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BookReview: 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, Free Press, June 9, 2009, B002AQRVXQ

Fool's Gold is yet another book about the 2008 meltdown. I didn't finish it. Too much drama and grandiosity.

[k507] A few weeks after he had summoned Dennis Weatherstone and Peter Hancock to meet with him, in January 1992, Corrigan delivered a stern speech to the New York State Bankers Association. "Given the sheer size of the [derivatives] market," he said, "I have to ask myself how it is possible that so many holders of fixed-or variable-rate obligations want to shift those obligations from one form to the other." Translated from central bank jargon, this suggested that Corrigan was dubious about the banks' motives for making these deals. "Off-balance-sheet activities have a role," he continued, "but they must be managed and controlled carefully, and they must be understood by top management, as well as by traders and rocket scientists," he added. "I hope this sounds like a warning, because it is!"

[k568] In 1992 and 1993, though, many investors thought it was worth taking those risks, by buying products with high leverage. "It was a type of crazy period," recalls T. J. Lim, one of the early members of the J.P. Morgan swaps team, who worked with Connie Volstadt in the 1980s and decamped with him to Merrill Lynch. "The herd instinct was just amazing. Everyone was looking for yield. You could do almost anything you could dream of, and people would buy it. Every single week somebody would think of a new product."

Some prescient warnings were issued. Allan Taylor, the Royal Bank of Canada chairman, said that derivatives were becoming like "a time bomb that could explode just like the Latin American debt crisis did," threatening the world financial system. Felix Rohatyn, a legendary Wall Street figure who worked at Lazard Frers in corporate finance, far removed from derivatives, called derivatives "financial hydrogen bombs, built on personal computers by twenty-six-year-olds with MBAs."

[k644] Brickell and the other members of ISDA were opposed to setting up a clearing system because they feared it would be the thin edge of a wedge of further regulations. They insisted that counterparty risk could be handled perfectly well by following the ISDA guidelines, posing some collateral against the risk of default, and just good smart trading. "The swap [market] framework is a model of market discipline," Brickell argued. "Within it, every participant scrutinizes the reputation and credit quality of his counterparties and adjusts the flow of his business accordingly."

Via Rob 12/19/2010