They had parties, we got the hangover
Complex derivatives were greeted as a new dawn for banking,
says Ruth Sunderland. But few reckoned with the greed of bankers
Ruth Sunderland
The Observer, Sunday 7 June 2009 / http://www.theguardian.com/books/2009/jun/07/fools-gold-gillian-tett
Surprisingly for an account of the masculine world of
finance, this book is full of women. Apart from Gillian Tett herself, who has
been the most prescient British financial journalist on the credit crunch, the
most fascinating is Blythe Masters, a blonde, porcelain-faced Tilda Swinton
lookalike who has the dubious distinction of having devised the first credit
default swap. She also took a tiny device into the maternity ward to pass the time
tracking share prices - doesn't everyone? - and was later blamed for opening
the Pandora's box that led to global financial meltdown.
But it is Terri Duhon, another female financier, who best
sums up Tett's core thesis: that it is not complex derivatives that were to
blame for the crisis but the recklessness and greed of the bankers who so
eagerly adopted them and used them in ways which their inventors claim never to
have envisaged. Duhon, a Harley-Davidson-riding maths whizz from rural
Louisiana whose talent for numbers catapulted her into the rarefied world of
finance, commented: "When car crashes happen, people don't blame cars or
stop driving them, they blame the drivers! Derivatives are the same - it's not
the tools at fault but the people who used those tools."
This is a fascinating and detailed look at the crisis, seen
through the prism of the venerable investment bank JP Morgan, where many of the
complex derivatives that helped bring the system down originated. Tett, a
senior journalist at the Financial Times, has several advantages as an author
on this subject: she spent time in Japan, which underwent its own banking
crisis and recession before this one; in the period running up to the collapse,
she was covering credit markets, an area even most banking specialists viewed
as obscure; and she has a doctorate in social anthropology, giving her an acute
insight into banking tribes.
As she says, in most societies elites try to maintain power
not simply by garnering wealth but by ideological domination too - deciding
what is talked about and what is not. The "social silence" around the
explosion of derivatives, and around the wealth and influence of the banking
cadre, helped to construct and reinforce a new power structure and encouraged
financiers to regard their activities as detached from the rest of society,
until they became "like the inhabitants of Plato's cave, who could see the
shadows of outside reality flickering on the walls, but rarely encountered that
reality themselves".
This lack of a holistic vision of finance had, Tett points
out, terrible consequences, the most tragic of which have been the blows to
families who had never heard of a CDO (collateralised debt obligation) or an
SIV (structured investment vehicle), but are now suffering the loss of savings,
homes and jobs.
As Tett tells it, the deadly progress of derivatives can be
charted as a tale of three parties. The first was held in June 1994, in Boca Raton,
Florida, when a dozen young bankers from JP Morgan in London, Tokyo and New
York descended on a hotel where they got drunk, threw the bosses into the pool
and discussed how they would grow the derivatives business. They were fired by
the fervour of scientists who thought they were splitting the atom or
discovering DNA - with no notion that their innovation, in the hands of others,
would run disastrously out of control.
The second jamboree took place on 11 June 2007, in Barcelona, when
industry body the European Securitisation Forum held its annual meeting and
celebrated the most lucrative year in history for investment banks. The meeting
was dubbed "Global Asset Backed Securitisation: Towards a New Dawn!".
With what now looks like grim irony, the band, composed of bankers, was called
D'Leverage - and played slightly out of tune. When the new dawn actually broke,
the very next day, it was with the news that a crisis was erupting at a hedge
fund with close links to Bear Stearns - one of the early markers of the great
unravelling.
The third bash took place in January this year, at the World
Economic Forum, where Jamie Dimon, the chief executive of JP Morgan Chase, was
one of only a few chastened senior bankers to show his face. Dimon, who bought
collapsed rival Bear Stearns for a knockdown price in 2008 in a deal described as
being like "the Boy Scouts taking over the Mob", hosted a cocktail
party for 200 key contacts in the Piano Bar at the Swiss resort of Davos. The invitations
were embossed with the ghostly image of the bank's founder, J Pierpont Morgan,
hailed as the saviour of Wall Street in the crisis of 1907, with the
not-so-subliminal message that Dimon had fulfilled a similar role in this
debacle.
A down-to-earth, hard-nosed New Yorker, Dimon emerges well
from these pages. I can testify to him being a different breed from most
investment-banking CEOs: my mobile phone trilled one Monday afternoon last
year, and to my astonishment it was "the King of Wall Street" himself,
wanting to discuss one of my columns, a task many banking grandees would have
delegated to a PR aide. Once I realised it was not a colleague playing a
practical joke, we had a cordial exchange of views on short-selling.
Tett's book gives the lie to the comforting notion that the
crisis could not have been foreseen. Veteran financier Felix Rohatyn warned in
the early 1990s that derivatives were "financial hydrogen bombs built on
personal computers by 26-year-olds with MBAs". In 2003, Bill White and
Claudio Borio, the two most senior economists at the Bank for International
Settlements, presented a paper challenging the orthodoxy that financial
innovation was good, because it reduced and dispersed risk. Their audience,
which included Alan Greenspan, was not impressed.
The JP Morgan team, whose evangelism for financial
innovation went so horribly wrong, are portrayed as stunned and chastened;
Blythe Masters is "livid at how bankers have perverted her derivatives
dream". As one of the JP Morgan innovators emailed another: "What
kind of a monster has been created here? It's like you raised a cute kid who
then grew up and committed a horrible crime." Readers will have to make up
their own mind whether Masters and her peers could, or should, have done more
to curb the destructive potential of their brainchildren, who grew into such
monstrous adolescents.
• Ruth Sunderland is business editor of the Observer
To Hear a Lecture with Gillian Tett in The London School of Economics: http://youtu.be/Z3YIcksBRhI
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