Two years is perhaps too soon to be looking back and calculating the ifs and buts of the financial crisis of 2008. But the past year has seen a rash of books attempting that, and then some. A selection of ten books
The focus of someone caught in the middle of a disaster is usually narrow. Be it a soldier in battle, or a tsunami victim or the survivor of a train wreck; each develops his or her own subjective perception of reality seen through a microscope. Anthropologists dub this “The Rashomon Effect”, in reference to the Kurosawa classic where several witnesses to a murder all produce plausible but conflicting accounts.
People trapped in the middle of a financial crisis also experience a similar narrowing and warping of perspective. At first glance, this seems odd because financial disasters are incorporeal and rarely include the prospect of imminent physical danger. At least in the early stages, it’s just paper being shuffled around.
Yet, a large financial disaster can cause grief of the same magnitude as physical catastrophes. The pain and loss can spread across continents and generations. Millions may be left literally starving because they cannot afford to buy food. Entire nations can be crushed by mountains of debt.
But the Rashomon Effect makes it difficult to piece together the big picture even with the benefit of hindsight. There will always be a mass of conflicting narratives in play. Over the past year, we’ve seen the development of that interplay of narratives about the financial tsunami that bankrupted Wall Street in 2008.
There have been quite a few books about the crisis, its origins and its aftermath. The best of these are all insider accounts by people close to the epicentre. Some are scholarly attempts to explain what happened by eminent social scientists. Others are memoirs by policy-makers caught flat-footed. There are a few tales about the traders who found ways to survive and thrive. There are also a couple of attempts by journalists to stitch together coherent macro pictures.
The trader’s tales are perhaps the most anecdotal since they are unabashedly focussed on larger-than-life personae. The two best examples are written by men who are among the most facile practitioners of ‘faction’ since Truman Capote himself. Greg Zuckerman and Michael Lewis are both masters at the art of presenting fact as though it was fiction.
Zuckerman broke the story of John Paulson of the eponymous hedge fund in The Greatest Trade Ever, sub-titled ‘The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History’. Between June 2007 and November 2008, Paulson tripled a ‘stake’ of $12.5 billion. He bet against institutions that went into collapse and against mortgage-backed securities that went into default.
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Paulson was the most successful of the small band of Wall Street traders who came out on top but he’s a relatively normal individual. Lewis chose instead to focus on a small bunch of traders who were all completely over the top.
Each protagonist of The Big Short had a couple of unusual defining character traits apart from a shared ability to go against the crowd. Steve Eisman’s wife describes him as “sincerely rude” and he spends much of his spare time working out parallels between his own life and the fictional career of Peter ‘Spiderman’ Parker.
Michael Burry is a one-eyed neurologist with Asperger’s Syndrome. His social inadequacy and lack of communication skills lost him all his clients even though his single-minded and awesomely accurate analysis of subprime bonds generated hundreds of millions in profit for them. Greg Lippmann had the nous and bloodymindedness to bet against his own institution. Cornwall Capital consisted of three counter-culture drop-outs sitting in a California garage.
Lewis and Zuckerman do a good job letting their characters take centre-stage. But for the nuts and bolts of the instruments traded, you’d have to go to Scott Patterson’s The Quants.
Patterson is obviously fascinated by mathematical abstractions. He also has a talent for explaining complex maths models insofar as that is possible without delving into pages of equations. Quants concentrates on the men who built some of the complex trading models that Wall Street loved.
Patterson’s perspective would be considered micro if it wasn’t for the fact that his four major characters controlled deployments of well over $100 billion. Some of those models went disastrously wrong of course, and Patterson does a fair job explaining why. He does an excellent job of explaining what happens to an institution when the models go wrong.
Three others have made brave and largely successful attempts to present a global macro-picture. One is Gillian Tett whose Fool’s Gold has a historical perspective reaching back to the early 1990s when credit derivatives were launched.
Tett is racy, well-researched and comprehensive. She also offers a slightly preachy analysis of the crisis from a social anthropologist’s perspective (she has a PhD in that discipline). This is probably the best ‘cheat sheet’.
Ranged alongside, there’s Roger Lowenstein’s The End of Wall Street. The kernel is 180-odd interviews, featuring everybody who was somebody. Like Tett, Lowenstein builds a broad historical narrative of the crisis. But he does it through the medium of interviews and utterly merciless profiles of the who’s-who of global finance.
Less impressive but still a good read is Andrew Sorkin’s Too Big to Fail. Sorkin uses the tired old metaphor of business as war but he understands his subject and carries it through well.
Sorkin only pales in comparison to another writer who does an absolutely brilliant dissection of the implicit moral hazard that lies in anything being considered too big to fail. Joseph Stiglitz’s Freefall deserves to be up there with The Affluent Society and Wealth of Nations as a timeless classic.
There is an element of schadenfreude in the exposition of how the crisis was botched and bungled. There is also a lot of real anger about the perpetrators getting away scot-free. You may disagree with some of Stiglitz’s alternate policy prescriptions. But the book is astounding for the sheer clarity and ease with which concepts like information asymmetry, moral hazard and incentives are introduced from first principles and related to the extremely complex circumstances in which the crisis played out.
The other professional economist with an interesting take is Nouriel Roubini. The New York University professor is nicknamed Dr Doom for issuing a public warning about the bubble as long ago as 2006. Crisis Economics: A Crash Course In The Future Of Finance, written in collaboration with Stephen Mihm, attempts to lay out some ground rules for recognising bubbles. His thesis is that there are clear recurrent patterns and it behoves us to recognise them. Remarkably, Roubini draws as often on Keynes and Marx (!) as on Hayek and Shumpeter.
Last but not least, there are two books which could be considered pleas for the defence. In the space of months, Alan Greenspan went from being the darling of financial markets to the demon who enabled the worst depression in 80 years. His autobiographical The Age of Turbulence: Adventures in a New World appeared in 2007, before the bubble burst. The former Fed Chairman is known for the obscurity of his public utterances. Remarkably, this is an articulate “psychoanalysis of himself”, as he describes it, and an excellent first person insight into US politics and several presidents.
Hank Paulson was the US Treasury Secretary in 2008, and hence, prime mover for the massive bailouts. He enabled the deals that let i-bankers, who almost destroyed the global financial system, retire with eight-figure golden parachutes. In On The Brink, he tells his side of the story and tells it well. Paulson is actually a fascinatingly ambiguous character. How does a committed ecologist whose wife is a fund-raiser for her old college buddy Hillary Clinton end up working for Dubya?
Taken together, these books present a multifaceted picture of the most monstrous bubble the world has seen. It will take years, perhaps decades and many learned debates before social scientists come to some consensus on what happened. In the meantime, we have the narratives. Enjoy!
| The Greatest Trade Ever The Big Short The Quants Fool’s Gold The End of Wall Street Too Big to Fail |
Freefall
America, Free Markets, and the Sinking of the World Economy
Joseph Stiglitz
Rs 499
Allen Lane
Crisis Economics
A Crash Course In The Future Of Finance
Nouriel Roubini & Stephen Mihm
Rs 550
Allen Lane
The Age of Turbulence
Adventures in a New World
Alan Greenspan
Rs 695
Allen Lane
On The Brink
Hank Paulson
Rs 599
Hachette India