Financial Crisis Book Review: Fool’s Gold by Gillian Tett

This book review is my fourth, in a series of reviews on the financial crisis. The three previous books I reviewed focused almost entirely on the events leading to the collapse of a specific investment bank. Two books focused on the collapse of Lehman Brothers, and the other book focused on the collapse of Bear Sterns.

Fool’s Gold by Gillian Tett is written from a different perspective. While the book is written with an emphasis on JP Morgan, the book is not focused entirely on the firm. The book is an in depth explanation of how a small group of bankers at JP Morgan invented the tools that are now blamed for exacerbating the financial crisis. They invented credit derivatives which were supposed to be beneficial for the economy and the banking system in particular. The author notes the irony, how instruments that were supposed to make banking more efficient, were manipulated by other firms to take undo risks and cause a near collapse of the financial system.

An interesting fact I learned from the book was how the first CDS was created. In 1993, after the Valdez oil spill, Exxon wished to borrow $4.8 billion from JP Morgan. JP Morgan knew Exxon was credit worthy, but did not want to extend them a loan because it would require a large capital reserve and produce little profit. JP Morgan persuaded the European Bank for Reconstruction and Development to insure the loan, while JP Morgan would keep the loan on its books. JP Morgan would pay a small fee to the bank, collect interest and be protected from a default by Exxon. JP Morgan was able to persuade regulators that since JP Morgan had no risk of default from this loan, they should be allowed to reduce capital reserves.

I have two main criticisms of the book. The author does an excellent job explaining the roots of the financial crisis, and the risks undertaken by the various financial institutions. However, the author is scant on detail when the crisis reached its height. I wish she had focused more on the collapse of Lehman Brothers, near collapse of AIG and other firms in late 2008. While the author devoted over 200 pages to explaining the various instruments the banks were using, she only devotes a few pages to the crucial year of the crisis: 2008.

My second criticism is that, although the author focuses almost entirely on the role of credit derivatives. I would have preferred that she also explain the other factors that caused the financial crisis i.e. Government actions, subprime lending etc. However, I do not think her goal in writing the book was to focus exclusively on these instruments and therefore I am not sure my criticism is valid.

Overall, the book is excellent and the author does a superb job in explaining the origination of structured investment vehicles, CDOs, and CDSs and their role in causing the financial crisis. I was surprised to learn the author had no formal education or job in finance, since she seemed to have such an excellent grasp on it, I would not recommend this book for someone who does not have a background in finance/economics. The book explains complex financial instruments which I think most people will have a hard time understanding. However, I think this is a great book for anyone who has an understanding of finance. This is the best publication I have read so far that explains the various instruments the banks created that ultimately lead the world to near financial Armageddon.

anyone who wishes to purchase the book on amazon.com can do so by clicking on this link

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

disclosure: long JPM