In 1994, a series of derivatives scandals—including one that bankrupted Orange County, California—tarnished the industry, and most observers assumed that its freewheeling days were over. But again the almighty banking lobby flexed its muscles with Congress, and pressured journalists “to stop writing about derivatives in such a negative light.” Again, nothing was done. Tett rightly calls this fiesta of wire-pulling “one of the most startling triumphs for a Wall Street lobbying campaign in the twentieth century.” Four years later, Long-Term Capital Management blew up after it made ill-fated bets using derivatives. And again, nothing was done.
The incredible thing about J.P. Morgan’s 1994 brainstorming session in Boca Raton is that it took place against the backdrop of the unfolding derivatives scandals on Wall Street. While this havoc was playing out in the economy, J.P. Morgan was trying to figure out how to morph its latest creation into something new and exponentially bigger. It makes you wonder what schemes are being hatched even now, and how much regulation will actually be imposed, since it’s clear that the industry is emboldened by mixed signals from Washington.
The great irony of Tett’s book (and of the last decade of financial history) is that J.P. Morgan dodged the fallout from its radioactive creation. I suppose the person who builds the bomb knows best how to defuse it. As for the analogy with atomic weapons, it’s less of a stretch than it sounds. Witness this unintentionally ironic quote from a Morgan banker: “I’ve known people who worked on the Manhattan Project—for those of us on that trip, there was the same kind of feeling of being present at the creation of something incredibly important.”
If there’s a problem with Fool’s Gold, it’s that the author lets J.P. Morgan off the hook a bit too easily. The derivatives team comes off like a cadre of wizened gurus, and Tett’s somewhat gauzy portrait of the bank’s culture is hard to swallow.
Contrasting J.P. Morgan’s culture with that of its rapacious competitors, for example, Tett insists that “the senior bankers still talked about banking as a noble craft, where long-term relationships and loyalty mattered, both in dealing with clients and inside the bank. While at other banks the emphasis had turned to finding star players, offering them huge bonuses, and encouraging them to compete for preeminence, at the Morgan Bank the emphasis was on teamwork, employee loyalty, and long-term commitment to the bank.”
Relatively speaking, Morgan’s culture was better than that of its peers. But let’s face it: Wall Street isn’t in the nice-guy business. Tett has excellent access to the players, which makes her story that much more vivid, but at times she seems a bit too sanguine about their motives and selective reconstruction of history.
She doesn’t, however, let the media off the hook. The author tartly notes that a critical Securities and Exchange Commission ruling in 2004 on leverage ratios for brokerages got “almost no attention in the press.” That ruling allowed the brokerages to double their debt levels, adding much more air to the bubble.
And as we’ve said before, the press institutionally just isn’t set up to cover the debt world, as Tett points out. Far more business reporters cover equities than bonds, and very few understand the arcana of that industry—and even fewer understood it before 2007. Tett also reports that the commercial-paper sector, which was one of the first areas to break down, was “comprehensively ignored by journalists and regulators in the previous years.”
The credit-ratings agencies, which like to claim First Amendment protections, come in for a justified bruising of their own. When they appear in Tett’s narrative, they are hapless and essentially corrupt. Which is only fair: Standard & Poor’s, Moody’s, and Fitch were linchpins in the whole mess. Without the agencies sprinkling holy water on those ungodly securities, they wouldn’t have existed. Tett points out that the banks “constantly threatened to boycott the agencies if they failed to produce the wished-for ratings.” Needless to say, they got them.
The final third of the book alone is worth the price of admission, if only as a crib sheet for the events of the last two years. Tett does the best job I’ve seen of reconstructing the drama of the meltdown. Reading through it is a useful reminder of how close we came to an utter cataclysm. After the Bush administration disastrously let Lehman Brothers fail, it had the sense to prop up AIG and get into the bailout business, however clumsily. Tett quotes one senior banker in London, speaking before it was clear what steps the administration would take: “If this continues, the next logical step is that the cash eventually stops coming out of the ATM machines—if that happens, God help us all.”