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36 of 38 people found the following review helpful
5.0 out of 5 stars Get this book if you want to understand Wall Street antics
This book is an absolute must read if you want to understand Wall Street shenanigans. Partnoy has done a phenomenal job of demystifying the world of swaps, derivatives and other exotic financial instruments. Even better, he shows how investment banker antics have affected Main Street inhabitants including yourself. How did Orange County and so many other municipalities...
Published on July 14, 2003 by Srikumar S. Rao

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2 of 5 people found the following review helpful
3.0 out of 5 stars Infectious Greed- Here to stay
Great historical perspective of the out-of-this world greed and borderline illicit trading that began in the 80s...if not before.

Problem is this is a tedious book of complex financial terms and stories. Requires patience and end result in my opinion is a presage of a bigger meltdown yet to come.
Published on November 5, 2008 by T. Ottinger


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36 of 38 people found the following review helpful
5.0 out of 5 stars Get this book if you want to understand Wall Street antics, July 14, 2003
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This book is an absolute must read if you want to understand Wall Street shenanigans. Partnoy has done a phenomenal job of demystifying the world of swaps, derivatives and other exotic financial instruments. Even better, he shows how investment banker antics have affected Main Street inhabitants including yourself. How did Orange County and so many other municipalities get so deeply in trouble? The author explains.
I have a Ph.D in business and many finance courses under my belt, but I never quite understood the systemic dangers of the 'financial innovation' that is sweeping our markets. Now that I have, I will sleep much less well at night.
Partnoy describes the evolution of exotic instruments and the characters involved in this evolution. How CS First Boston made securites of virtually any type of debt, Salomon pioneered the CMO and so on. He details the specific wrongdoings of companies like Enron, Global Crossing and WorldCom. He shows you the enabling role played by gatekeepers like accounting firms, law firms, analysts and credit rating agencies.
Even more important, he shows you exactly how the collusion happened and why. He gives you both an aerial view of the markets and a down-in-the-trenches description. I often wondered why, in efficient markets, participants voluntarily involved themselves in such convoluted transactions that had high costs in terms of record-keeping and fees. The answer, as Partnoy shows, is that virtually all of these arrangements permit some set of parties to subvert law or regulation or both. This is true domestically and internationally.
He graphically describes how lobbying keeps regulators at bay and the venality and ineffectuality of politicians. The chairperson of the Commodities Futures Trading Commission, for example, exempted important parts of Enron's business from regulation and, just weeks later, joined Enron' board. There are many such stories that show exactly how self-serving our legislators and regulatory guardians are.
My quibbles are minor. While Partnoy is clear, his language is colorless. Perhaps his legal background has something to do with this. Given the strength of his material and the depth of his research, he could have made this book a popular bestseller if he had used more forceful colloquial expression.
Also, he does not talk at all about the role of technology in this evolving mess. Greedy, incredibly smart bankers have always been with us. What has permitted them to have this huge impact now is the ability of computers to churn massive amounts of data, pick out the faintest of patterns and keep records of incredibly complex transactions involving dozens of parties over vast stretches of time.
This said, this is the best book I have yet come across that explains how and why large scale financial malfeasance happens. And why it is hardly ever punished. You will understand why the perpetrators of Enron, Global Crossing, Adelphia, WorldCom, Sunbeam and so many others will walk and hold on to their vast gains. Start praying that there is justice beyond our courts.
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27 of 29 people found the following review helpful
5.0 out of 5 stars A chilling summary with very thorough analytical background, June 23, 2003
In a much more serious project than his previous FIASCO, Partnoy gives an extremely persuasive explanation of how the interaction between financial product developments, legal change and administrative character have led to the series of financial scandals witnessed over the last twenty years. Few books on the subject have managed to explain the bizarre stories of Enron or LTCM in an understandable way but Frank puts together a convincing interpretation. The story depends not just on developments of financial products but also on accounting and legislative reforms, which he details. I'm not sure any other book on the subject approaches this one in detail and scope. Many have been written on individual cases but this is perhaps the first work to explain an overall pattern of corruption and it's evolution. The most familiar scandals are no longer bizarre events but can be seen as almost a logical consequence of a system going off the rails.
Other reviews have suggested that Frank is anti-derivatives but this is not at all the case. He makes it clear that derivatives are in many case useful structures with a role to play but that they have been used at other times to less beneficial ends. There is an undertone of indignation in the writing but such anger is surely more than justified considering the huge injustices which have gone more or less unpunished.
The suggestions for financial reform at the end of the book should be a blueprint for new legislation worldwide.
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16 of 16 people found the following review helpful
4.0 out of 5 stars A very good book, but not of the FIASCO type, November 11, 2003
I always regard FIASCO as the Morgan Stanley version of Liar's Poker. Both of them are outrageous. It's certainly great fun to read insider stories, which are interesting but fifthy, of how the supposedly honorable banks screwed their customers. Naturally I had very high expectation of this book before I started reading it. To my minor surprise, the author had adopted a completely different style writing this book, making it a very serious and exhaustive account of how big banks like Bankers' Trust, CSFB, LTCM, Morgan Stanley and gigantic conglomerates like Enron, Worldcom, Orange County made use of dubiously legal practice for their own profits or demise, but certainly at the expense of shareholders. This material is really qualified to be a testimony before the Congress, which the author really did.
I do appreciate the author's sincerity of warning the public about the legal and moral problems of the real financial world with the advance in technology and financial techniques. A reviewer here said that the author was living in an ivory tower. I feel so sorry for that critic and those who thought so. As a professional trader, I assure you that the real world is indeed more dangerous and fifthy. Anyway, I do recommend this book as an indispensable material for anyone, especially govt officials (though I doubt very much they will humbly read and take this book seriously) who want to look into this. For those who just want to read for fun, FIASCO might be a better choice.
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15 of 19 people found the following review helpful
4.0 out of 5 stars Insightful and complex reading, October 6, 2003
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There are many positives and negatives about this book. Are derivatives bad? Well, they can be. Partnoy builds the case that derivatives were sold that carried massive risk to customers that did not understand them. In addition, the salesmen were greedy individuals raping and pillaging only to make money with no regard for the customer's well being. While I don't find this totally wrong, any customers who are buying assets they don't understand should share in the blame. For example, he gives the Gibson Greeting example where they are making an interest rate bet with their investment while stating they had no such risk. You can't have it both ways.
Irrespective of this double standard for investors (I want higher returns unless it goes bad then I want to sue), Partnoy brings some very valid criticism. The massive off-balance sheet investments hiding true risk were inappropriate and harmful to shareholders. I think Partnoy does an excellent job examining this risk and presenting his case with Enron and Worldcom specifically as examples. The interesting point he made in this book I wasn't aware of is that Enron's trading operation was highly profitable and was a solid going concern until the liquidity crunch of the publicity.
But derivatives that are appropriately understood can be excellent investments. In the 80s CMOs (Collateralized Mortgage Obligation) were invented allowing investors to invest in short tranches to receive lower average lives to match their funding liabilities. This was a great investment for many banks for which credit is not given in this book. Now, these type derivatives did have extension risk or prepay risk if mortgages prepaid faster or slower than anticipated. In the 90s we saw volatility of many markets that caused such fluctuations and left an aftermath of blame placing. But in this case, the derivative was not the issue, market prepayments were.
Be forewarned this is not light reading. This book took twice as long as most I read due to the complexity of the examples. It is an interesting read but a complex read. I would strongly recommend this book for finance geeks or stock investors who would like an in-depth look at how company financial statements could be manipulated.
DISCLOSURE: I took a massive loss in Worldcom preferred stock based on the accounting fraud. However, I reinvested in utility preferreds such as Dynegy and Williams, both mentioned in this article that turned around from their low to recoup gains. Also, my largest holding has been mortgage derivatives that generated substantially above market returns ANNUALLY over a 6-year period.
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3 of 3 people found the following review helpful
5.0 out of 5 stars 4.5 stars.The author demonstrates that when financial markets become speculative the end results are recessions or depressions, December 6, 2008
By 
Michael Emmett Brady "mandmbrady" (Bellflower, California ,United States) - See all my reviews
Partnoy's entire approach in this book is presented for the reader on p.3.He first gives a brief historical summary of events leading up to the crash of the NASDAQ and other stock market bubbles in the 2000-2001 period : " But most investors were perplexed.Should they wait patiently for another upward run,confident that Adam Smith's " invisible hand " would discipline the bad companies and reward the good ?...The conventional wisdom was that markets would remain under control,that the few bad apples would be punished,and that the financial system was not under any serious overall threat....The argument in this book is that the conventional wisdom is wrong "(2004,p.3).

Partnoy's major point is correct .The conventional wisdom,based on the efficient market hypothesis(EMH) that the time series data for stock market prices is normally distributed,does not have a shred of empirical,historical,or statistical support .Every single study has demonstrated ,over the last 50 years,that the normal (or log normal)distribution does not come close to representing the data.Benoit Mandelbrot has been demonstrating this since 1963.Partnoy realizes that there are severe problems(see pp.89-90)with the EMH,but does not appear to be familiar with the work of Mandelbrot.The use of Mandelbrot's extensive statistical studies would have provided a massive empirical base of support for Partnoy's arguments .The EMH is very similar to the type of theorizing that characterized Ptolomaic astronomy.It is based purely on a priori assertions and claims;it is also a good example of Robert Lucas,Jr.'s artificially constructed models of rational expectations that assumes that the normal distribution simply must be the correct one to use.NO goodness of fit tests were ever presented to support the presumption that the normal distribution is the correct one to use.

Partnoy demonstrates quite convincingly that the terms " financial innovation ' , " financial services " ,and " securitization ", of the 1990-2004 time period ,were Wall Street code words for massive banker financed speculative activities and behavior.Derivatives,especially the credit default swaps,collateralized debt obligations(CDO's),SIV's,and off balance sheet items were,just like the money market funds of the late 1970's-early 1980's and the junk bonds of the 1980's pushed by the Milken-Boesky crowd,speculative endeavors created to evade the eyes of passive regulators.The result was the creation of a banker financed bubble that was pumped up until it inevitably deflated,leading to a panic ,crash ,and economic downturn.This pattern has been continuously repeating itself over the last 400 plus years in all countries that allow speculation to dominate enterprise and entrepreneurship.

I have deducted one half of a star because Partnoy appears never to have read Adam Smith's The Wealth of Nations(WN,1776).His page three reference to Smith is completely false.Smith had already carefully analyzed the nature and role of banking and speculation in an economy .Smith,based on his familiarity with both the 1720-21 Mississippi bubble of John Law,finance minister to the King of France ,and the 1720 South Sea Islands bubble ,laid down clear policies that an independent central bank would have to enforce on the private banking industry.The wisdom of Adam Smith concluded that there were three categories of individual borrower who would not be alowed to borrow loans and/or obtain lines of credit.These three categories are (a)projectors,(b)prodigals,and (c)imprudent risk takers.Smith's three categories are identical to J M Keynes's speculators and rentiers from chapters 12 and 22 of the General Theory(1936).Smith is very clear about what the consequences wil be if the private banking industry goes ahead anyway and makes loans available to these types of borrower-The savings of the depositors will be "...wasted and destroyed...".It will be impossible to intertemporally satisfy the necessary Investment = Savings condition needed to maintain full employment over time because the Savings will have been used to fund speculators instead of business investors,whom Smith refers to as the " sober people ".Smith advocates a monetary policy that will fix the long run rate of interest permanently a little bit above the prime rate of interest charged the most creditworthy borrowers.A policy of credit restriction will be practiced by the banks .ALL loans will be made to the sober people.NO loans will be made to the prodigals,speculators,and imprudent risk takers.This will allow all Savings to be transformed intertemporally over time into Investment.The economy will be on an optimal growth path that maintains itself on the boundaries of the static and dynamic production possibilities frontiers.it is interesting that Smith's recommendations about how money(loans) is used are very similar to those of J M Keynes,as well as Aquinas,Augustine,and Aristotle.See Adam Smith,1776,pp.260-340,especially pp.339-340 for all,of Smith's still relevant analysis.
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9 of 12 people found the following review helpful
5.0 out of 5 stars Be afraid, be very afraid..., July 8, 2003
By 
Mike Howard (Melbourne, Aus) - See all my reviews
Wow... what a scary book.
You already knew that something very wrong has been happening in the relationship between investment banks and their customers but I'll bet you didn't how wrong.
Partnoy's long book (there is an ENORMOUS amount of malfeasance available for the author to dissect) is well written. He has done an excellent job of creating separate threads from inter-connected stories without falling into too much repetition between chapters.
An earlier reviewer remarked that Partnoy is a crusader and "Frankly, I think he goes to(o) far in his ranting".
I couldn't disagree more. It is clear (to me, anyway) that, for too many people, the balance between the desire to make money on the one hand and the utterly vital community issues of honesty and integrity has been lost.
It's also clear (to me) that the justice system does not seem to be properly configured to deal with this.
If you've an interest in how your investment banker will roll you if he gets the chance - READ THIS BOOK.
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4 of 5 people found the following review helpful
5.0 out of 5 stars The only sure bets were the fat fees, November 16, 2009
By 
Luc REYNAERT (Beernem, Belgium) - See all my reviews
(REAL NAME)   
From the 1980s onward, a financial `revolution' (better: disaster) took place. Top executives were paid with stock options. `Irrational Exuberance' reigned about the profitability of Internet companies. Financial instruments became so complex (better: risky) that control by regulators over the industry, control by owners over their company's books and control by executives over their employees was inexistent. Even the valuations of the financial products and/or of the trades themselves became impossible.

The players
The cop of Wall Street, the SEC, was controlled by the other players.
The politicians (the regulators, better: the deregulators) received ample campaign donations and promoted further deregulation.
The CEOs were responsible for massive accounting frauds. Two-thirds of them wanted a misrepresentation of their company's financial statements in order to pump up the share price.
The credit-rating agencies (an oligopoly) were paid by those who asked for a rating (of course, the highest).
The securities analysts pumped up the new offerings as true salesmen, and dumped the stocks after the fat fees were collected.
And those who put the money on the table, the `investors'? Well, they were considered to be morons and had to be fleeced.

Some financial instruments
Quantos (structured notes based on foreign interest rates, paid in home currencies)
Inversed floaters (coupon of x % - LIBOR), long term financed with short term paper
FELINE (Flexible Equity-Linked Exchangeable Securities) convertible preferred stock
CBOs (Collateralized Bond Obligations): bonds emitted offshore (and off balance sheet)
Synthetic CDOs (Collateralized Debt Obligations) based on credit default swaps (as `assets')

Trades
Trading systems based on standard deviations were demolished by the 1987 market crash (20 times s).
Trades on stable/low interest rates resulted in a $1.5 trillion loss in 1994 when the Fed hiked his rate by 0.25 per cent.
Carry trades on interest differences between currencies generated monstrous losses when the Mexican peso and the Thai baht fell into the ravine.
Some traders made a fortune (putting the entire capital base of the company at risk) on tiny price discrepancies (kinks) in the yield curve and by waiting for prices to converge. However, when other players stepped in, the sources of fortune dried up. Other discrepancies had to be found.

Result
The dot.com bubble burst.
Big companies (Enron, WorldCom, Global Crossing, Barings, Kidder Peabody) went bankrupt. `Sophisticated' speculators (LTCM) put the whole financial system at risk.
And ultimately, the CDO explosion brought the whole capitalist system on the brink of implosion. Governments had to step in to save the `free market'. But that happened after the publication of this book.

Frank Partnoy did a monumental job by delving up trading and `cooked books' secrets, by explaining outlandish investment `opportunities' and, ultimately, by exposing the extreme greed of the salesmen.
His phenomenal research will be a handbook for all those who want to understand the financial history of the world from the 1980s till the beginning of the Third Millennium.
A must read.
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4 of 5 people found the following review helpful
5.0 out of 5 stars All We Need Is Honest Politicians- Where Are They?, October 25, 2009
For those who hope to understand what has gone wrong in a dysfunctional American economy, this book is like the joke about ten thousand lawyers at the bottom of a chasm- a good start. Frank Partnoy understands OTC derivatives and the arcane world of securities regulation and enforcement, and he makes it intelligible to any literate reader. The book was written in 2002, and if an honest Congress had bothered to read it chances are very good that our recent 'financial crisis' could have been avoided.

For those too cheap to buy the book and those Congressmen lacking sufficient attention span to absorb it, I will tell you that OTC derivatives trading has made financial regulation itself into nothing more than a joke. It is now impossible to evaluate the financial reports of any bank, corporation, mutual fund or money fund the securities of which are traded daily at the speed of light. Any allegedly regulated entity may be positioned to explode upon the next blip in the Mexican Peso, Thai Bhat or Burmese Fhart, and of course we now know what happens when ten trillion dollars of US residential mortgages are securitized and sliced and diced into tranches and insured by AIG: The taxpayers get a two or three or five trillion dollar bill and all the losses end up as profits in seven offshore hedge funds.

The obvious solution to this nightmare finance is to tax it and expose it to daylight, to force entities supported by US investors to account for their derivative exposure on a current basis. A simple two page federal stature would probably do the trick. [...]. Meanwhile, I will keep my money in my mattress and continue reading Frank Portnoy's books. If I were you I would do the same thing.
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6 of 8 people found the following review helpful
5.0 out of 5 stars Exceptional, June 15, 2010
By 
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Exeptional! A great history of the deception of Wall Street. It looks like an intimidating book at close to 400 pages but it is absolutely captivating. The sad conclusion however is that nothing has changed and Wall Street continues to use us as rats in its financial labratory. And the government, rating agencies and accounting firms sit on the sidelines collecting fines and fees. I only mildly disagree with his conclusions on Efficient Market Hypothesis which I don't think concluded markets were rational.
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7 of 10 people found the following review helpful
5.0 out of 5 stars An AWESOME Book, April 13, 2003
By 
"theoridd" (Burke, VA United States) - See all my reviews
This is an incredibly well-written, immensely timely book; a definite must-read. I literally could not put it down once I started it. I've read both of Partnoy's books; the first one was good, but this one is INCREDIBLE. I'm recommending it to all of my friends; a great, great read.
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Infectious Greed: How Deceit and Risk Corrupted the Financial Markets
Infectious Greed: How Deceit and Risk Corrupted the Financial Markets by Frank Partnoy (Paperback - September 8, 2009)
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