Book Review: The End of Wall Street

 The End of Wall Street
by Roger Lowenstein
I am slowly but surely making my way through books about the financial crisis. Having had a view from, well, if not the front row then at least the bleachers I find reading multiple accounts interesting in order to compare characterizations and conclusions.
Roger Lowenstein has been writing books about high finance for a while and one might expect that his book about the financial crisis would be his masterpiece. Yet, although I did like this book, The End of Wall Street is not the best book on the crisis-it's not even the best book on the crisis written by Lowenstein, but that statement takes some explanation.
Lowenstein's book is great in the early going. He nails the causes and consequences of the subprime crisis. His descriptions of the mania, greed, and silliness of the whole housing bubble wil make you see red. But then End of Wall Street begs a question that is very hard to answer: did the subprime crisis cause the financial crisis? Was it a necessary condition or merely a sufficient one? Or was it not a cause at all, but a result of bigger trends happening on Wall Street that would necessarily, sooner or later, find their way into the one large asset class that most Americans hold?
At some level, it's unfair to expect Lowenstein or any other author to answer all of these questions just yet. And in terms of the raw information of the story, it's all there in the book. But that's part of the problem. Having read Andrew Ross Sorkin's Too Big to Fail Which is 900 pages on just the direct events of the meltdown, Lowenstein's final chapters on the great bailout of '08 seems both abbreviated and too dense. Sorkin gives us the human story of Wall Street and the government, Lowenstein has a much harder time fitting in the characters, facts, and explanations of financial esoterica in the small space he reserved for the denouement. For this reason, I stalled out about 2/3ds of the way through the book. Lowenstein isn't the zippiest writer anyway, but it is hard to imagine a short summary of the crisis reading like anything other than a newspaper article. There's a reason Sorkin needed his 900 pages; this thing was epic.
Yet oftentimes epics can be encapsulated in smaller stories, even anecdotes, There was a precursor to this crisis, and that was the collapse of the hedge find Long term Capital Management in the late 1990s. Lowenstein's book on that episode, "When Genius Failed" is the book I'm thinking of when I say he's written a better account of the 2008 crisis. I've already reviewed that book so I won't rehash everything but the takeaways are striking. Wall Street demonstrated a decade before this crisis that it was willing to stake system-destroying amounts of borrowed money on flawed-mathematical-modeled trades. And government showed it would step in if needed. LTCM seemed like a major crisis at the time but in retrospect it was just a prelude.
And so, in a sense, maybe Lowenstein's first book on LTCM answers the question his book on the 2008 crisis does not. Subprime loans were a debacle all there own to be sure. But Wall Street was heading down a path of destruction that would inevitably wend its way past tech stocks, Russian bonds, and Asian currencies into our very homes. We were warned.

Book Review: The Ascent of Money

This is another book I started to review and then didn't finish.  I enjoyed this book a lot, I remember that clearly.  But now that I'm a year or more away from it, I can't remember much else about it.  Of course, that's why I write these book reviews in the first place, so it's not really fair to the book.  But at the same time, I do remember being a bit underwhelmed by it.  Ferguson's books are all now done in conjunction with the BBC for televisions specials.  And so each chapter reads a bit like a little episode of a show.  "Today: the Dutch Tulip Bubble!"  Still, it's fun stuff, even if at times he used some fairly technical jargon without explaining it.  Perhaps I'll have to just watch the show and review that instead.  Or, dear reader, you could read the book and post a comment reminding me of why I liked it.

Book Review: When Genius Failed

The second book I read on finance (OK, listened to on Audible) was When Genius Failed by Roger Lowenstein. It was a great follow-up to Liar's Poker because it follows John Meriwether, a key figure at Solomon Brothers in the 1980s and, thus, a key figure in Liar's Poker. Meriwether was one of the top traders at Solomon and he had one particular stroke of genius: to find other geniuses to tell him how to trade. Meriwether saw early on that a set of super-geniuses who were applying rocket-science to trading might be able to make a heck of a lot of money if they got out of the ivory tower and on to the trading floor. In one of my favorite passages in the book, Meriwether calls up a Harvard professor to try to poach one of his grad. students and the professor offers himself instead.

Meriwether and his group were incredibly successful, he but ended up leaving over a bond trading scandal. Pressing on, Meriwether took his group from Solomon and started a hedge fund called Long Term Capital Management (LTCM). He hired a former Vice Chairman of the Federal Reserve. He hired two of the most highly respected financial economists around (John Merton and Fischer Black, both of whom would win the Nobel Prize while working for LTCM). These guys were so smart that they thought they couldn't lose. They had incredibly complex and intricate computer models that told them that the odds of losing all their money were so low, you wouldn't expect it to ever happen in the history of the universe. Guess what?

Long story short, LTCM lost it all and had to be bailed out. The government didn't offer any funds, but the New York Fed. called all the big Wall Street bankers into a room and basically ordered them to work it out. (The one firm that wouldn't play ball? Bear Stearns.)

The book is well written and provides interesting pictures of the LTCM principals, though some of the detail about trading strategies is a bit dry and long. But what's amazing about this book is that, much like Liar's Poker which was written a decade before, everything that is falling apart now was falling apart then and no one seems to have learned. After LTCM (and after Lowenstein's brilliant deconstruction of what went wrong) it's flabbergasting to think that in 2006 the same banks that had to bail out LTCM were convinced, utterly, that they couldn't loose money on subprime mortgages because housing prices never fall!

Reading this book makes me think of the people who stayed in New Orleans because they'd been through hurricanes before and figured they could make it through Katrina. That attitude seemed to pervade our entire financial system. The tragedy of LTCM is that it perversely made people in power feel optimistic that any problems like that could be dealt with and solved. But the Category 5 subprime crisis hit and all the financial levies broke, and now we're in the midst of the greatest crisis since the Great Depression. Just like New Orleans, the warning signs were all there and Lowenstein meticulously flagged and catalogued them in When Genius Failed.

Book Review: Liar's Poker

So what with working at the Federal Reserve and with the economy falling apart, I've been on a financial book reading kick lately. I thought I'd start reviewing the books I'm reading. I should note that nothing I do at the Fed really has to do with economic policy so these opinions are my own.

First up, is a book I found at our favorite used book store that they were about to toss: Liar's Poker by Michael Lewis. It chronicles his years in the mid-1980s working as a banker at Solomon Brothers. It's a fun, witty and probably accurate portrayal of people who are hyper-competitive, very rich, and, it seems, out of control. Not out of control personally--these aren't people going to Studio 54 and doing lines of coke. Instead, they seem out of control in the wizardry of their financial dealings, and the way they live with and profit from conflicts of interest. Lewis seems to be saying, "Look at the way these people operate and tell me how it can last much longer?" Stunningly, of course, it lasted another 20 years. (Wall Street's ways lasted that long, Solomon did not).

The book also contains a fascinating description of Lewis Ranieri and his invention (not too strong a word) of the mortgage-backed securities market. No one could conceive of any use for these things until Washington changed the rules for the Savings & Loan industry (leading eventually to insane overreaching by the S&Ls; a crash; and a huge bailout in the early 1990s -- sound familiar?). Although the products got more complex and the markets got bigger and bigger, all the things that ended up going wrong are right there in this book, written 20 years ago. The wonder is not that it all came crashing down, the wonder is that it lasted as long as it did.