Satyajit Das: The Financial Compass

By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk

Roddy Boyd (2011) Fatal Risk: A Cautionary Tale of AIG’s Corporate Suicide; John Wiley & Sons Inc, New Jersey

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.

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12 comments

  1. Typing Monkey

    I really liked Fatal Risk, and think it’s the best of the lot of books I’ve read since the crash (Ritholz’s Bailout Nation, which you don’t list, was also very good).

    Since I haven’t yet read Extreme Money, though, I’m curious as to where you place it on your compass points–is it similar in style/scope to Traders, Guns, and Money?

    1. Yves Smith Post author

      Put Das’s name in the search field, he’s been doing reviews of books that are pretty recent for quite some time (although since he is in Sydney, “recent” means when he can get them down under). Bailout Nation was early and hence not reviewed by him, or at least not on NC.

      His new book is much broader than Traders, more of an omnibus of financial chicanery and stupidity.

  2. don

    To find books on the subject with greater depth, perhaps one has to go outside the “mainstream”.

    For instance, how about:

    ‘The Crisis of Neoliberalism’, by Gerard Dumenil and Dominique Levy, both senior scholars at the Centre Nationale de Recherche Scientifique in Paris, a book with a much more historical perspective.

  3. different clue

    If I were a good writer (which I am not), I would write a good novel (which I can’t) about fictional “normal” and “young” people living and learning the kind of information and visions offered at places like Backwoods Home, Kurt Saxon, Global Guerillas, Journey To Forever, etc.

    I would write a novel about admirable and exciting fictional young people taking over and refitting neighborhoods
    for neighborhood food/water/energy production; microfinance, etc. I would end the novel with an exciting vision of rich System-Connected people dying of starvation, disease, etc., as the New Young methodically exterminate the Mainstream Economy the way a million army ants methodically exterminate and eat an elephant. The novel would linger lovingly over every upper class death from every untreatable cancer because the upper classes lost all their money as they lost their economy. The readers would revel in loving lingering depictions of how the Enemies who deserve to die . . . die in the slowest agony possible.

    No . . . I guess I would end the novel with the New Young dancing on the graves of the Enemy as they bake a new pie on the wreckage of the old. (I told you I am not a good writer).

  4. Clark

    I recently bought “Extreme Money,” but haven’t yet done more than flipped through it. My impressions are that it’s more comprehensive than “Traders,” (which I found a tough read as someone w/o a background in finance), and covers some of the same ground as “Econned”(an easier read, since I have an M.A. in economics). I could be wrong about this, though. The table of contents is very helpful (almost at random, under the chapter “Minsky Machines,” there’s a sub-head “Crime without Punishment.” He’s a decent writer, and good at weaving anecdotes into the narrative. There are good, but fewer, charts in the book to illustrate the mechanics of CDOs and other structured products. As soon as I finish Frank Partnoy’s “Infectious Greed” (about the shenanigans up through c. 2005), it’s next on my list.

    My comment breaks the common-sense rule of not talking about a book one hasn’t read yet, but here it is. I’ve enjoyed all of Das’s posts, esp. the book reviews. On the compass, it appears to be both East and West.

  5. Jim Haygood

    ‘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.”

    Mwa ha ha ha — the irreverent interlocutor should consider a career in ‘public service,’ where his sassy quip applies in spades (as does “other peoples’ money”)!

  6. David

    Somebody needs to tell Mr. Das that Louis Brandeis is a more relevant precedent for the title Other People’s Money (1914); that Ms. Prins, while more current, is secondary; and even Brandeis was not the first to use the title.

    You can read Brandeis at Google Books.

    Few people seem to know who Louis Brandeis was. Sigh.

    1. Das

      I was aware of the original Other People’s Money by Louis Brandeis. But like you I assumed few people would know who Louis Brandeis was so went with the more recent titles. I trained as a lawyer so I knew but am not sure how many people would remember him, sigh indeed.

      1. sgt_doom

        Sadly, both Brandeis classic (the Old Testament of OPM) and Nomi Prins’ almost-updated version of it (the New Testament of OPM) should both be required reading.

        Brandeis so brilliantly nails everything; the way they (the banksters) use other people’s money to control them, the issuing of securities — without actual money changing hands — to cement cross-ownership, etc., etc.

        (And most appropriate today, Justice Brandeis’ nailing the uselessness of those rating agencies, etc.)

        Ms. Prins’ work, exhaustively encyclopedic in details, and wonderfully so, makes important mention of how Enron’s overseas projects and investments were really underwritten by the American taxpayer (OPIC), something which should have been expanded upon by some other progressive institute out there, but sooooo many have missed:

        that USAID, OPIC, and other US foreign aid programs, have financed all those factories, production facilities, call centers, R&D labs, and associated foreign infrastructure, which those American-based multinationals then offshored the American jobs to, and also created new jobs at.

        In other words, it’s still the same old Other People’s Money scheme…… (And thanks to Mr. Das for his works.)

        1. F. Beard

          the issuing of securities — without actual money changing hands — to cement cross-ownership, sgt_doom

          Someone else mentioned that securities (common stock?) was used between corporations. So is common stock the money of the rich while the people are forced to use FRNs? And unless the stock is sold for FRNs there is no capital gain? Or does the cross-ownership imply that they simply create equal values of common stock and swap them with no capital gain to report on either side?

          I’ve been saying for a while that common stock is the ideal private money form. It seems the corporations have known that for a long while.

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