5 July 2009

GFC Plot Lines! ~ Satyajit Das

One is tired of the conventional blame finding and finger pointing from the likes of Puplava, Andros and others who rant in upper case about the evil of socialism and excessive intervention, which in the context of global dollar hegemony is kinda like aquarium fish saying that instead of the owner picking winners, they should compete fairly for the food flakes. That is; talking about the ideology of schooling forgetting that the tank and heaters are what really sustained the ecology and context in which they debate the largely mythological rationales for their preferred order...when thermodynamics might be a better bet.

I got interested in the subject and somehow acquired in five years of research the courage to come to grips with who and what I was and the tools to find that secure center from which all right action can flow and take it from me, that was hard.
By finding your authentic self first your less likely to be misdirected.

Humour, humility and some understanding of the complexities are likely to be a more fruitfull base for any success. I've wandered away from my point which is that Das has the light touch I like.

The number of books on the Global Financial Crisis (GFC) has reached pandemic proportions - the World Health Organisation (WHO) is investigating. With the decorum of vultures at a carcass, publishers are cashing in on the transitory interest of the masses (normally obsessed with war, scandal or reality TV shows) in the arcane minutiae of financial matters.

Authors, the slave labour in the system, have to “innovate” to differentiate their work from those of others. Upon being asked for the nth time about his latest work, an exasperated playwright is supposed to have barked: “Of the 32 possible plots in drama, this is number 19!” In the case of the GFC, all 32 plots have been featured, sometimes in the same work, or even more worryingly in the title.

In Greek mythology, Apollo gives the beautiful Cassandra the gift of prophecy. Later, the spurned Apollo, “Cass”, it seems, did not return his advances, cursed her so that no one would ever believe her predictions. Kevin Phillips’ “Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism” and Barry Ritholtz’s “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy” are “Cassandra books”.

There has been “bad dreams”, “bad love” so why not “bad money” – shorthand for excessive dependence on mega-finance to drive economies. Veteran commentator Kevin Phillips warns of the consequences of U.S. economic policy, addiction to debt and its dependence on imported oil. Published prior to the onset of the crisis, Mr. Phillips presciently anticipates some of the key issues in the GFC. “Bad Money” does not further the case that the author made in his previous works such as “American Theocracy” but repeats and updates the argument. Cassandra too seemed to frequently repeat her warnings to no avail.

Barry Ritholtz is the epitome of new financial renaissance. A prolific blogger, his site, www.ritholtz.com, is hugely popular (at least, that’s what the site says!). Multi-talented, he is also the CEO and Director of Equity Research at FusionIQ and obligatory media star, appearing frequently on the money channels. One of the editorial reviews of “Bailout Nation” states that it anticipated the great credit crash of 2008. While Mr. Ritholtz may have seen it coming, the book suffers from the disadvantage that it was published in 2009, someway into the GFC.

Notwithstanding any timing issues, “Bailout Nation” (the title is a self conscious reference to “Prozac Nation”) provides a series of well practised rants about the transition of the U.S. from free markets to a form of socialism where the government bails out troubled firms. At times entertaining and never less than forthright in its opinions, the book makes similar arguments as Mr. Phillips and also identifies the familiar list of the “evil villains” responsible for this tragedy - from financial regulators to politicians. “Bailout Nation” provides an interesting history of U.S. Government intervention in the free markets commencing with Lockheed in the 1970s, in banking in the early 1990s, and eventually the entire market in 2000/ 2001 and in 2008.

The polemic arguments of “Bad Money” and “Bailout Nations” themselves are perhaps not as clear as they might appear at first glance. Surely, government have a role in modern economies. Debt also has utility if used sensibly. The build up of debt in the U.S., especially government debt, may seem egregious but Japan’s level of government debt relative to GDP far exceeds that of the US. In addition, the world, especially emerging markets, has relied on U.S. growth to pull itself up from previous recessions and as the basis of economic development. In the final analysis, it may be that the fate that the authors are trying to avoid is the final evolution of all dominant economic powers, a fact borne out by a study of a longer stretch of history than the last 20 years.

Vast generalised overviews of the GFC suitable to the soapbox or pulpit run the risk of simplifying a complex, highly nuanced problem where there are no real heroes or villains just pervasive societal fallibility. As Woody Allen once observed in “My Speech to the Graduates”: “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.”

Amusingly, the number of people who anticipated the crisis seems to be increasing in direct proportion to the gravity of the crisis. Undoubtedly, Messrs. Philipps and Ritholz “saw it coming” as their publicity says frequently. The question is what did they see and the precision of their prognostications. Cassandra did foresee trouble in Troy focused around a horse. Given the prevalence of equine forms of transport this did not, without further information, prove to be of much use.

Other books have resorted to Pointillism, a style of painting where small distinct dots of colour are used to create the impression of other colours and the depicted image. Several books tackle specific stories relating to the crisis, using the specific to draw inferences about the broader issues.

“House of Cards: How Wall Street’s Gamblers Broke Capitalism” tackles the demise of Bear Stearns. The author, William Cohan, who wrote the prize winning and acclaimed “The Last Tycoons” (the history of Lazard Freres), was big news with the financial deal for this book (as the jacket reminds us).

“House of Cards” is a well written and detailed history of Bear Stearns built around its dominant chief executive Jimmy Cayne. Ironically, “The Lost Tycoons” too was constructed around Lazards famous “big men” – Andre Meyer and Felix Rohatyn. The story is told meticulously and fairly. The book provides some interesting insights into the goings on in major investment banks in the 1990s.

In “Fools” Gold: How Unstrained Greed Corrupted A Dream, Shattered Global Markets and Unleashed A Catastrophe”, Gillian Tett, award winning Financial Times journalist and author of “SavingThe Sun” (a best selling history of the demise of Long Tern Credit Bank of Japan), writes about J.P.Morgan’s role in creating credit derivatives.

Given the role of derivatives generally, and credit derivatives specifically, the subject is immediately relevant. Ms. Tett’s admirable history records the process by which these innovations emerged and how the attempt to disperse credit risk by banks to investors ended up making the financial system more not less dangerous. Ms. Tett, whose journalistic offensives are both legendary and much feared, uses her anthropology training to focus on the human dimension of the story.

Many books on the GFC have sought to identify “heroes” and “villains” – a process that is fraught with problems. Amey Stone and Mike Brewster’s “King of Capital: Sandy Weill and the Making of CitGroup” amply illustrates this risk. In this solid and through book published earlier this decade, the authors focus on Weill the powerful dealer maker in the process of building Citi. Unfortunately, the rather hagiographic view proved unsustainable as the GFC humbled the once dominant institution. Time it seems makes chumps out of all of us in some way or another.

The previous three books are based on extensive interviews with the protagonists. This also creates a minor problem in that it is unclear as to whose version of history we are being presented. As Sir Winston Churchill noted: “History will be kind to me for I intend to write it.”

Charles Morris’ previous book “The Two Trillion Dollar Loss” remains amongst the most successful books on the GFC (both commercially and critically). In “The Sages: Warren Buffett, George Soros, Paul Volcker, and the Maelstrom of Markets”, Mr. Morris focuses on the heroes of the crisis. He chooses Buffett, Soros and Volcker, three quite different individuals whose scepticism of the norm and crowd behaviour has served them well.

Buffet is shown as a canny stock selector with a clear reluctance to be herd driven. Soros is portrayed as mercurial - both a creature and questioner of markets. Volcker is seen as the self-sacrificing but shrewd regulator with a deep sense of public service. Perhaps, these three have the fairest claim to having been the Cassandras that foresaw the GFC. Certainly, Soros made a lot of money of it.

Mr. Morris’ analysis of the records of all three is fair and interesting. A worrying aspect of being elected a sage is the likely after effect. In Australia, recipients of a business award have inevitable encountered trouble shortly after being awarded the prize. Some of been fired, some have gone bankrupt and a few have ended up in Her Majesty’s prison.

There is, of course, always the grand history, for example. Thucydides’ History of the Peloponnesian Wars. In “Chasing Alpha: How Reckless Growth and Unchecked Ambition Ruined The City’s Golden Decade”, Philip Augar delivers the third instalment in his remarkable history of U.K. investment banking that started with “The Death of Gentlemanly Capitalism” and continued with “The Greed Merchants: How the Investment Banks Played the Free Market”.

A trained historian who stumbled into stockbroking simply because he was unable to find work in his expertise, Mr. Augar writes brilliantly about what he knows – the evolution of the equity, corporate finance and investment banking business in the City of London from the 1980s to the present day. Drawing on his intimate knowledge of the firms and personalities (he was one of them), Mr. Augar paints an extraordinarily detailed picture of the factors that drove the changes in the business – specifically the demise of the U.K. Merchant banks, the rise of the U.S. integrated investment banking model and the road to the GFC. As an ultimate insider, he provides insights and analysis rarely ever found in the public domain.

“House of Cards”, “Fool’s Gold”, “King of Capital”, “The Sages” and “Chasing Alpha” despite their absurdly elongated sub titles (the subtitle is now, it seems, the message) are valuable historical records that will be useful to those who ultimately attempt more comprehensive analysis of the GFC.

© 2009 Satyajit Das

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).


No comments: