Wednesday, August 10, 2011
A Summer Reading List?
In finance the past few years, there has been an explosion of published accounts of the financial crisis. Just when we think there is nothing else to report or analyze as it relates to the collapse of Lehman, Bear Stearns or AIG, out comes another 300-pager.
Then comes the summer of 2011. Just when we thought it might be safe to escape for vacation and tote copies of what's on our reading list (in duffel bags or imbedded in a Kindle), the circus of Washington becomes more frenzied. And the markets behave as if it's 2008 all over again.
A summer reading list at a time like this? With the daily chaos of global markets, political fisticuffs over sovereign debt levels, S&P punishing politicians and the U.S.'s lackluster recovery, will there even be time to go on vacation before fall arrives?
Is there any point to combing through an old analysis of the Madoff scandal, Goldman Sachs' "big short" on mortgage markets, or Countrywide's massive buildup of subprime assets when nobody knows what today's markets and business confidence will look like next week? When much of the industry had hoped to be gazing at the horizon from a vacation rental?
Still, prospective students in finance will ask what's appropriate to read as they prepare for business school or gear up for a tough semester of corporate finance 101. MBA alumni and other experienced professionals wonder what they can read to catch up on current issues.
What can they read to "stay ahead in the game" or have an in-depth understanding of specific topics? What should they read to comprehend the controversy of derivatives, CDOs, and mortgage-backed securities? What should they read to figure out what happened at Madoff, AIG, Merrill, and Goldman? Why did some hedge funds prosper during the old crisis? Could Bear Stearns and Lehman have been rescued? With pending reform, what will banking and finance look like in the next decade?
Publishing houses have flooded the book-reading public with new takes and versions on what happened in 2007-09. There are numerous viewpoints, analyses, and updated summaries of events. In the latest round, William Cohan follows his thorough accounting of the fall of Bear Stearns ("House of Cards") with a new book on Goldman Sachs, a book project he likely had in mind for years. But he might have updated his approach when Goldman suddenly became a symbolic punching bag as industry recovered from mishaps of the 2000s.
Cohan's "House of Cards" was an excellent, day-by-day account of Bear Stearns' fall and explained better than others how lack of funding, liquidity and perhaps wisdom and morals caused the firm to sink. His understanding of investment-bank operations, people, deals and history would make the new book "How Goldman Sachs Came to Rule the World" required reading. Goldman, of course, doesn't rule the world, even if it tried to, but Cohan provides a solid accounting of how a top firm manages to remain perennially profitable.
Last year, Suzanne McGee hopped on the Goldman story-telling bandwagon with her book "Chasing Goldman Sachs." She argues the crisis of 2008-09 is partly due to other firms and funds trying to "be like Goldman." Everybody wants to achieve similar returns and approach businesses and markets in the way Goldman does. And they think they can do so--whether or not they have the capital or people.
In doing so, we got the near collapse of the financial system in 2008. Her book, however, offers pages of solutions. She suggests an overhaul of investment banking and recommends the industry be operated as a public utility if it doesn't learn to manage risks. McGee knows she won't win fans in the industry with this idea, but hints this may be inevitable if more crises ensue.
Joe Nocera, a New York Times op-ed columnist, teamed with Bethany McLean to write the consummate book on how mortgage markets spurred the crisis: "All the Devils Are Here." They write fascinating accounts, for example, on the internal failings and politics at Countrywide, at Washington Mutual, at Merrill Lynch (before BoA acquired it), and among regulators. They spare readers some of the technicals. Instead they present the drama of bankers and mortgage brokers hustling to become rich from originating and selling subprime loans.
For just one summer, the list is almost too much to choose from. Gretchen Morgenson, a Times business columnist, and Joshua Resner paired up to pinpoint leaders who were responsible for the troubles at Fannie Mae and Freddie Mac in "Reckless Endangerment." Times business columnist Diana Henriques offers her account of the Bernard Madoff scandal in "Wizard of Lies." She was the first journalist to interview Madoff in prison. Roddy Boyd, not from the New York Times, jumped in to tell the tale of what happened at AIG, or more notably how its derivatives-trading unit contributed to the mortgage mess: "Fatal Risk."
One new book sought to explain the mechanics and virtues of high-frequency trading, although nobody has yet written the book on last May's "flash crash," a subject that might be too cumbersome for a general reading audience.
Even with the cascade of books, nobody has sufficiently tackled the pressing issue of how banks will evolve and be profitable in the face of new regulation and reform. Many argue that greater amounts of capital help banks survive or withstand tough times. But not many have figured out ways for banks to achieve reasonable returns, when more capital will be required. Banks themselves are struggling to figure this out.
And nobody dared to touch the impact of the crisis and subsequent upheaval on diversity? Have the events the past few years discouraged those from under-represented groups from becoming traders, bankers, investors and researchers? Why does it seem as if there are fewer women and people of color in top levels in financial institutions? Do banks, insurance companies, and hedge funds care as much?
For now, for this late-summer period of stomach-churning volatility, most will agree on one thing: Not many right now will want to read a book about bipartisan quarrels and political jockeying occurring on Capitol Hill.