Saturday, 25 July 2009

Fool's Gold, Fool's Paradise

I've literally just finished Gillian Tett's Fool's Gold, an insightful, frank and highly readable account of the credit crunch, explained from the standpoint of the JP Morgan staff who somewhat unwittingly unleashed the Bistro-style CDS derivative into an environment of such stunning irrational exhuberance, greed, negligence, recklessness and downright fraud that it's left even the insiders angered and aghast.

And it ain't over yet. While subprime default estimates continue to be revised upwards, bankers brazenly continue to repackage downgraded debt into yet more CDO's backed by leveraged loans.

Importantly, Gillian Tett's narrative tellingly confirms a string of cultural problems that we're told again and again abound in the capital markets trading "pit": regulators whose remit and resources prevent them seeing the financial world holistically, a commission/bonus-driven sales mentality that often ignores the limits of the hallowed Gaussian 'models', banking groups that merely comprise dysfunctional silos, the cosy social contract banks enjoy with government. It's little wonder that everyone lost sight of the big picture - and that our faith in these institutions is utterly shattered.

Yet none of these factors is about to change. Amidst all the talk and shuffling of deckchairs little is actually being done to avoid or minimise exposure to Black Swan events. Hedge funds scramble to avoid the sunlight, like the swaps world did previously, and the quest for transparency has degenerated into protectionist farce. With an election still a long way off, competing government and opposition plans for the financial sector realistically mean regulatory paralysis throughout the time when structural and cultural reform would have been most achievable.

We're living in a fool's paradise. Enjoy.

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