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The Financial Meltdown: A Guest Post from Mrs. KfC

April 14, 2010

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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