Fool's Gold: The Inside Story of J.P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe [Paperback]

Gillian Tett (Author)

Book Description

Release date: April 13, 2010

 From award-winning Financial Times journalist Gillian Tett, who enraged Wall Street leaders with her newsbreaking warnings of a crisis more than a year ahead of the curve, Fool's Gold tells the astonishing unknown story at the heart of the 2008 meltdown.

Drawing on exclusive access to J.P. Morgan CEO Jamie Dimon and a tightly bonded team of bankers known on Wall Street as the "Morgan Mafia," as well as in-depth interviews with dozens of other key players, including Treasury Secretary Timothy Geithner, Tett brings to life in gripping detail how the Morgan team's bold ideas for a whole new kind of financial alchemy helped to ignite a revolution in banking, and how that revolution escalated wildly out of control.

The deeply reported and lively narrative takes readers behind the scenes, to the inner sanctums of elite finance and to the secretive reaches of what came to be known as the "shadow banking" world. The story begins with the intense Morgan brainstorming session in 1994 beside a pool in Boca Raton, where the team cooked up a dazzling new idea for the exotic financial product known as credit derivatives. That idea would rip around the banking world, catapult Morgan to the top of the turbocharged derivatives trade, and fuel an extraordinary banking boom that seemed to have unleashed banks from ages-old constraints of risk.

But when the Morgan team's derivatives dream collided with the housing boom, and was perverted -- through hubris, delusion, and sheer greed -- by titans of banking that included Citigroup, UBS, Deutsche Bank, and the thundering herd at Merrill Lynch -- even as J.P. Morgan itself stayed well away from the risky concoctions others were peddling -- catastrophe followed. Tett's access to Dimon and the J.P. Morgan leaders who so skillfully steered their bank away from the wild excesses of others sheds invaluable light not only on the untold story of how they engineered their bank's escape from carnage but also on how possible it was for the larger banking world, regulators, and rating agencies to have spotted, and heeded, the terrible risks of a meltdown.

A tale of blistering brilliance and willfully blind ambition, Fool's Gold is both a rare journey deep inside the arcane and wildly competitive world of high finance and a vital contribution to understanding how the worst economic crisis since the Great Depression was perpetrated.

Editorial Reviews

From Publishers Weekly

Tett's complex and well-written narrative of J.P. Morgan's role in the financial meltdown lends itself awkwardly to the audio format, in part because general readers who are not specialists in the workings of financial derivatives will find themselves lost in a sea of acronyms and specialized terminology without the useful glossary at the back of the print book. Stephen Hoye's talents don't shine here, with an on-again/off-again British accent for one of the key players and a plodding delivery of some portions of the labyrinthine story. An abridgment could have helped to retain listener interest without becoming ensnared in intricately detailed descriptions of events; such descriptions were the lifeblood of Tett's sophisticated print book, but they slow the audio version significantly. A Free Press hardcover (Reviews, June 8). (Aug.)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved. --This text refers to the Audio CD edition.

Review

[Audio Review] Most of us have been scratching our heads (tearing our hair might be more accurate)
trying to fathom the whos, the hows and the whys of the mega-financial meltdown
we re in. Answers have been scarce and understanding the abstruse financial instruments
that paved the way, difficult. Help is here in Gillian Tett s totally engrossing 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 performed by Stephen Hoye with the care this complex story deserves. Tett has the remarkable ability to make swaps, derivatives and their arcane securitized, synthetic offspring understandable to a financially challenged dummy like me and she does it while telling the tale of how this brainstorming group of J.P. Morgan whiz kids came up with a way to make risk, riskless, removing old constraints and unleashing a great wave of capital into the economy that should have been beneficial. But, sadly, it was all too good to be true. When Morgan s rivals combined this financial alchemy with subprime mortgage madness, without considering that a boom could bust, it was all over, leaving us battered by the rippling toxic aftereffects of unregulated greed. --Bookpage --This text refers to the Audio CD edition.

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Product Details

• Paperback: 320 pages
• Publisher: Free Press; Reprint edition (April 13, 2010)
• Language: English
• ISBN-10: 1439100136
• ISBN-13: 978-1439100134
• Product Dimensions: 8.4 x 6.5 x 0.8 inches
• Shipping Weight: 9.9 ounces (View shipping rates and policies)
• Average Customer Review: 4.3 out of 5 stars  See all reviews (76 customer reviews)
• Amazon Best Sellers Rank: #74,507 in Books (See Top 100 in Books)
  • #73 in Books > Business & Investing > Industries & Professions > Banks & Banking

More About the Author

Gillian Tett oversees global coverage of the financial markets for the Financial Times, the world's leading newspaper covering finance and business. In 2007 she was awarded the Wincott prize, the premier British award for financial journalism, for her capital-markets coverage. In 2008, she was named British Business Journalist of the Year. She previously served as the newspaper's deputy head of the Lex column (an agenda-setting column on business and financial topics), Tokyo bureau chief, economic correspondent, and foreign correspondent. She speaks regularly at conferences around the world on finance and global markets. She has a PhD in social anthropology from Cambridge University. In 2003, she published a book on Japan's banking crisis, Saving the Sun: How Wall Street Mavericks Shook Up Japan's Financial World and Made Billions.

Most Helpful Customer Reviews

162 of 170 people found the following review helpful

5.0 out of 5 stars Excellent Review of the Players: From AIG to Wells Fargo May 18, 2009

By Mike Morgan

Format:Hardcover

The book starts with a fly-on-the-wall description of big, offsite meeting in Boca Raton for J.P. Morgan employees. There they made plans to ensure that J.P. Morgan led the industry in credit derivatives. This story of the bravado of young party animals becomes the backdrop for how we got into this mess. These recently minted and overconfident traders and analysts risk takers, lead a headlong charge into a poorly understood market innovation. After that, Tett describes in detail the array of models, players and events that lead to the financial crisis and weaves them all together to explain the events like no other author yet has done.

Although the description of events are detailed, Tett leaves out explanations of how basic psychology and particular modeling errors contributed to the problem - such as the researched described in Hubbard's The Failure of Risk Management: Why It's Broken and How to Fix It (although Hubbard is talking about risk management in a broader sense than financial risks alone, I still recommend both books for this topic). But Tett is also more pragmatic and specific than Taleb's The Black Swan: The Impact of the Highly Improbable and makes more logically supported conclusions than Posner's A Failure of Capitalism: The Crisis of '08 and the Descent into Depression.

Tett seems to cover just about every aspect of the recent crisis that an author can cover without getting into specific mathematical modeling errors (Hubbard argues this is a critical contributor but it would be hard to elaborate without alienating much of the audience). She covers AIG, Bear Sterns, Fannie Mae, the credit rating agencies and the Basel II accords. She mentions Gaussian copula model, Goldman Sachs and the actions of Alan Greenspan. The details of Structured Investment Vehicles (SIV) and Value at Risk are included along with recent events like the Troubled Asset Relief Program (TARP).

I do not believe there is another single book that has this breadth of coverage combined with a logical picture of how they formed an avalanche of connected events. As of now, this is the single most important book on the topic, period.

93 of 100 people found the following review helpful

5.0 out of 5 stars Well written book that is a must-read for anyone who works in finance, or is mad at the financial wreck we are in May 23, 2009

By S. Yang

Format:Hardcover|Amazon Verified Purchase

Having read this book over 3 days (interrupted only by work, playtime with my two toddlers, and sleep), I highly recommend it to anyone who cares about our financial system (be it that you work in finance, or hate financiers that brought us the ruins - just bear in mind they were not the only ones to blame, throw in the regulators, lenders, and borrowers who enjoyed the party, and politicians who took credit for the housing boom). The book is well-written, focused, and surprisingly a page-turner that you don't want to put down once you start reading it.

Having fought the battles in the trenches over the past two years during the ongoing financial crisis, I have a deep appreciation for what Gillian Tett has accomplished in this book. It provides a comprehensive view of one corner of the financial markets - the one that caused so much of the wreckage over the past two years. While it will be a daunting task for any single writer to document the crisis we are still going through (given the multiple contributing factors/actors to this crisis), the author has done a great job producing a contemporary record on the credit derivatives market and its role in fueling the housing bubble leading up to the crisis.

Obviously, the author deliberately chose to exclude some critical episodes of the credit crisis (such as the SocGen trading scandal, the resulting ill-timed massive cut in Fed funds rate leading to the oil shock of 2008 that partially contributed to the inflation scare and added shock to the economy). She also chose to withhold judgment on policy responses during the early stage of the crisis and exclude the various "local" factors contributing to the subprime housing boom (think Hank Paulson and Ben Bernanke claiming the subprime crisis "being contained", think Barney Frank and his role in shielding Fannie and Freddie from proper oversight, think Clinton and Bush administrations' claim that homeownership was at "historical highs"). She may be right to do so as inclusion of these topics will obfuscate the focus on credit derivatives. An educated reader will want to keep in mind such background information as part of the mosaic of the financial crisis.

Without a full understanding of all the factors contributing to the crisis we find ourselves in, it would be tempting to find solutions that seem to eliminate the excesses of the past years only to sow the seeds for future problems. So-called "always fighting the last war". A simplistic solution to the credit derivatives abuse would be to ban it. A simplistic solution to the failed U.S. auto industry would be to subsidize it with taxpayer funds. A simplistic solution to the housing problem would be to mitigate mortgage foreclosures through taxpayer subsidies (as if everybody who bought a home deserves to live in that home or be a homeowners in the first place).

Gillian Tett was nominated as British Business Journalist of the Year not for this book, but her regular writings in the Financial Times. Her writings in the FT are insightful and timely. This book only reinforces her reputation as one of the best journalists in the field.

On a separate note not related to the book but the book reviews found on Amazon, I find it hard to believe that any review by people who haven't actually read the book is entertained on this site. Simply saying that "I heard this was a good book and I heard the author interviewed" is no qualification for one to write a book review. There is no prize to win from writing the first review, especially when it's only based on hear-say. Anyone who does that is doing the author and intended readers a great disservice, no matter how flattering the review is. Amazon should impose some minimal standard on such postings.

170 of 196 people found the following review helpful

3.0 out of 5 stars Not as Good as it Appears May 26, 2009

By EWC

Format:Hardcover

I loved the documented history this book provides. It's a treasure trove of dates, quotes and important juxtapositions on the development and unwinding of structured finance. I turned the pages and you will too. But in the end, I was disappointed by the author's superficial understanding of the underlying issues. She wants to argue that the banks used clever innovation to exploit big loopholes in Fed and Basel regulations and to arbitrage ratings but she doesn't have a deep enough understanding to truly explain how this was done. As a result, she ends up contributing to the general populations' great misunderstanding of these markets.

Pages 61 to 64 provide one of many examples. She concludes at the top of page 64, "Banks had typically been forced to hold $800 million in reserves for every $10 billion in corporate loans on their books. Now that could be just $160 million. The CDS concept had pulled off a dance around the Basel rules." Regulators and rating agencies aren't that naive! Three pages earlier she notes that the issuer of credit default insurance had to post $700mm of collateral, held as Treasuries, and that the Fed demanded that the issuer either had to have a triple AAA rating, i.e. the capacity to absorb losses greater than the $700mm it posted as collateral, or else the bank had to post an addition $160mm of reserves with the Fed, over and above the $700mm. The logic of this requirement is obvious, either way, someone, the bank or the insurer, had to post at least $800 of reserves. There is a popular belief that AIG posted no collateral but the truth is that while, it in part did not post liquid collateral, it in fact posted the value of its other businesses as collateral. The Fed, of course, took those businesses as collateral in exchange for posting liquid collateral.

Her descriptions of leveraged super senior on pages 96-98 are similarly muddled, incomplete and misleading, greatly overstating the extent to which sophisticated regulators, rating agencies and commercial paper investors failed to understand the issues surrounding these structures. It's akin to a beginning chess player interpreting the games of grandmasters by mistakenly assuming they are boldly trying to win pieces rather than much subtler truly winable advantages. Instead, capital markets are highly efficient. And regulators and rating agencies are far more knowledgeable than the popular press wants to admit. I would suggest going to: http://www2.standardandpoors.com/spf/pdf/fixedincome/082205_levsuperseniorcdosSNAP.pdf and reading paragraph 1.3, "Incentives for the Protection-Buyer in a Leveraged Super Senior Transaction".

In the end, if the value of loans fall far enough, no matter how much you slice and dice the risk tranches someone must eat those loses. The slicing and dicing isn't necessarily the problem but rather the magnitude of the losses. And so, the story is woefully incomplete without also understanding the buying spree of Freddie and Fannie who, when they were not allowed to guarantee sub-prime and alt-a mortgages, instead bought 15-20% of the market with cheap quasi-government guaranteed financing, which drove up pricing. Brokers and banks couldn't have offered homeowners the ridiculous terms they did unless investors stood eagerly ready to buy on those terms. In large part, that buyer was Freddie and Fannie.

For its rendition of history, I would give the book 4; for the more important underlying argument, a 2; and so generously in total, a 3.