Customer Reviews

Famous Financial Fiascos

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Financial fiascos are as old as the hills, but John Train has done a good job of selecting a useful cross-section of twenty of them for readers to enjoy. This book is an excellent graduation gift for an MBA, or for someone starting a new business. It's light reading, with humor leavened throughout, and the stories are memorable enough to stick with you as you make your own way in life.

The challenge and the beauty of this brief work is in the selection of which fiascos to present. Although many a reader will think of one or two scandals that were missed, there are enough of them here of various types that any one exclusion is not relevant to the presentation. This was not written to be a history of all financial scandals of all time. The organization of fiascos in the book is non-chronological, jumping between long stories and short stories in different time periods, offering different lessons.

"Fiascos" carefully dissects various overriding themes of financial scandal in its seven page afterword, which I will not repeat here. The book is also bracketed with an excellent foreword by C. Northcote Parkinson. I will just summarize that most of the scandals involve otherwise talented or intelligent people driven to do very foolish things, whether by personal ambition or under the influence of a crowd. It was noteworthy to me that three of the twenty scandals (John Law, the French Revolutionary hyperinflation and the French Panama Canal) involved France in a major way. What am I to make of this? France obviously had a difficult transition from its absolute monarchy into the modern era, and it appears to have been an environment ripe for manipulation. It may be correct to say that under authoritarian environments, whether involving governments or just corporate bureaucracies, financial weeds are more likely to grow. This suggests to me that China may be ripe for scandal as it continues its uneven road towards a modern economy (beyond those involving metals trading or banking that have already been disclosed).

In fact, the best antidote to financial fiasco appears to be complete transparency between buyers and sellers regarding what is being offered, and intelligent consideration of risks by those involved. This is what makes truth in financial accounting, to the extent it can be achieved, so critical.

One criticism I do have of Train's storytelling involves repentance, told towards the end of his description of the French Panama Canal fiasco [p.74]:

"[In the wake of the scandal] over a hundred parliamentarians were brought to trial, but a single poor naif who actually confessed was the only one found guilty.

...But there was a happy twist: on the basis of a legal technicality a higher court quashed the sentences."

Hooray for the "poor naif"! I don't know why he chose to confess when so many other guilty figures did not, but on the day that man died I'm sure his conscience was a little bit clearer for it. It's most difficult to "play by the rules" when the entire crowd goes mad, as these stories often illustrate. This dissent by the lone French parliamentarian is to be lauded, even if it could have cost him dearly as the sole bearer of guilt.

When the rest of the crowd goes against you, will you have the strength to stick to your convictions?

C. Northcote Parkinson provides an especially informative Foreword in which he briefly discusses the balance between investment risk and reward, noting that human error is frequently the cause of investment failure. Shifting his attention to this book, Parkinson suggests that Train "has usefully analyzed a number of these human errors and we do well to study his conclusions. Some of the worst mistakes have been made by people to whom the nature of their problem was entirely new. They lived at a time when the textbooks of economics had still to be written, at a time when the word `inflation' was applied only to balloons. There are still such people today and they can be identified, very often, as folk who have plunged into industry without any previous background in commerce." Parkinson suggests that there are many different causes of financial disasters, with the worst the result of several causes in combination, such as confusion of purpose, overgenerous investment, and a mistake in timing. To these I would add "homework" or rigorous due diligence. Train carefully examines 20 of the most famous (infamous?) "financial fiascos" which range from "Mr. Ponzi and His Scheme" to "The Putrefaction of Juan March." He also includes an excellent analysis of two which have always fascinated me: "Xerox Discovers the Computer: The S.D.S. Scandal" and "The Fine New $6 Million Sydney Opera House."

Following the brief but insightful analyses of such `fiascos", Train concludes his book with an Afterword which has special relevance to the contemporary business world. After noting that the syndrome that begets inflation and then unavailing price controls seems as old as history (e.g. Hammurabi's code in about 1745 B.C. and Diocletian's in A.D. 301), he poses a thought-provoking question: "Do we still treat inflation by controlling prices instead of government expenses and the money supply?" After all the millennia, Train suggests, an aphorism attributed to the Swedish chancellor Oxenstierna seems to remain true: "The world always wishes to be deceived: let it be deceived." Those who share my high regard for this book are urged to check out Edward Chancellor's Devil Take the Hindmost.

The stories in the book are delightful, starting off with Mr. Ponzi and going into other amazingly true real life stories. Without repeating what others have said, this book could have been so much better. But the writing is dull, boring, and in short, there simply MUST be another book that is more pleasant to read. I'm a lawyer, and I feel like I'm reading an informative trial brief. Great stuff inside, but not very entertaining. Just my two cents.

Nassim Taleb once pointed out the prevalence of survivor bias in how we regard success and failure in history. The fallacy is predicated on the notion that because history typically only records those who have succeeded, we naturally don't have an objective comparison between the traits of those who succeeded versus those that failed. It is easy to characterize success by hard work, determination, and persistence, but if you overlook the likelihood that many failures also possessed those same characteristics you risk undervaluing potentially more pertinent elements that go unnoticed due to this bias. Survivor bias is prevalent in many areas but perhaps no where as often in books that attempt to provide insight into business success. Thus John Train's entrance into stories of colossal financial failures presents a refreshing outlook on perhaps what not to do, if not simply an enjoyable look as history from the "other' side of success.

The bulk of the stories presented are no more than a few pages in length, yet Train is an expert at getting to the issue quickly and establishing key elements. The stories range from the despicable and intentional such as Ponzi and his schemes, to the ludicrous and mind numbing European Tulip craze of the 1500s, and even the flat out failures of ego and planning such as the French Panama Canal Company and the 100-fold cost debacle of the Sydney Opera House. An expert at historical and international trade and business,Train presents several entertaining accounts complete with detailed and reasoned lessons.

At some point you have to have a sense of humor about things because everyone fails at one time or another, but it takes perhaps real genius to fail so colossally that you are remembered for it for centuries. If you'd like a quick rundown of what you may want to avoid if you are planning for any level of financial success, then Famous Financial Fiascos is a terrific primer.

Delightful and droll memories of the various and colorful characters who have burned through capital with so much flim-flam. John Train's narrative style is dry, and wry, and understated, so many readers may miss the fun. This is dry wit in the same vein as Churchill nodding politely to the vermouth bottle when making his martinis.

This is one of the most amusing retellings of the story of Ponzi ever crafted, and the tales of John Law and his various descendents (France did it AGAIN, and within thirty years, ushering in and solidifying Napoleon) never cease to amuse.

As we currently observe the Euro unravel and watch Dubai sink back into the sands, and laugh at the over construction of homes on the backs of NINJA loans, these stories of canals, schemes, insurance pyramids, foolish central bankers, inflated asset prices and self-dealing, all ring all too true, sadly time and time again.

A gem of a book to treasure forever. Well worth re-reading.

This book could have been much better. John Train's essays contain some interesting nuggets of information, but the overall quality is uneven at best. The book reads a bit like a first draft. With some better editing, this could have been an outstanding book. As it stands, though, it's a moderately entertaining collection of half-baked stories.