Fool’s Gold is a narrative expose’ of the financial crisis that walks us through the 15 year journey of the J P Morgan Investment bankers team instrumental in innovation of credit default swaps on corporate loans (CDS) and how the innovation led to its perversion resulting into the ultimate disaster.
Gillian Tett is an Assistant Editor at the Financial Times and one of the very few journalists who took interest in the credit market as early as 2004 and tried to fathom this new-fangled world. Her training in social anthropology (She has PhD in social anthropology) makes Fool’s Gold exceptional read as Tett is able to reflect not only on why the crisis developed but also why it took a crisis for the outside world to discover this mammoth but yet unheard world of exotic derivatives.
Tett observes how a state of social silence developed around the credit derivatives. This helped the banks to be opaque about how the derivatives were modelled and priced as opacity leads to hefty profits. This also explains why the banks were so vehemently opposed (and still are) to the idea of a centralised clearing system as such system would mean transparency in pricing and hence loss of profit.
Like Michael Lewis, She also explains that in order to understand the actions of an individual we have to look at the incentives that drive them. In case of credit derivatives the multimillion dollar bonuses that the bankers raked up by packaging debt into CDOs were more than sufficient incentive to keep this gigantic debt factory running. It also led to the subsequent distortion when the “raw material”- debt required started falling short in supply than the demand.
This resulted into more and more creative and synthetic structures. The lenders lost their conscious while lending as they no longer held the debt on their balance sheets and carried the risk. They simply sold it to banks that repackaged it into CDOs and sold to gullible investors looking for higher returns. The basic idea of derivatives meant for dispersing the risk of debt got mutated and distorted so much that the very instrument led to concentration of risk in the hands of few institutions that became “too big to fail” and “too interconnected to fail”.
Another observation by the Author that needs serious attention is that of mental and structural silos. The credit instruments were perceived to be so technical and complex that hardly anyone outside the small group that dealt with them made any attempt to know about them, let aside to understand them. Even the management and other departments from the banks were at times unaware about the risk that was being created.
The book is gripping. Gillian Tett is thorough in her research and I think the British Press Award for Journalist of the Year in 2009 is a fitting tribute for the journalist and her work.
Thank you for reading. I appreciate your time.
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