This is a "tell all" book surrounding the financial disasters that most people have heard about, but only a few understand. The author provides with high energy and more metaphors than atoms in the universe the financial underpinnings that created all the financial disasters over the past five years. This includes the failure of many of the big names of finance as well as those implicated in the sub-prime mortgage diabolical. A majority financial collapses leaving investors holding the bag is outlined in this book. More importantly, the book attempts to provide the "math" or the structure of how the financial mechanisms worked to produce large virtual gains leading ultimately to literal financial bankruptcy.
The author himself is a financial advisor with over 30 years of experience. The basic thread or meta message through the book is the inability to analyze and sometimes the resistance to accept the inherent risk in the investment structures that were producing huge returns for their customer base. The book provides the culture and attitude of those working in high financing which is pivotal to understanding the reluctance to understand the long term risk of the analyzed investment mechanisms. The author is probably complicit as a financial advisor for over thirty years, but that really isn't discussed in any great detail. He provides sage wisdom after the fact, but really was not the "ethical fighter" in the battle against the balloon ready to pop (not at least in this book).
So who might want to read this book?
This book probably will appeal to anyone who reads the Business section or listens to the news and sees guys with suits talking about how derivatives were responsible for the demise of someone, something, or even some country, and wants to understand what all the double talk means.
Also, anyone who wants to better understand his own investment strategy should read this book. There is one important thing that has not changed, the availability large pools of retirement funds. A great deal of 401Ks and other retirement funds are still out there with large pools of cash looking for investment opportunity. This was the starting point for the last calamity. These contrived financial structures (and opportunistic financial engineers) were just waiting to take a piece of America's retirement funds. This is really contemptible when you really think about it. There are few people that are immune while the financial "criminals" still on the loose looking for a way to manipulate the system yet again. The author spends considerable time illustrating how the "system" enabled this in the name of economic growth.
In addition, anyone who is wondering how the sub-prime mortgage problem occurred with a desire to understand the structures and mechanisms that created and enabled these financial disasters.
Finally, anyone who wants to know why countries like Greece and Iceland (you can add Ireland and many other countries to the list) have and continue to have financial problems. Everything seems great and then suddenly a single event creates a financial avalanche of bad debt.
Why I personally liked the book.
You almost always need an insider to get to the guts of the matter. In this case, an insider is needed that has tracked and analyzed all the problems worldwide. Many smart people fell into financial traps including Harvard University with all their financial and economic advisors. With that happening, what chance does the every day guy have of saying "no" to possible big returns using risky financial mechanisms? The chance is bettered with an education of what has failed. It goes without saying that Harvard now understands as does many governments, institutions, and other large mechanisms that felt like they could win big because they play big. Sounds like a professional gambler in Vegas, doesn't it?
I have to admit that I'll need to reread this book to really pick up the subtleties and nuances. The material is complicated at times and often the author makes it overly-complicated (my main complaint about this book). The diagrams in the book were generally not helpful because they parroted the text almost verbatim and really didn't provide any additional insight into the structure. I do believe that better diagrams would have been very beneficial in this book.
Overall, I'd recommend this book for those interested in how the practical financial world is evolving. The material will take some mental work, but worth the effort if the interest is great enough.
Satyajit Das presents an erudite, insider's view of the world of very high finance, far removed from the every day money transactions on "Main Street." This world is as different, and as counter-intuitive, as quantum mechanics is from classical Newtonian physics. Das has "paid his dues," working on both the "buy" and "sell" side in this ethereal world for 33 years. His 2006 book Traders, Guns and Money: Knowns and unknowns in the dazzling world of derivatives Revised edition (Financial Times Series) raised the specter of a "crash," due to leverage and the concentration of economic power, as opposed to the carefully promoted image of "risk management" that has been flogged by the salesmen for derivatives, including Alan Greenspan. As is well-known, the crash did come in 2008, requiring a massive government bailout as it is politely called (in actuality, it is the many who pay, and continue to owe so much to the few). The Few have survived, Masters again of the universe, and the good times (for them) roll on. Das does a fairly good job of making these whirlwind events intelligible.
Fittingly, his Prologue is entitled "Hubris." As indeed it was (and is). I was recently at a dinner in Orange Co. CA., and the consensus was the 2008 debacle was all Barney Frank's fault! Well, Das has a more nuanced, and comprehensive view. Starting with George Bush, who wanted home ownership to be as widespread as possible in America, and that meant more "affordable" products which led down a very slippery slope to a toxic asset cesspool that was somehow labeled "Triple A." The author fleshes out this story with abundant anecdotes; certainly the one most referenced is über-hedge fund manger Steve Cohen's $12 million purchase of a shark stretched over a weighted fiberglass mold entitled: "The Physical Impossibility of Death in the Mind of Someone Living." And, no doubt as intended, the shark was a wonderful metaphor for the business.
The book is divided into five parts. The first looks at the sheer faith involved in money transactions, and how it has involved from shells and silver coins to bits and bytes. The second part looks at financial "fundamentalism," an all too apt term, with the ground center of such thinking, which has come to dominate the world, being at the University of Chicago, with its arch-gnome, Milton Friedman. Personally, I think Naomi Klein, in The Shock Doctrine: The Rise of Disaster Capitalism covered this ground much better, but Das is incisive too, with a chapter entitled "False Gods, Fake Prophecies." Imagine being dominated by the thoughts of an individual who believed government should not be involved in the business of education or the national parks, as a small sample (ah, but it should be involved in enforcing contracts). Yet that has come to pass, since the so-called "free market" is the magic elixir that fixes all. The third part focuses on how we have become enthralled with debt (and drowned in it), all because one makes a higher percentage return when less actual equity is retained in a company (well, when one makes a return at all). In this part there are numerous diagrams which readily explain to the non-financial "layman" how those mortgages were "sliced and diced," and what the actual underlying assumptions were that governed the "tranches." In the fourth part, on the oligarchy that now governs us, Das explains how Ayn Rand has dominated the thoughts of so many of the elites, and reminds us, fittingly again, of a particular S-M scene in The Fountainhead (Centennial Edition Hardcover). And I shuttered to learn that now Fed Chairman Bernanke was attending Milton Friedman's 90th birthday party. More frightening still, is Bernanke's thesis that the real problem is a GLUT of global savings! The concluding part, and epilogue are not optimistic; featuring Bernanke's comment that the future will be "unusually uncertain."
Das repeatedly references his financial story to both the popular and academic culture. There are plenty of "bon mots," like: "Greenspan excelled at lacquering a slate of ignorance with a thin coating of knowledge." Das also refers to the "Greenspan put," meaning that there was always an assumption the Fed would bail Wall Street out of any folly; an assumption that came to pass. Das quotes Martin Baker on the magic formula of hedge funds: "Take a speculative cocktail shaker. Add four parts public ignorance, and 33 parts greed. Toss in a little perceived genius...Season generously with mystique. Add apparent publicity shyness to taste. Serve in opaque tumbler of awed, to ill-informed media coverage." Das even works in my favorite quote (and proverb for paranoids) from Thomas Pynchon's Gravity's Rainbow (Penguin Classics Deluxe Edition): "If you have them asking the wrong questions, you don't have to worry about the right answers."
But that is also the problem with this book. I hate to say it, since in general I like the references, but there are simply TOO many, madly tacked together at times, and they simply don't work. And Das throws them at the reader staccato style, bam, bam, processing the relevant and the irrelevant like the trader he once was. For example, one paragraph of three sentences goes from an expert at the Heritage Foundation to another commentator on the 2008 Beijing Olympics to Lillian Hellman. He does this repeatedly. Another swings from Arundhati Roy to John Steinbeck. He ties in Edward Abby's comment about growth and cancer cells; aphorisms from Yogi Berra and Mark Twain, and obscure 16th century Portuguese writers. Erudite yes, but also slap-dash, lacking a central thesis that holds it all together. At times, it dazzles; at others, it was simply exhausting, and seems to reflect Baker's comment above about tossing in a little perceived genius.
Overall, though, a book well marked-up, with passages that will be reviewed, and re-reviewed in the future. 4-stars.
Extreme Money is Satyajit Das's account of how a culture of corruption led to the great financial and mortage collapse at the end of the first decade of the twenty-first century and the ensuing financial and monetary crises. It mixes scenes depicting actors at extremes of elation and despondency with the history of events, using the purchase of works of art as markers and icons for the mood and the people.
At the book's core is a solid chronology and a lot of detail, and the book is valuable for that. But it disappointed me in a number of ways. First, the story begins with mood and atmosphere, then lurches into finance and back to atmosphere without a clear alignment between one and the other. There is no guiding structure (eg. atmosphere-event-atmosphere). Second, the level of detail is inconsistent, alternately glossing over details of financial instruments and swamping the reader in them. Often the reader is left searching for an explanation of how a financial instrument works, and how it is supposed to work. (An appendix might help here, or else a more complete introductory section on the topic.) Third, the role of government in the mess is treated quickly and forgotten. The careful reader will realize that the government not only created the mess and set up the incentives, but also punished the people who tried to stop the avalanche. The reader immersed in atmosphere will forget it in the parade of horribles of greed and irresponsibility.
Fourth, and perhaps most damning for the reader uneducated in financial matters, there is almost no description of the proper and responsible use of the financial instruments in question. What is "hedging"? When are CDOs the right instrument to use? Before reading this book, the reader would be well-advised to prepare by reading Thomas Sowell's Basic Economics 4th Ed: A Common Sense Guide to the Economy and Peter L. Bernstein's Against the Gods: The Remarkable Story of Risk, at least. Without such preparation, the reader gets the idea, apparently shared by many members of Congress, that every derivative financial instrument is the work of the devil.
Finally, the author admits to having acted as a hired gun during the crisis, fighting for one party on one side and another party on the other. This involvement ought to have been admitted up front, and squared with the condemnatory tone of the book as a whole.
Extreme Money reads as a moral condemnation of bankers, brokers, traders, speculators, regulators, and elected officials. It fails to examine the other side of the coin. In this it is like a book condemning the various problems of motor vehicles without recognizing that they contributed mightily to public health by removing millions of tons of horse manure from city streets and that they contribute to prosperity and quality of life by harvesting food quickly and moving that food--still fresh--quickly from farm to consumer, by moving heavy firefighting apparatus quickly to where it is needed, by transporting the injured and sick swiftly to treatment, and by allowing people more freedom to work at jobs for which they are better suited, improving productivity and making all of us more prosperous.
In other words, it makes a moral case without preparing the reader to make a serious moral analysis of the financial system, the financial collapse, and the players in it. It paints an incomplete picture that is liable to lead to wrong conclusions and wrong actions, to the harm of us all.
Postscript: As an alternative to this book, I recommend Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon. It avoids the problems I find in Extreme Money and paints a very clear picture of the actual paths of money and power.
This is a very impressive book! It details how, over the years, money progressed during history from a means of commerce to the ultimate goal, and the financialization of the US from a nation which was centered on producing things to producing debt, camouflaged as things. Plus, all kinds of derivative concoctions, resulting in just moving around forms of money, with financial insiders and middle people collecting fees, bonuses, etc, all the while these concoctions were so difficult to understand that many didn't even try to understand them, just relying on rating agency ratings while the rating agencies were just a marketing tool of the financial industry, bought and paid for - another form of money exchanging hands with no, or little, analysis of risk. So, the whole thing was a financialization of risk using debt. The book does make a good case that insiders in the financial institutions intentionally wanted many mortgages to fail and used another concoction, credit default swaps (an over-leveraged form of insurance). What they didn't count on were the senior level mortgage concoctions failing because no one really anticipated how far home prices could fall.
And, the creators of this mess were bailed out by everyday taxpayers. If you are a fan of Ayn Rand and free-market capitalism, embraced by Milton Friedman and Chicago economists, you probably will be critical of that part of the book, as the author finds much fault with them, including Greenspan, but does also cover that blame extends pretty much everywhere - everyone wanted to prosper. But, it really was a phony prosperity.
The last words in this terrific book, as an epilogue to the financial mess we are still going through...."Extreme Money, the idea of universal wealth and prosperity engineered by financial alchemy, was immensely powerful, impossible to resist. Was it possible to turn back? As Leonardo DiCaprio understands in the film, 'Inception,' 'the hardest virus to kill is an idea.'"
on August 28, 2011
Satyajit Das' new book "Extreme Money" has weaknesses, but these do not stop the book being a five-star read. The book is essential reading by anyone (everyone?) who has an inkling that the western world's financial market system over the past 25+ years has evolved into a giant Ponzi scheme. The book proves your inkling is correct and does so with the presentation of well-compiled and convincing evidence at the level of both illustrative individual transactions and of the financial system as a whole.
Das is one of the few people in the world who has the knowledge, skills and practical experience to go substantially beyond making generalized and unsupported pronouncements. He's a details person and these details help the rest of us understand aspects of market behavior that are not self-evident. For instance, read of why (swap) derivative transactions are off balance sheet transactions (page 242) and of Lehman Brothers' flip clause in its legal documentation (page 255).
Das' book is outrageously critical of virtually every entity that has been associated with "extreme money" creation over the past 25 years, regulators included. But his criticism is warranted. The financial leverage the western world has experienced in recent years has been extraordinary and most of us have been happy to ride the wave of (apparent) prosperity for all it was worth ... until now.
A sense of the vigor and breadth of Das' thinking can be gleaned from a selection of sentences in the book:
Rather than using derivatives to manage risks, dealers structured transactions to create risks, disguise true values, delay competition and prevent clients from unbundling products (pg 272)
Risk models underestimated volatility and used incorrect correlations (pg 289)
Extreme money created a powerful coalition of financiers, business interests, regulators and politicians that increasingly dominated the economy. This oligarchy set the agenda and set policies, which benefited them and their constituencies. Similar backgrounds, education and interests, especially a common cognitive view of the world shaped the oligarchy (pg 305)
The new liquidity factory .... was based on financial alchemy. Securitization and derivatives provided most of the money, around 79 percent of total liquidity. ... The astonishing growth in global liquidity was driven by financialisation. (pg 312)
Complex chains of transactions allowed risk and debt to move from a place where it was observable to places where it was hidden and unregulated (pg 313)
Risk managers with the `brain the size of a caraway seed and the imagination of a parsnip' slavishly used inadequate techniques (pg 318)
Mathematical finance lent credibility and false precision to the dismal reality of risk management (pg 318)
Financial economists and risk management just replaced oracles and soothsayers (pg 318)
The Greenspan put ensured that at the first sign of trouble central bankers - `pawnbrokers of last resort' - flooded the system with money, lowering interest rates to protect risk takers" (pg 326)
Central bankers' assumption about securitization and derivatives reducing risk were wrong (pg 327)
Modern accounting struggles to provide tolerably accurate, reasonably objective and meaningful information about financial positions (pg 333)
When things were going well, regulators favoured self-regulation, which bears the same relationship to regulation that self-importance does to importance (pg 341)
Well-meaning and ineffectual hearings, irrespective of topic, typically conclude that any failure was systemic, not attributable to any individual. The inadvertent, unconscious clan and class sympathies of men and women dressed in similar attire on both sides of the bar are a factor in the outcome. (pg 352)
The economic and financial models were deeply flawed and had failed. The available tools and knowledge were insufficient to manage the crisis and restore the health of the global economy (pg 391)
Short-term profits were pursued at the expense of risks that were not evident and would only emerge later. Financiers entered into increasingly destructive transactions, extracting large fees and leaving taxpayers to cover the cost of economic damage (pg 422)
By October 2010 the fees paid to lawyers, advisers and managers involved in the bankruptcy of Lehman Brothers reaches over $1,000 million (pg 432)
New instruments emerge, being traded in huge volumes among institutions essentially trading with themselves. They undertake transactions, price them and book fictitious earnings, neglecting to establish whether any of it is real or makes economic sense. (pg 438)
The deadly pathology of finance - the gaming of bonus systems, manipulation of valuations and accounting tricks - continues (pg 443)
Over the last 40 years, financial fundamentalism and financial oligarchs changed the world (pg 447)
Although not an easy read (how could it be so?), Extreme Money is a tour de force.
The book's faults are relatively minor, but one is worth noting. Das makes extensive use of illustrative quotes throughout the book. There are probably hundreds of them. Although sometimes interesting, I generally found them to distract me from the book's messages. Maybe their inclusion was the publisher's idea to lighten the read (?!)
Still, a terrific book .... a five-star read!
on October 3, 2011
Das has a dual existence as a writer. On the one hand, he is the author of daunting tomes such as "Structured Products (2 Volumes, 1200 pages each), or the (no kidding) 4,700 page "The Swaps and Financial Derivatives Library: Products, Pricing, Applications and Risk Management." Pretty much an insider then, and on the muscular side.
On the other hand, he can travel light, as in "Extreme Money" (and in the prescient "Traders, Guns and Money" of 2006). On the surface, it is all breezy style, vivid stories and snazzy quotations, but even if the erudition is weightless, it's still there. The book is always informed by the perspective of a beady-eyed insider who is, if not jaded, certainly disillusioned, and quite often, an eye witness. The folly is documented deadpan, but mercilessly. Das's background as consultant, negotiator and (one imagines) expert witness clearly help, with both the deadpan and the mercilessness.
Das is utterly addicted to the illustrative quotation, by the way. If you've read any 'financial crisis books' you'll have seen some of them before. But the breadth of reference, and the surprising yet apt novelties that result (I hadn't thought of Kierkegaard as a theorist of offshore finance before) more than make up for that.
His theme is the folly of modern finance. It isn't quite a narrative, more a set of quasi-anthropological themes arising from modern finance, illustrated by quotations, personal experiences, and commentary on current events and recent history. The themes are roughly:
1. The rise of the financialized economy ("money culture")during the second half of the 20th century
2. The economic theory that goes with the money culture
3. The characteristic artifacts of the money culture (the zoo of new financial products)
4. The various tribes that create the culture (politicians, economists, bankers, regulators)
5. The signs of the collapse of the money culture.
It's a thorough job, and yet, so entertaining. However, the conclusion is as gloomy and uncertain as could be. How on earth do we get out of this mess? Das doesn't offer an answer, though he is not optimistic about how smoothly the adjustment will go. Still, you couldn't wish for better background to the question.
on September 5, 2011
Extreme Money : The Masters of the Universe & the Cult of Risk is a fascinating account of how money and debt have come to dominate and potentially overwhelm the real economy. Securitisation, sub-prime mortgages, junk bonds, leveraged buyouts, derivatives, investment bankers, central bankers, financial regulators, Chicago school economists , option models, hedge funds, Nobel laureates and rating agencies are all roundly castigated and critiqued with devastating lucidity for their contribution to the wall of liquidity that the world is now struggling to confront. A sobering account that is essential reading for all those seeking some form of context for the sub-prime and sovereign debt crises and the asset bubbles that preceded them. The linkages between the worlds of real industry and money are explored with humour and devastating but insightful cynicism.
The analysis is current to August 2011 and helps the reader draw his or her own conclusions as to "how long the governments [could] keep the economic life support system switched on." The effectiveness of the Volcker rule and other regulatory, monetary and fiscal interventions are discussed in an analysis that is real time for us all. Das' conclusions include that the world has unsuccessfully tried to defy financial gravity and that the ability of governments and policymakers to control the world economy is questionable.
A highly recommended read for all those involved or affected by the financial markets.
on November 27, 2011
I really liked his Traders, Guns, and Money but the current offering lacks wit and insight present in the former. It rather pompously claims to be a "history of a modern area". Frequent references to high and low brow literature and movies generously peppered all over the pages are meant to deepen the insight but feel forced and obligatory and do not really add much to the argument. Poor Londoners asking for change make an early appearance to illustrate callous wealth gap but the point of bringing them in is rather lacking - the author himself is firmly placed on the sunny side of the wealth divide - so why chastise those who pay for his consulting services? I gave it an honest try but after 47 page is was getting really hard to keep my interest up. So off it went back to Amazon. If you want something that Extreme Money aspires to but never manages to reach try Whoops! Why Everyone Owes Everyone and No One Can Pay.
on November 17, 2011
Mr.Das's first book "Traders, Guns and Money" was exceptional.
It was funny, well written, timely and informative. However, "Extreme Money" is merely a thin, overly diverse ramble across fifty years of the modern world's money culture. Unfortunately, Mr. Das has lost the humorous edge of his earlier book and become "preachy"...the "Church Lady" of finance. He tells us nothing that has not been pounded home by the hundreds of books on the financial collapse of 2008/10 which have been written since the Lehman failure.
Thomas Sowell's , "The Housing Boom and Bust", gives a better look at the breath of the regulatory and economic underpinnings of the disaster. Both McLean and Morgenson have written better explanations of the personalities and organizations involved. Lewis's "Big Short" explains how honest capitalists provided research, skepticism and investment in the process of discovering that "the emperor had no clothes." James Grant's "Mr.Market Miscalculates" is the best explanation of the financial structures of MBS, CDO and CDS along with their underlying economic flaws.
Read Das's "Traders, Guns and Money", Partnoy's "FIASCO", Durban's "Inventing Money", Steinherr's "Derivatives" and Bookstaber's "Demons of Our Own Design", all of which were published before the fact, to understand how good "in time" writers were well aware of the size, reasons and inevitability of the ethics and economics problem.
on September 13, 2011
Satyajit Das has been immersed in financial product engineering for a long time. Presumably this intimacy has helped him to lead a comfortable life. This book will make all those, like me, who make their living form the market he helped develop question how they fit into a world teetering on the edge of financial disarray.
Das points out the ephemoral value of fiat money, and uses a wealth of anecdotes from his experience as well as a deep analysis of economic history to have us all question what that paper or plastic in our wallet means. He points out that banking systems are not organic, they exist on a belief system that is regulated by the sovereign and that people believe in because it is convenient to do so.
As we look at markets where a sovereign European borrower, Greece, has a 98% expectancy of default we can see that some belief systems do not bear analysis. This book has the feel of a Dawkins treatise on religion; almost like the spurned believer who now needs the world to understand as he does that the daily process we have all embraced is under a severe threat when - as logic demands, presumably - the belief suddenly stops.
I make my living in credit derivative markets. I think I understand them, they feel familiar to me.Das has created a work that will make my narrow world more available to the audience, and I fear the audience will question all that I do. My counter is weak - we need money so we need to keep believing. I am like the priest who has spent his life poor and chaste and can't bring himself to reject the values he holds as fact. My hope is that Das is wrong and the world financial markets come off the teetering edge it is at and has been since 2007.
Credit and banking structures are a funny thing. Unlike equities where you can make a gain as the company improves, the only analysis in credit is how much you can lose and in banking is how safe is my money? Das points this out and that the cliff edge is steep. I like to think that we are on a motorbike at full throttle heading towards the cliff edge, but we are a thousand miles from the cliff and the petrol tank will empty before we get there. Yes there is a drop, but hopefully the motorbike has not been overfilled.
An annoying but great book.