The Financial Meltdown: A Guest Post from Mrs. KfC

As a number of regular visitors here probably know, Mrs. KfC has somewhat different reading tastes than I do. She spent her working life in the corporate world and knows it well — non-fiction books that explore that story are her favorite and there certainly are a number to choose from right now. In my review of Jonathan Dee’s The Privileges, I said that she would be willing to do a Guest Post as an introduction for those who might be interested in some of these books. Here it is:

The financial doomsday clock was at 23:57 and counting, and unless someone did something very big very fast, it would tick down to the greatest financial disaster the world had ever seen. The economies of entire countries were at risk, not to mention the financial survival of everyone in the world who was participating in the financial markets.

How on earth did we get to this, and what in the world could we do to cope with it? There is a frightening, yet fascinating story of how it all went so wrong: how the financial titans of the world created these instruments of destruction, how the regulators were asleep at the switch (Ladies and Gentlemen, give it up for Alan Greenspan!), how the banks and insurance companies were laying off risk to each other, none of them understanding how big the risks were, and the fact that this was all knowable, but was only seen by eccentric outliers who were not invested in the Good Old Boys Club, and made a killing because of it.

I confess to be riveted by all of this (note to self: get a hobby), and found that four recently published books do an excellent job of describing what happened, why, who was involved, and the fallout that resulted. There is a natural order for reading these books, as they go from the general to the very technical.

Too Big to Fail, by Andrew Ross Sorkin, is a superb page turner, detailing the events starting in September 2008 from the perspectives of the CEOs who were in full panic mode once things started to unravel, and trying to save their own skins, their companies, and eventually the world economy. Sorkin has done a thorough job of researching the events and the interconnections, and describing them in a narrative that gives the reader wonderful insights in to the personalities of the financial Uberchiefs literally rushing around New York 24/7 negotiating with each other to try and stop the hemmoraging.

At the heart of this debacle was the American Dream of home ownership for everyone, and the creative effort that was expended by the financial industry to push unwitting buyers in to homes they had no hope of ever keeping is mind boggling. It was a house of cards, and once it started to topple, no one was safe. Hank Paulsen, Tim Geithner, Jamie Dimon (CEO of JP Morgan Chase), and literally hundreds of others tried to figure out what to do. This was unprecedented, and if they got it wrong, there was no telling how bad it could be. They didn’t know how much was enough – and the descriptions of how to decide on the quantum of TARP are fascinating (spoiler – they made it up). The take away from this book is that there was massive corruption on Wall Street (not a new thought) in the form of bankers being incentivized to the tune of billions of dollars while everyone on main street was teetering on the edge of financial ruin. The very systems and institutions designed to prevent this from happening were absent at best, and enabling it at worst. Sorkin brilliantly describes the behaviours and emotions of the Big Honchos on Wall Street who believed their paychecks were proxy for their brilliance, and what happens to these guys when it all goes bad.

The Sellout, by Charles Gasparino is next up on the list. He picks up where Too Big to Fail left off, going deep in to the instruments that were created to support and inflate the housing bubble, and how the big Wall Street firms embraced these instruments, and built their companies around them,. The relentless pursuit of billions by the bankers, their cavalier disregard of the consequences of their actions on their shareholders, and the public gives a reader pause – why would I NOT put my money under my mattress? Gasparino does an excellent job of portraying the haplessness of the regulators, and all the system failures that contributed to the meltdown. The CEO’s of the big firms are engaged in quarter by quarter sprints to profits, each trying to outpace the others, eyes firmly on each other and the sizes of their bonuses as the ultimate measure of virility. He also describes in layperson-friendly terms how the interconnectedness of the financial world accelerated the meltdown.

The Big Short by Michael Lewis and The Quants by Scott Patterson are two excellent books that take us in to new territory. While Sorkin and Gasparino detail the events of 2008-2009 from the perspective of the titans of Wall Street, and their willful blindness to the unfolding disaster, Lewis and Patterson have written two excellent books about the people who COULD see it. These are the stories of the people we would have described as “the unpopular kids” in high school. Brilliant nerdy mathematicians, and physicists who are eccentric personalities, but figure out what is hiding in plain sight. They are not invited to the fraternity because they are busy studying mathematical equations, and improving upon them, dissecting financial systems and asking themselves the question “what if we did THIS” and figuring out how to make a lot of money from the craziness infecting the world economy.

They are all interesting characters, some with amusing eccentricities (one billionaire takes his guitar to the subway and busks), but the important lessons from these two books is how critical it is to have outliers in the tent. The “group think” that infested the financial world was a function of a bunch of entitled white men (there are no women involved in the mass financial destruction, and only Vikram Pandit at Citibank is a minority player) who rose to the top together, drank from the same cup of wisdom, socialized together, and could not conceive that they could create anything but success from their actions.

Both The Big Short and The Quants are useful, reader friendly books describing the technical underpinnings of the financial instruments currently in vogue, and the reader will be struck by the number of these geniuses who cut their teeth in Las Vegas at the 21 tables counting cards, or trying to beat gaming systems of some sort (sometimes successfully).

Having read these four excellent books in a very short time, it was hard not to have personal moments of panic, and wonder who the hell really IS in charge of the economy. Well, no one is, of course, and we can only hope that the new players are chastened by this huge near miss, and have put their houses in order. Indications are not good though – Wall street bonuses recently announced are back to pre-08 levels, the sturm und drang emanating from politicians on cleaning up Wall Street is becoming a distant memory, and there is still a precarious recovery trying to find it’s legs, particularly in the US.

Plus ca change, as they say.

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23 Responses to “The Financial Meltdown: A Guest Post from Mrs. KfC”

  1. Trevor Says:

    Bravo Mrs. KFC! When Kevin announced your post I couldn’t wait!

    I have only read the first on your list, Too Big to Fail. Did you notice, by any chance, the players from that building you visited in late November? I found that book as riveting as any work of fiction I’ve read recently, though that might be because the players and the game are getting more and more familiar. Your final words are echoing.

  2. Sheila o'Brien Says:

    Thank you for your kind words Trevor.
    I fear that the players are getting more familiar because they are all interchangeable. It’s frightening how soon we forget, isnt it?

  3. Colette Jones Says:

    I agree with Trevor, thanks Mrs KfC.

    And with one phrase (sturm and drang) I’ve got Little Shop of Horrors going around in my head. :)

  4. Mary Says:

    Can I just add a book written about the same thing from a British perspective namely The Gods that Failed by Larry Elliott and Dan Atkinson? This book by two financial journalists explains the crisis in the City of London following the collapse of the American banks. I’m just about to start Gillian Tett’s Fool’s Gold which has been highly recommended also. (The John Lanchester book Whoops is unfortunately too pricey at the moment!)
    As an old lefty but not an economist I’ve been fascinated by the whole crisis and I’ve been trying to find the uber -book that describes it all clearly.
    It seems odd that our politicians were so taken aback at the unfolding of the crisis. Liberal economists like Will Hutton have been warning about the spiraling levels of debt for years. The `house of cards’ analogy is appropriate I think. Here in the UK bankers are universally loathed but are still awarding themsleves huge bonuses whilst the Labour government wags its finger in an impotent manner. We keep hearing that unless these bankers are handsomely rewarded they will seek work elsewhere. ( so f*** off then…) Meanwhile drastic spending cuts here will ensure that life for the poor, the old and the disadvantaged will become much more difficult.
    The banking world is indeed a world of fantasy and speculation but the consequences of its folly and greed will be felt in the lives of ordinary people here for decades.

  5. KevinfromCanada Says:

    Mrs. KfC (that would be Sheila), being a rookie blogger, didn’t realize that posting one hour before hopping on a plane to Spain means that she can’t respond to comments until she returns. I will try to fill in in the meantime.

    Mary: Thanks for the titles. We do have the Lanchester (it is titled I.O.U., not Whoops, in North America) and I have read some of his thoughts in the LRB. I’ve heard of the Tett and the Elliott/Atkinson does sound interesting (Mrs. KfC will comment later). One of the things that I find interesting about this particular meltdown is that while it originated on Wall Street (where all the books that Sheila reviews are set), in many ways its most disastrous consequences took place far away (say Iceland, not to mention the UK) as others piled onto the game. Whereas in Canada, we got off relatively undamaged since our tired, old banking regulations got in the way of full participation in the scam.

    Colette: Sturm und drang is supposed to remind you of Haydn, not Little Shop of Horrors. Although I would suppose both are appropriate. :-)

  6. Mary Says:

    Thanks for your thoughts and good on you Canadians and your tired old banking regulations! I have very fond feelings for Canada as my great uncle Ted was a mountie and my great aunt Ginnie used to send gloroius Christmas parcels to us in the dreary old 50’s with dolls with real nylon hair and candy walking sticks in stripes – magical!
    I hope Mrs KFC made it to Spain as volcanic ash from Iceland ( not to mention their collapsing banks) has led to a plane free zone over the UK for the moment.

  7. KevinfromCanada Says:

    Mary: Luckily for Mrs. KfC, she was travelling via Frankfurt and has made her way to Barcelona. A couple of her friends were travelling via Heathrow and got turned back halfway over the Atlantic — they are still in Calgary.

  8. Kerry Says:

    Mrs. KFC,

    Great job! Count me among those looking forward to your post and, subsequently, enjoying it immensely. I have not read any non-fiction about the crisis yet, but I am fascinated by the whole thing, including the unmasking of Maestro. Sheesh. Maybe too much Ayn Rand isn’t such a good thing.

    I am just wondering how long it will take to recover from this, or have we permanently reduced our standard of living. As Mrs. KFC points out, practices seem to be returning to “normal” while the economy still lags and only inadequate changes have been made to prevent a repeat. That may be something for the kids to look forward to experiencing, if we are lucky enough to wait that long for it. I think our kids are not going to be impressed with our policy-making.

    I am happy her flight went without a hitch.

  9. KevinfromCanada Says:

    Kerry: “Our kids are not going to be impressed with our policy-making.” An excellent thought — the entire Tea Party movement is based on “we deserve it” and “screw the future”. That is only my opinion: Sheila will respond when she gets back. I still think that our generation has left nothing but problems for the one that follows us, and, even worse, we all lived so well.

  10. Isabel Says:

    I am glad that Sheila made it safely to Spain!

    Well, I must thank her for the reviews. I started reading the NY Times reviews for these books and I got bored. Her reviews were better to read.

    As to the downturn, I don’t think it’s over yet. There are many books to be written.

    For example, many banks were infused with cash. However, they are not lending any of the money to small business owners, who need the cash RIGHT now. Where is the extra money??? Another mystery needs to be solved.

  11. leroyhunter Says:

    Great round-up, Mrs KfC. I looked at the Sorkin book but was worried he was too connected to the big beasts he was reporting on: not an issue, based on your precis. I recently read Lewis’s Liar’s Poker, which although about his experiences in ths 80s bull markets, could have been written about the current crop of Masters of the Universe and their (even more) egregious behaviours. The Big Short is on the wish list – am awaiting the paperback.

    Hope you enjoy IOU (Whoops! where I am)…I thought it was excellent, and does as you say cast the net wider then Wall St alone.

  12. Shelley Says:

    My work is about the previous crash, not this one, but I hope people keeping raising whenever possible the question you raise: how could this happen?

    The follow-up question is obvious, but sadly may not be given a satisfactory answer.

  13. Thomas at My Porch Says:

    Very interesting round-up. I wish more journalists would read these books and then use the knowledge when they interview politicians, regulators, and Wall Street types. So often these sometimes clueless, but more often than not complicit parties get away with repeating endlessly that no one saw it coming. People did see it coming but those in government and on Wall Street had too much to gain from pretending like it could go on forever. And then of course there is the complicity of Joe Public who thought he could afford a $500,000 home when he only made $60,000 a year. Certainly many were hoodwinked by unscrupulous mortgage brokers and bankers and the big banks that incentivized them, but just as many chose to believe that money was free and that the old dictum “what goes up…” didn’t apply anymore.

    Interestingly enough I read The Ice Age, a novel written by Margaret Drabble in 1977 that had passages in it that could have been written verbatim about the most recent bubble. http://myporchblog.blogspot.com/2009/04/who-could-have-predicted-financial.html

  14. Max Cairnduff Says:

    Fascinating, and good to see Michael Lewis back on form, his last couple of books I thought weren’t as strong as some of his earlier.

    I’m curious too to hear what Mrs KfC makes of the Gillian Tett, I’ve heard good things of it.

    The whole saga is remarkable, though even more remarkable is the lack of post-crunch regulatory response. Essentially, nothing is changed. Business as usual.

    The point on regulators is well made, my experience of them is that they’re just not paid that well, compared to in-house as compliance officers. If you’re a skilled regulator, you can carry on in that job or take a salary multiple and go to a bank. It leads to a hollowing out, senior regulators are often ex-bankers, junior regulators are compliance officers in training. The regulator becomes a form of outsourced training department.

    Thanks for this post, I found it very interesting and when Sheila’s back I look forward to her comments.

    In the meantime, the question which seems always to remain relevant is this: Where are all the customer’s yachts?

  15. KevinfromCanada Says:

    Thomas, Max: As both The Quants and The Big Short show, there were quite a few people who did know that this was all a house of cards — it seemed to serve a lot of people’s interests to ignore them.

    I have the same impression that you do of the regulators, Max. There’s just too much money being employed in a bank — “outsourced training department” is what the regulatory agencies become. Much the same happens with the reporters who Thomas mentions. Once they get a basic understanding of the financial world, they head off to become analysts at three or four times the salary. And there are certainly many, many more analysts than there are financial reporters so I don’t think that is a circumstance that is likely to change.

    Mrs. KfC will be back with more thoughts in about a week.

  16. Sheila O'Brien Says:

    Dear KFC Readers:
    thank you for your comments on my guest post, and for your forebearance in overlooking my rookie mistake (writing a post then disappearing to Spain for 2 weeks). Thank you also, KFC, for responding to some of the comments in my abesence. I’ll reply to individual comments in separate notes below.

  17. Sheila O'Brien Says:

    Kerry: “how long will it be until we recover from this”? Alas, a long time for the average person to recover, I fear, but the Wall Street types havent missed a beat. They HAVE recovered.
    And Mary, I will read “The Gods that Failed” as soon as I can find it, and let you know what I think. I did read Lanchester’s book and while it was interesting, I didnt find anything new or compelling in it, having read the other 5. If one were to read it, I’d suggest substituting it for “The Big Short”, as they cover the same teritory.

  18. Sheila O'Brien Says:

    Isabel; Indeed there are many books to be written, and I hope that people do read them, and understand how careful we all have to be with respect to our investments. The days of the trustworthy, local banker are long gone, we are now in an era of Caveat Emptor writ large.
    Leroy; I agree with you – Lewis is at his best writing about Wall Street, and this last book is another example of him in top form.

  19. Sheila O'Brien Says:

    Shelley:
    It seems that this keeps happening, but the cycles get shorter (Enron, Worldcom, etc was only 9 years ago) and the amplitude gets more severe. It’s depressing, isnt it?
    Thomas: People seems willing to suspend disbelief when offered a good deal. If only everyone remembered – when something seems to good to be true, it is! And many of the folks who were lured in to huge mortgages trusted the vendors, who were in this only for commissions.

  20. Sheila O'Brien Says:

    Max;
    You are so right. The big bucks get paid in the investment banks and hedge funds and the regulators get paid a pittance (relatively speaking), so the system is rigged (in this and many other ways).
    It is also interesting (read “terrifying”) to note that in the US, the best credential for senior powerful positions in any administration is a career at Goldman Sachs. If you look back over the last 75 years, virtually every administration has had GS alumni at the epicentre of financial power, making regulations to benefit guess who?

  21. Max Cairnduff Says:

    It is remarkable. I’ve mixed views on Matt Taibbi’s stuff but he has brought out the ubiquity of Goldman’s quite well (though if I were on Goldman’s franchise committee I’d be hanging out in dark alleys with a baseball bat and hoping to run into him).

    There’s an interesting tension, you want the best in government and Goldmans is frequently just that, but when government is taking decisions that profoundly affect their bottom line there is a clear potential conflict of interest. The bailout of AIG springs to mind…

  22. @KA Says:

    speaking of Non-Fiction titles….. a wonderful post by Mrs KFC : )

    i remember browsing your note mentioning a book she was involved in publishing… can you kindly forward me the web link to that site with the pdf samples Kevin as i cant seem to locate that specific post?!?!

    ThX

  23. KevinfromCanada Says:

    Here’s a link to my review of her book. Unfortunately the pdf version is no longer available but at the end of the review you will find a link to the Canada West Foundation site that further describes it and which also has a link to the pdf file of the Vision document that resulted from the project.

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