The Financial Compass
Justin Cartwright (2010) Other People’s Money; Bloomsbury, London
Nicholas Dunbar (2011) The Devil’s Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street…And Are Ready To Do It Again; Harvard Business Press, Boston, Massachusetts
Barry Eichengreen (2011) Exorbitant Privilege: The Rise and Fall of the Dollar; Oxford University Press, Oxford
Diana B. Henriques (2011) The Wizard of Lies: Bernie Madoff and the Death of Trust; Times Books/ Henry Holt & Company & Scribe Publications, Melbourne
Graeme Maxton (2011) The End of Progress: How Modern Economics Has Failed Us; John Wiley, Singapore
In his novel, Justin Cartwright writes that: “There are beginning and there are ends, and there are also many ways of telling the same story.” The problem is that the great 2007 financial crisis shows no signs of ending. Far from ending, the crisis has shown a virus’ capacity to reconstitute itself. Given the literary difficulty of an uncertain end, publishers and editors have improvised in telling the story - a multiple points of the compass approach to “credit lit”.
South is the narrative focused on a supposedly pivotal or at least newsworthy event – Too Big To Fail and In Fed We Trust are examples of this approach, taking as their point of departure the collapse of Lehman Brothers. The relative calm of the last 18-24 months has meant there has been few additions to this list. As the crisis re-intensifies, there will be other Lehman weekends and books about it.
East is titles trying to draw more general points from an individual aspect of the crisis, such as the history of an individual organisation or type of instrument, derivatives and securitisation feature prominently. Fatal Risk, Devil’s Derivatives and The Wizard of Lies are examples of this genre.
West is the professional economist’s analysis of the crisis or aspects thereof. Exorbitant Privilege belongs to this class of book.
North is the solution manual – the 10-point plan to solve the problems, delivered with polemic gusto. End of Progress comes closest to that type of book.
Then there is the centre – fiction. Untroubled by facts, the author proceeds to use the power of literary rendition to describe the issues. The publicity of Other People’s Money claims that it is a novel about the financial crisis.
In Fatal Risk, Roddy Boyd, an investigative reporter (an endangered creature soon to be listed on the CITES list), provides a solid history of AIG and its problems. Based largely on his own reporting for the NY Post and interviews, Mr. Boyd provides an accurate chronology of events leading up to the implosion, requiring a government bailout in September 2008.
Fatal Risk struggles to explain the insurance deals that were used to hide losses and the financial instruments within AIG’s Financial Products operations that were responsible for the problems. The omitted technical details are critical. It was a failure to understand the structure and risk of these contracts, at least at senior levels of AIG, which brought about their downfall. There is also a lack of explanation of the rationale for AIG’s expansion into non-insurance business – the desire to monetise its ‘AAA’ rating, balance the volatility of its re-insurance operations and also over confidence about it capabilities in risk assessment.
Mr. Boyd largely accepts that Hank Greenburg, the driving force behind AIG growth and expansion into financial derivatives, was a superb risk manager, who personally oversaw the exposures of the company. Implicit in this argument is the suggestion that had Greenburg not been ousted as a result of Elliott Spitzer’s investigations, the problems may not have occurred.
Writing about the Battle of Borodino, Tolstoy observed that: “It was not Napoleon who directed the course of the battle, for none of his orders was carried out and during the battle he did not know what was going on.” The same might be true of AIG.
An alternative view might be that AIG was too large, ruled by fear of an autocratic CEO and lacked rudimentary controls that its non-insurance businesses required. Given that Greenburg presided over this state of affairs, the cautionary tale of the book’s sub-title might just be an older and more familiar one - avoid powerful and dominant chief executives and entry into businesses which existing management is not experienced in.
A career as a trained physicist who turned to financial journalism at Risk Magazine provided Nicholas Dunbar with a unique vantage point to the comings and goings in the market. Mr. Dunbar turned this insight into his first book Investing Money, which examined the demise of Long Term Capital Management. The Devil’s Derivative focuses on the role played by derivatives in the current crisis with an emphasis on the Collaterallised Debt Obligations (“CDOs”) and other manifestations of structured finance.
Well-researched and knowledgeable, The Devil’s Derivative has some problems. The experienced practitioner will find little knew here but the inexperienced will struggle to come to terms with the material as it assumes some basic knowledge. Mr. Dunbar’s desire to titillate, perhaps to appeal to a wider readership, frequently distracts. Tales of men in expensive Italian suits in Knightsbridge night clubs drinking £400 bottles of Belvedere Vodka and cavorting with eastern European blondes might confirm the reader’s suspicions but are not integral to the story.
The subject matter of The Devil’s Derivative has also been covered before and better by the Financial Times’ Gillian Tett in Fool’s Gold. Oddly, The Devil’s Derivative’s very long sub-title (24 words and 100 characters) – “The Untold Story of the Slick Traders and Hapless regulators Who Almost Blew Up Wall Street’ …. And Are Ready to Do it Again” - unconsciously competes with that of Fool’s Gold (13 words and 82 characters) – “How Unrestrained Greed Corrupted A Dream, Shattered Global Markets and Unleashed A Catastrophe”. Marshall McLuhan’s famous aphorism – “the medium is the message” – has now been replaced by the lengthy sub-title which obviates the need to read the book.
Diana B. Henriques, a senior writer for the NY Times (are there “junior” writers?), covered the Madoff Affair. The Wizard of Lies is her book of the newspaper articles, collating the history of the life and times of Bernard Madoff, grandee of finance, feted investment manager and finally convicted master Ponzi scammer.
The thorough and (perhaps excessively) detailed biography is “long” on personal details (houses, clothing, charities, holidays, parties, friendships and personal behaviour) but “short” on real insight (the motivations and most importantly the why’s).
Madoff emerges as a curiously dull figure, especially relative to the scale of the fraud he was able to perpetrate. A central figure as insipid as Madoff rather robs the narrative of drama.
In the absence of the charismatic villain, Ms Henriques unfortunately miss the opportunity to delve into two interesting issues to the extent warranted. The first is the efforts of the eccentric Harry Markopolos to draw the attention of regulators to the fraud. The SEC’s damning post-mortem contrasts with Ms. Henriques excuses for their failure and criticism of Mr. Markopolos for alienating regulators over their ignorance of derivatives. Curiously, Ms. Henriques assertions that Markopolos’ questions were irrelevant because no derivatives are required for a Ponzi scheme conflicts with Madoff’s claims that his investment strategy depended critically upon derivatives.
The second issue is the complicity of feeders fund, which channelled investors into the Madoff Fund, and wealthy investors in their own destruction. There is a little analysis or coverage of how much they knew and why they continued their involvement.
Answers to both these questions would have shed greater light on Madoff but also perhaps the prevailing culture. Madoff was possible because everyone believed in his or her constitutional right to get rich. Investors ignored what they suspected was a Ponzi Scheme or even investigate the source of the returns, in the belief that they would always be able to get out before it collapsed. Everyone, including regulators, believed in this, ultimately to their own detriment.
Exorbitant Privilege is a readable short history of the US dollar and how it came to dominate global trade and financial transaction. The title pays homage to the description of the benefits to America of the dollar’s reserve status, attributed to Valéry Giscard d’Estaing, France’s finance minister in the 1960s.
Barry Eichengreen, an international monetary historian, who in his 1992 book, Golden Fetters argued that the inflexibility of the gold standard exacerbated the Great Depression, tells the story of the dollar’s ascent.
The history is solid and factually reliable demonstrating how the international monetary system based on the dollar evolved, allowing America the capacity to borrow more cheaply and more aggressively than might otherwise have been feasible. Professor Eichengreen glosses over the geo-political basis of this power. America’s military and industrial strength at the time of the Bretton Woods meetings as well as the economic and military weakness of Britain and France battered by two world wars underpinned the rise of the dollar.
Exorbitant Privilege sees the dollar’s continued dominance as mainly the effects of incumbency and the absence of a viable alternative. Professor Eichengreen seems to not fully recognise the role that the dollar’s dominance together with trade imbalances played in the current global crisis. He also underplays the backlash against the dollar, primarily from major holders of US government bonds such as China. The chapter on the financial crisis is highly derivative and unsatisfying.
In the end, the author cannot find any alternative to a continuation of the existing system because there is really no alternative to the dollar.
Economist, author and presenter Graeme Maxton’s End of Progress is a damning attack on the underlying drivers of economic growth – financialisation, pollution and poor allocation of scarce resources, like oil and water. The book is a powerful polemic highlighting some of the key challenges facing mankind, although they only infrequently trouble policymakers or citizens, busy acquiring the latest must-haves.
Mr. Maxton hits the mark in identifying the problems. His attempt to blame all this on modern economic thinking is less convincing, attributing perhaps too much power and importance to the “dismal science” and its practitioners. Economics is the outcome of a tacit societal accord where economic growth at all costs is the consensus. The sociology of crowds, greed and DNA of homo sapiens were arguably more important than economists in setting the stage for the present crisis.
In the final chapter, perhaps at his publisher’s urging, Mr. Maxton sets out a check list of “solutions”. The prescriptions are predictable – lower population; better distribution of resources; and reformation of economics – fair profits; better pricing of the world’s resources. Unfortunately, as Scottish philosopher David Hume observed: “All plans of government, which suppose great reformation in the manners of mankind, are plainly imaginary.”
Mr. Maxton’s short book (probably no more than 50,000 words) ranges widely if thinly over its key pre-occupations. The evidence is not always complete, but there is no doubting the message. Mr. Maxton raises critical issues that should be on the top of the policy agenda.
Asked about the difference between non-fiction and fiction, a writer who migrated from the second to the first responded: “There is no need to do any research; nor do facts matter.” He could just as easily be talking about modern fiction, which has no end and no beginning. This does not prevent the story being told in many ways. Justin Cartwright’s Other People’s Money is acclaimed as a “brilliant” and “beautiful” novel about the crisis. The critics and reviewers quoted extensively on the cover were clearly reading a different book.
Mr. Cartwright’s well written and cleverly crafted work is at heart an old fashioned tale of the rise and fall (well almost) of the monied classes of England that readers of Dickens and Thackeray would recognise. Borrowing its title from Nomi Prin’s book about corporate America and the eponymous film featuring Danni De Vito and Gregory Peck, Other People’s Money has little to do with finance. Mr. Cartwright’s grasp of banking is rudimentary and painfully second hand. Fortunately, it is irrelevant to an old tale of the scions of families destroying the family business.
The characters are cliched and often border on caricature - the English merchant banker resembling Colonel Blimp, his second wife with acting ambition, a slavishly devoted assistant who is secretly in love with her boss, a self indulgent son who travels the world on his trust money seeking experiences, a conscientious son who becomes an unhappy banker with a Californication wife devoted to urban organic farming, a sundry affair with a hirsute South African rugby player, a despotic American banker etc. The characters that dot the book are shallow and unconvincing. The real people who populate Michael Lewis’ The Big Short are far more interesting and better drawn than Mr. Cartwright’s cast.
The one exception is the auteur Artair MacCleod with his wild dreams of bringing the works of Flann O’Brien to the stage with Daniel Day-Lewis. Bumbling MacCleod with his dependence on the rich to realise his flaky artistic dreams points to the uneasy compact between those who have money and those who have dreams in modern society. Other People’s Money’s ending is also too contrived and too trite to be credible.
But Mr. Cartwright does understand something of the role that ordinary people play in the world of money. One character expresses it accurately: “The rest of us are just the extras, without speaking parts, just fill in the blank spaces in the frame.” It is sad that there wasn’t more of such sharp observations in Other People’s Money.
© 2011 Satyajit Das All Rights Reserved. Satyajit Das is author of Extreme Money: The Masters of the Universe and the Cult of Risk (August 2011)
