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 (Hardcover)

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Editorial Reviews

From Publishers Weekly

Starred Review. At once a gripping narrative, an education in derivatives, and a most lucid origin-story for the current financial meltdown, it's no surprise the author of this volume is an award-winning Financial Times journalist. Taking readers back to the invention of credit-derivative obligations (CDOs) at J. P. Morgan in 1994, and the subsequent exponential growth of that market, Tett (Saving the Sun) deploys a remarkable sense of pacing, generating real suspense over rapidly inflating debt on bank balance sheets; by the time Lehman Brothers fails, the book has become a bonafide page-turner. Tett explains how credit derivatives seemed a win-win for the financial world, freeing up capital, increasing profits, and diversifying risk, but makes the missteps equally clear as the industry hurtles toward a largely-unforeseen wave of loan defaults (the worst since the Great Depression). Interestingly, J.P. Morgan was one of a handful of banks sufficiently prescient to imagine this "perfect storm" of simultaneous defaults, and so never became over-reliant on CDOs. Ignoring the tacked-on, preachy epilogue (in which Tett advocates her specialty, social anthropology, as a way to avert future such crises), Tett's explosive, illuminating narrative is the one to read for anyone confused by the present financial mess.

From The Washington Post

From The Washington Post's Book World/washingtonpost.com 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. [e-mail]
Copyright 2009, The Washington Post. All Rights Reserved.

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Product Details

• Hardcover: 304 pages
• Publisher: Free Press; 1 edition (May 12, 2009)
• Language: English
• ISBN-10: 141659857X
• ISBN-13: 978-1416598572
• Product Dimensions: 9.1 x 6.1 x 1.2 inches
• Shipping Weight: 1 pounds (View shipping rates and policies)
• Average Customer Review: 4.3 out of 5 stars  See all reviews (43 customer reviews)
• Amazon.com Sales Rank: #1,999 in Books (See Bestsellers in Books)

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Customer Reviews

Most Helpful Customer Reviews

98 of 102 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 (New York, NY) - See all my reviews

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.

55 of 56 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 "Gadget Tester" - See all my reviews (REAL NAME)

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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.

92 of 108 people found the following review helpful:

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

By	EWC - See all my reviews

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.