Page 2 of 2 BOOK REVIEWS Crisis hindsight
By Chan Akya
Dear Mr. Buffett is styled on the romantic Persian novels of yore
("Tavakoli" is the name of the author's Iranian husband, whom she divorced a
while ago), wherein chaste love is expressed through flowery prose in letters
exchanged between the paramours. What Tavakoli and her "mentor" Buffett discuss
are more mundane matters such as the true value of securitization and the
unconstrained risks within; this does have the unfortunate effect of making the
discussions more predictable.
I found the book enjoyable in terms of the outlining of key stories that broke
over the course of 2007-08, and the background information contained on the
specifics of what some investment banks had been selling. The book also
provides an informative
timeline of what happened through the phases and the apparent warning lights
that arose during the period.
The biggest failing of the book is that soon it reads like the peer review of
two class-toppers, sharing some private jokes about the less fortunate around
them. That's not to suggest the book is mean-spirited, far from it, but that
there is no actual digging into the decision-making process of those who bought
and sold these arcane securities; instead, the points of view are of those who
did not participate in the market at all but rather stood on the outside
warning about the risks.
Another weakness of the book is Tavakoli herself: being the author of the
well-respected Collateralized Debt Obligations and Structured Finance: New
Developments in Cash and Synthetic Securitization, which was last
updated in September 2008, the question of why she wasn't more forthright about
industry risks previously does linger even after one finishes reading the book
with Buffett.
She obviously did a great job in explaining risks, valuations and so on in
numerous media interviews during the 2007-08 period; those transcripts could
have well proved good additions to this book.
Fool's
Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and
Unleashed a Catastrophe by Gillian Tett.
As with the works of other authors who have previously written good books on
financial matters, I approached Gillian Tett's latest book with some
expectations of a good summary. After all, the person behind the wonderful Saving
the Sun couldn't possibly flub a book about the most important banking
crisis of our time, I thought.
And she didn't disappoint to start off. Writing in clear prose, Tett explains
the risk processes that led to the expansion of the credit derivative world
since the earlier part of this decade. Through much of the book, her ease with
the subject matter is apparent, as is the comfort in knowing the key players
(always a risk for financial journalists who are close to but not actually
inside the action).
Unfortunately, Tett chose a format not entirely dissimilar to that of Tavakoli
as previously reviewed, that is, the vantage point of someone not participating
in the market madness. This approach has its risks, as I outlined above, not
the least of which is the sheer uselessness of the "I told you so" crowd when
things actually do go wrong. Since they all along expected things to go wrong,
it stands to reason that they wouldn't exactly know what to do about the
blow-up either.
While Tavakoli chose to speak through Buffett, Tett chooses to speak through
the world of the storied banking institution JP Morgan and in particular a
close-knit team of individuals who essentially invented the market for
collateralized debt obligations (CDOs) and then, amazingly, failed to make the
most money out of it - they did end up losing the least, which is what the book
is really about.
There are many parts of the book that read quite badly; indeed the kind of
hero-worship that permeates Tett's description of the house of JP Morgan and
its main personalities does not have much place in this book (but if it was
Tett's intention to show a human face to the world of credit risk modeling she
certainly succeeds).
Also left unsaid is that the major reason for the house of JP Morgan not
embarking on a blistering pace of selling CDOs wasn't so much their
intellectual scruples (perhaps) but the sheer math problem associated with
calculating the risk of residual positions.
Ironically, the much-derided value-at-risk (VaR) methodology (see my review of Black
Swan by Nicholas Nassim Taleb -
Of black swans and greedy oilmen, Asia Times Online, January 5, 2008)
was invented in JP Morgan to express position risks across all market desks
into a single metric; this measure failed to capture the outstanding risks of
unsold portions of CDOs on the books of JP Morgan because there were no market
prices for what has not defaulted or had a very, very low probability of
default.
Rather than taking on risks that couldn't be properly explained to senior
management, JP Morgan traders sat out the market for CDOs (actually, most of
them left to join other companies, taking with them the technology for making
the same product at other banks).
Between that gap, and the unwillingness to explain the more arcane risks of
securitization (such as supersenior tranches) in good detail, Tett's book
leaves one with the notion that a lot of material was left at the copy editor's
table.
Home
Game by Michael Lewis.
To the old adage "Do not judge a book by its cover", I will add "Do not buy a
book based on its spine", especially not when you are rushing to board a plane.
This is what happened to me; the name "Michael Lewis" immediately brought up
the idea of the author of Liar's Poker exercising himself in explaining
the latest financial crisis. The name of the book Home Game also seemed
appropriate, for who else but a former bond salesman could think of the game
theory aspects of the US housing market.
Well, I was wrong: the book is about the experiences of parenthood that Lewis
wants to share with the rest of us. It is a funny little book (with emphasis on
the "little") but doesn't have anything to do with the financial crisis.
There is also a section on voluntary emasculation towards the end of the book.
I am not sure if Lewis intended this to be some sort of warning sign for
America's position in the new world order, but I rather wish he would give us
his thoughts on the matter in his next book.
Meltdown
by Thomas E Woods Jr.
Having gone through all the above books, I approached Meltdown with low
expectations. As it turned out, this is perhaps the best of the batch, and I am
not saying that just because of my own subscription to the Austrian school of
economics.
Indeed, having just finished reading the book as I set out to write this, I
would say this was the only title that inspired me to write a review - thereby
also requiring a contrast with all the other books mentioned herein. Why then
the shortest review for the book I liked the most? Well, because it is so good
that I simply cannot put a finger on exactly what is the most excellent bit.
The subtitle of the book A free-market look at why the stock market collapsed,
the economy tanked, and government bailouts will make things worse should
pretty much read as the manifesto of topics expressed in the "Chan Akya" column
over the past few years whenever economic issues were discussed.
There are certainly many aspects of the book with which I disagree: the notion
of eliminating the US Federal Reserve for example, which I believe is
impossible in practice (although the idea of severely restricting its ability
to print money willy-nilly has always been close to my heart); the idea that
governments will not to be tempted to take short cuts even if that ends up
hurting longer-term prospects is another such (because I actually have dealt
with government officials and there is no illusion in my mind about what they
are capable of).
Still, the book forms an excellent reading source for anyone interested in
financial markets and much more so for anyone interested in learning about
capitalism without all the misinterpretations being thrown about in the
financial media.
When Markets Collide: Investment Strategies for the Age of Global Economic
Change by Mohamed El-Erian.
McGraw Hill Professional; May 2008. Price:
US$27.95, 304 pages.
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for
Global Capitalism by George Akerlof and
Robert Shiller. Princeton University Press;
February 2009. ISBN-13: 978-0691142333. Price:
US$24.94, 264 pages.
The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It
Means by George Soros. PublicAffars; May 2008.
ISBN-10: 1586486837. Price: US$22.95, 208 pages.
Fool's Gold: How Unrestrained Greed Corrupted a
Dream, Shattered Global Markets and Unleashed a Catastrophe by Gillian
Tett. Little, Brown; May 2009. ISBN-13: 978-1416598572. Price: US$26, 304
pages. Home Game by Michael
Lewis. WW Norton & Co; May 2009. ISBN-13:
978-0393069013. Price: US$23.95, 192 pages.
The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It
Means by George Soros.
PublicAffairs, 2008. ISBN-10: 1586486837. Price:
US$22.95, 208 pages.
Meltdown by Thomas E Woods Jr. Regnery Publishing, February 2009. ISBN:
978-1596985872. Price: US$27.95, 194 pages.
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Fool's
Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and
Unleashed a Catastrophe by Gillian Tett.
Home
Game by Michael Lewis.
Meltdown
by Thomas E Woods Jr.
