Gillian Tett was very shrewd in focusing her account of the financial meltdown of 2007-09 on J. P. Morgan. JPM was one of the few banks that came out on the other side looking relatively good, and I surmise that it was because they had acted with a greater degree of restraint and responsibility that they were willing to have Tett tell their story, and I assume that she had a lot of access to almost all the players. At the same time, the focus on JPM didn't impede Tett from giving very clear explanations of key terms -- collateral debt obligations, asset backed securities, derivatives, credit default swaps, monoline insurance, leverage, capitalization, structured investment vehicles, and all the rest. She has a talent not just for clear explanations but for framing analogies that make the transactions understandable to non-experts like me. Of course, her focus on JPM means that we don't get inner views on the operations of, say, Merrill Lynch, Morgan Stanley, and Fannie Mae -- or the Federal Reserve or the Treasury, come to that -- but there are other books that will give you some of that. Sorkin's "Too Big To Fail" has the broader scope, but the downside of his broader approach is that the narrative is a bit diffuse and the character of individual actors less developed. No reason not to read both, however.
Tett's focus gives her a chance to shape an arching narrative, for at the beginning we see a group of young JPM bankers disporting themselves in south Florida and in effect inventing credit derivatives. At the end of the book, she brings us back to that group, now dispersed fifteen years later, and wondering what the heck happened. How did a strategy they developed with the aim of dispersing risk end up increasing it? That's the story Tett's telling, and it's clear that at the end she and the original bankers still believe that their invention was a good thing -- a tool, as one of them put it, but one that was used for purposes that the inventors never intended (or imagined, it seems), and purposes that might have been subverted with better regulation, better oversight, and more attention from the upper-levels of bank management to what the young guns were doing. More than the other books on the crisis that I've read, Tett gives me an understanding of the "shadow banking system" and its relation to the big banks. Especially chilling was the explanation of how some banks -- though not JPM -- encouraged the setting up of separate "structured investment vehicles" (SIVs) for off-the-books trading that enabled them to make a lot of money when the going was good with a "parent" bank that was in fact undercapitalized. There were capital requirements for investment banks (that is, a certain percentage of their assets had to be always available as capital just in case there was a "run" on the bank) and compliance was monitored by the Fed. However, there were no such requirements for SIVs, and because the SIV trades were not on the parent bank's balance sheet, the parent bank's capitalization appeared to be stronger than it was. If one wanted to be moralistic about it -- and why shouldn't one -- one could say that the deployment of SIVs enabled banks to evade capitalization requirements. However, when people started cashing in or seeking to sell because the value of their purchased instruments was dropping, the shadow SIV couldn't meet the demand and suddenly the parent bank was on the hook and losses started showing up on their balance sheets apparently out of nowhere. Soon, in many cases, the parent found itself short of capital too. So . . . what was the Federal Reserve to do? It's a great and sobering story.
An obviously related matter that is very well accounted for by Tett is the degree to which it became almost impossible to put a value on mortgage-backed securities. Sellers invented complex instruments that involved the bundling together of millions of dollars in mortgage debt, which were then sliced up as "collateral debt obligation" (CDOs) and sold in "tranches'" that carried, ostensibly, varying degrees of risk. But the models on which the risk assessments were made envisioned no collapse of house prices and the tide of foreclosures that followed. To complicate matters, new instruments had been developed that bundled CDOs -- CDOs of CDOs, aka "synthetic" CDOs -- and sliced and diced THEM -- and how THEIR values could be clearly established at such a distance from the original mortgages became a major problem. When banks didn't like the fact that the market value of their instruments was falling, it was awkward, to say the least, that they couldn't give a rationale for a higher value. When a bank admits that it doesn't know what its (supposed) assets are worth, then the panic is on . . .
The irony isn't just that an invention intended to reduce risk actually made it worse. There's the irony that many of these bankers who followed Alan Greenspan in believing that the markets always got prices right didn't like it when the market started devaluing what they were selling. People who believed that the government shouldn't get involved in financial matters -- for that would stifle "innovation" -- were asking the government, in the shape of the Federal Reserve, to enable them to achieve adequate capitalization -- and try not to call it a "bailout," please! -- that had been undermined by the "innovations" by which they set so much store. The innovators weren't the only ones to blame, of course -- mortgage lenders (many of them unregulated and unscrupulous), inattentive and greedy mortgage purchasers, ratings agencies that were financed by the very people they were rating, credulous insurance companies, and -- some would say, though Tett doesn't get into this -- the Federal Reserve itself for failing to act promptly -- all can take their shares of the blame. Tett was academically trained as a social anthropologist and her feel for the cultures of groups in banking and for the psychology of panicky investors gives her telling of this story an interesting human dimension. It's not just a matter of "baddies" and "goodies." Jamie Dimon and his team at JPM resisted the siren song of easy profits when everybody else was making gazillions, and Dimon was able, in a crucial meeting with the Fed and the Treasury, to high-mindely invoke civic responsibility -- but when Bear Stearns got in trouble and he saw a chance to gobble it up, he took it.
NOTE: The title of this review is from Shakespeare's "Troilus and Cressida." In a crucial scene, the Trojans are debating whether Helen of Troy, whose kidnapping initiated the war with the Greeks, is worth keeping? The quotation I've used as a title is Troilus's assertion that yes -- we Trojans gave her the value she has, and that's what she's worth! and we're MEN, and we're going to fight to keep her. His brother Hector, tired of a seemingly endless war, isn't having it: "Brother," he says, "she is not worth what she doth cost the keeping . . ." It's a great moment in a great and disturbing play.
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