Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe

by Gillian Tett
4.1 26

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Overview

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett

From award-winning Financial Times journalist Gillian Tett, who enraged Wall Street leaders with her news-breaking warnings of a crisis more than a year ahead of the curve, Fool’s Gold tells the astonishing unknown story at the heart of the 2008 meltdown.

Drawing on exclusive access to J.P. Morgan CEO Jamie Dimon and a tightly bonded team of bankers known on Wall Street as the “Morgan Mafia,” as well as in-depth interviews with dozens of other key players, including Treasury Secretary Timothy Geithner, Tett brings to life in gripping detail how the Morgan team’s bold ideas for a whole new kind of financial alchemy helped to ignite a revolution in banking, and how that revolution escalated wildly out of control.

The deeply reported and lively narrative takes readers behind the scenes, to the inner sanctums of elite finance and to the secretive reaches of what came to be known as the “shadow banking” world. The story begins with the intense Morgan brainstorming session in 1994 beside a pool in Boca Raton, where the team cooked up a dazzling new idea for the exotic financial product known as credit derivatives. That idea would rip around the banking world, catapult Morgan to the top of the turbocharged derivatives trade, and fuel an extraordinary banking boom that seemed to have unleashed banks from ages-old constraints of risk.

But when the Morgan team’s derivatives dream collided with the housing boom, and was perverted—through hubris, delusion, and sheer greed—by titans of banking that included Citigroup, UBS, Deutsche Bank, and the thundering herd at Merrill Lynch—even as J.P. Morgan itself stayed well away from the risky concoctions others were peddling—catastrophe followed. Tett’s access to Dimon and the J.P. Morgan leaders who so skillfully steered their bank away from the wild excesses of others sheds invaluable light not only on the untold story of how they engineered their bank’s escape from carnage but also on how possible it was for the larger banking world, regulators, and rating agencies to have spotted, and heeded, the terrible risks of a meltdown.

A tale of blistering brilliance and willfully blind ambition, Fool’s Gold is both a rare journey deep inside the arcane and wildly competitive world of high finance and a vital contribution to understanding how the worst economic crisis since the Great Depression was perpetrated.

Product Details

ISBN-13: 9781439100752
Publisher: Free Press
Publication date: 05/12/2009
Sold by: SIMON & SCHUSTER
Format: NOOK Book
Pages: 304
Sales rank: 541,769
File size: 369 KB

About the Author

Gillian Tett oversees global coverage of the financial markets for the Financial Times, the world’s leading newspaper covering finance and business. In 2007 she was awarded the Wincott prize, the premier British award for financial journalism, and in 2008 was named British Business Journalist of the Year. Tett is the author of Saving the Sun: How Wall Street Mavericks Shook Up Japan’s Financial World and Made Billions and The Silo Effect: Ordered Chaos, the Peril of Expertise, and the Power of Breaking Down Barriers.

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Fool's Gold 4.1 out of 5 based on 0 ratings. 26 reviews.
ScottO49 More than 1 year ago
The book contains a very good explanation of credit derivatives, how they are created and how they were (and continue to be) sold in the financial system. The biggest drawback of the book is that Ms. Tett acts as an apologist for the people and financial institutions that ultimately used financial derivatives to create excess leverage and mis-price risk in the global financial system. The central goal of the "small tribe" that Ms. Tett glorifies in her book was to remove risk from bank balance sheets and reduce reserve requirements, so that banks could lend more money with reduced capital requirements. These same people, after the system almost collapsed, now express shock and dismay that banks became over-leveraged. Ms. Tett allows her protagonists to engage in some revisionist history that continues to obscure the fact that some very smart people created a poor business product that had little or no real productive use in the economy other than the creation of additional revenue for the financial institutions selling the products. The examples of the "good" early derivatives in the book following the "BISTRO" model were nothing more than accounting devices to remove liabilities from balance sheets and obscure the amount of debt incurred by the institution, and, as Ms. Tett describes, the industry degenerated from that poor starting point.
GeorgeN More than 1 year ago
I was too hard on this book when I first read it. Then I got ahold of "House of Cards" (Cohan) and "A Colossal Failure Of Common Sense" (McDonald/Robinson). The latter two books are "who said what when" sort of affairs. They make almost no attempt to describe the financial instruments that helped precipitate the crash. In contrast, Ms. Tett makes a very determined effort to get across some basic facts about CDOs, default swaps, and the like. I'd like to give the book a much higher rating, except that I have a feeling that it is not balanced or complete. Certainly, the group at J. P. Morgan, introduced in the first chapter, get kid-glove treatment. The prose is nearly worshipful. Less certainly, it is hard to understand how the system could work if it really was structured as described. Starting on page 52 there is a critical description of how bundles of debt-swaps (a kind of insurance against financial risk) could be bundled into high, medium and low risk "tranches". People who bought the high risk bundles were paid higher returns. About ten pages later, a major problem is described with tranches that are so free from risk that they have no meaningful returns. They are called "super senior" because of this perceived freedom from risk. The insurance firm AIG agreed to cover these non-risks for a "paltry return" of about 0.02 cents for every dollar of risk insured. As the story evolves, this putatively risk free tranch becomes a gigantic problem. This begs to be explained, but it is not. My suspicion (I'm not an investment banker) is that there really was risk associated with these super-senior default swaps, and that when first written these swaps had reasonable income. By bundling many swaps together, the bankers got a chance to move (you might say "steal") the income from the low risk tranches and into high risk tranches. How else could you get bundles that paid paid the banks such big fees and paid the purchasers big double-digit returns? Obviously I'm just guessing, but it demonstrates why I'm not fully happy with the book. Note: my description of these financial packages is pretty rough - the book is far more clear and certainly more authoritative. Bottom line: this is the best book that I know of about the mechanisms that set up the current financial crisis. It is not fully persuasive, but it is vastly more informative than the other books that I've seen. I really wish that Frank Partnoy ("Infectious Greed") would write a book on the subject.
Anonymous More than 1 year ago
If you want to better understand the financial crisis, but you don't know what a CDO, CDS, SIV, super senior debt, CDOs squared, etc., is this is the book for you. Gillian Tett has written a book that anyone outside of the financial industry can understand and it is a pleasure to read. The book describes how several bankers at JP Morgan were in the forefront of the derivatives markets in the early 90's. She then explains how credit derivatives evolved and how JP Morgan escaped the carnage that took place in the fall of 2008. Essentially credit derivatives are a way for a bank to reduce their exposure to risk. JP Morgan was able to create relatively safe derivatives when they were employed on companies because they could analysis their credit worthiness, but this was not the case with home mortgages. JP Morgan could not fine any reliable nationwide data on US housing market because US home prices had always went up since the Great Depression. The lack of housing data and their merger with Manhattan Chase preventing JP Morgan from becoming a major player in the securitiazation of home mortgages during the decade. Gillian Tett does not point fingers in her book, she simple describes how the course of events played out and how JP Morgan Chase was able to avoid most of problems encountered at most major banks. Gillian Tett's has written a interesting and informative book about the current credit crisis that a lay person can understand.
RolfDobelli More than 1 year ago
This ranks as one of the most thorough, accessible explanations of how the global financial system nearly disintegrated during the great financial crisis that broke in 2008. Gillian Tett traces the development of credit derivatives from their inception at an alcohol-fueled Boca Raton corporate retreat in the early 1990s. She shows how the pioneers struggled with risk management, turning down business that other financial institutions with less regard to risk sought eagerly. She elucidates the building and breaking of the wave of institutional crises - Bear Stearns, Lehman, AIG - during 2007 and 2008, and takes readers inside tense meetings between bankers and regulators at the New York Federal Reserve and the U.S. Treasury. This is capital financial journalism, which getAbstract highly recommends to any reader who hopes to get a better understanding of the forces at work in the financial crisis.
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willyvan More than 1 year ago
Gillian Tett, a Financial Times journalist, shows how a group of JPMorgan Chase bankers wrecked the financial system and plunged the world into depression. Typically, they deny all responsibility, echoed by Tett, who sees the disaster as the result, not of the application of their innovation, but of its perversion. Their big con was packaging default risk so they could sell it - they said - without risk: the market would magic the risk away! Then they put these dodgy deals into shell companies, mostly based in the Caymans, to shift the deals off the books. (Try telling the taxman that your income is 'off the books'!) They were breaking (not, as Tett claims, 'evading' or 'circumventing') the rules that limit the amount of loans they could hold on their books. They sold the risks and took the profits. All capitalism's institutions embraced their crimes. The IMF, for example, said, "The dispersion of credit risk by banks to a broader and more diverse set of investors, rather than warehousing such risk on their balance sheets, has helped to make the banking and overall financial system more resilient." This dispersion would help to 'mitigate and absorb shocks to the financial system' ensuring 'fewer bank failures and more consistent credit provision'. But dispersion did not spread and lessen risk, but increased it, focused it and then hid it. Capitalism's leaders played down the results of these crimes. Henry Paulson, the US Treasury Secretary, told Congress in spring 2007 that the subprime problem 'appears to be contained'. Ben Bernanke, the Federal Reserve governor, said, "we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market." On 18 July 2007, another senior US official said, "It seems very far-fetched to make any parallels with Japan's crisis. The key thing to remember is that these losses are not just held by American banks, as the bad loans were in Japan, but they are dispersed." Bill Dudley, of the New York Federal Reserve, said, "This is a correction, but it is not dramatic in light of history ... it could be over in a matter of weeks." The bankers, like our rulers, are all mad free-marketeers: for them, society does not exist, nor does Britain, only money.