of risk for themselves and their clients which eventually led to meltdown of 2008 and 2009. Risk managers at these firms were silenced or shown the door as the money making machines cranked up to full throttle.
The reality is that the business of Wall Street isn't innovating, or creating some flashy new product to boost its own profits; it's providing the wherewithal for corporate innovation. Whenever financial innovation-the kind Wall Street indulges in-ends by making capital less available to corporate innovators, that is when you know Wall Street has drifted too far from its mission. This lock down of available capital is what caused the credit markets to lock up during the crises. The book does a great job of telling the tale of the investment banks and why one went bankrupt, others were acquired for pennies on the dollar, and how Goldman Sachs and J.P Morgan Chase were the winners. Also you will get an idea of what the future may hold for Wall Street in regulation and smaller financial institutions that want to step in and grab business from the legacy firms. I found the book interesting and informative.
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26 of 35 people found the following review helpful:
3.0 out of 5 stars
The Fallacy of Perfect Solutions, August 6, 2010
This review is from: Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down . . . And Why They'll Take Us to the Brink Again (Hardcover)
This book was in turn interesting, tedious, informative, skewed, somewhat thought provoking but finally annoying, hence my three star rating [though I must admit that 2.5 is probably closer to the mark].
The Author's basic premise is that Wall Street has a "utility" function which involves distributing money the same way power companies distribute electricity. This function has a significant moral component in that it is a vital feature of the economy, and the financial meltdown occurred because this social obligation was ignored as greed, poor risk management and lax government regulation combined to blind the financial companies to anything more than their personal profit. And in case you don't at first get that, she writes about the pursuit of increased ROE and Goldman Sachs as the gold standard for profits just about every other paragraph. Trust me, subtlety is not her strong suit.
While she makes valid points, I have a definite problem with her major premise. Firstly, a utility is by definition a government allowed monopoly because of the infrastructure requirements which argue against multiple companies, and therefore it is hard to see Wall Street as such.
Secondly, the whole collapse was a result of the housing market bubble, which was due to the fact that for decades the government literally forced lenders to provide credit to people who shouldn't have had it in order to expand home ownership. When this asset class deflated it was so huge its ripple effect dried up liquidity and led to the crisis. Did Wall Street magnify the debacle by its policies and actions? The answer is yes, but it was because they were dealing with flawed input to begin with. To use an analogy, if governmental policy led to sick cows being used in meat to increase the food supply, and the food industry created new products from it to increase their profits, when everyone who ate it got sick, who do you blame, the government or the food companies? Think about it.
More importantly, expecting morality and civic purpose to motivate those in the financial sector is nice but unrealistic. Our system of capitalism is based on all of us pursuing our individual interests, which is usually making money! Banking evolved as a means for certain people to profit, not as a virtuous calling that requires self sacrifice in the name of the common good. After all, the food distribution business is just as important as banking to the common welfare, but has anyone written a book about the need for Supermarkets to be virtuous?
As wonderful as it would be for everyone to be beneficent and moral, reality just doesn't work that way. And when society has tried to enforce that kind of behavior, the results are usually coercive and worse than the original problem. In fact the 20th century saw several leaders who advocated that individual desires are irrelevant and that everyone has to work for the good of the state. Mussolini comes to mind- his system of fascism actually sounded real good on paper, and is the reason so many in the US acclaimed him in the 1920's as an exemplar of a great new system that would change the world. But as someone once said, every time we try to create Heaven on Earth, we wind up with a hell.
My point in regards to Ms.McGee is that yes, there were problems, and yes they must be addressed. However, chances are we will never create a system which totally avoids economic downturns because they are the result of human nature. And any attempt to create a "moral" Wall Street with social obligations as a primary parameter is doomed to fail for the same reason. Our solutions must address reality, not Liberal pie in the sky concepts which are at best doomed to fail and at worse result in unforeseen consequences which are usually scarier than anything we can imagine.
The solutions we need will accept the greed and profit driven nature of those in the financial system and allow it to work for us, as it has for most of the past 200 years. As for trying to mitigate the occasional meltdowns, the best way is to limit the bailouts and government largesse which removes the risk and moral hazards which are the constraints which capitalism imposes. And competition must be encouraged as this is ultimately the surest way to nurture "morality" on the market- customers invariably find the firm that treats them best, whether it is service, prices or some other metric. With this in mind, it must be realized that regulations favor the existing, large companies as opposed to smaller or newer firms that are trying to succeed [it's just a matter of size and resources- regulations actually help maintain the dominance of the established enterprises].
Is this a perfect fix? No there is no such thing because that is not the way life works. But as even the author notes in the final chapters, new firms are arising which do substitute concern for the clients in place of the rampant selfish greed which seemed so prevalent a few years ago, but they are doing it because it is good business, and in the end that will be the greatest determinant of how Wall Street changes.
It is said that the best is the enemy of the good. And sometimes it is actually the friend of the Worst. That is what we have to fear when we consider some of the well meaning prescriptions advocated in this book. As nice as it is to believe we do things for just reasons, the truth is that all we can depend on is that we are motivated by our self interest. To believe otherwise is a willful blindness which can lead to a far darker place than just a financial meltdown.
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