The Day the Bubble Burst - Gordon Thomas and Max Morgan-Witts (Doubleday & Co, 1979)

This is a social history of the Great Crash of 1929.  It weaves together the individual histories of dozens of persons whose lives or fortunes were deeply affected by the Great Bull Market and its subsequent collapse.   [338.54]

Neither of the authors of this book is an economist or a business writer by profession.  The style of the book is quite different from most financial histories in that it spends more of the text on recording the thoughts and feelings of the characters.  In fact, it is more like the style one expects to find in a novel.  The attribution of thoughts or feelings to the main characters would make a reader suspicious of the validity of the accounts except for two things: the book was written forty years ago when many of the principals or their families were still alive and available for interview and the authors cite numerous journals, diaries, and interviews among their sources.

The book covers the last months of the Great Bull Market from New Year's Eve 1928 to October 1929.  It is not restricted to the usual players in the Street, but takes individuals at several levels of society and at venues outside New York.  These individual stories reinforce the narrative by adding a poignancy to human plans overwhelmed by the event.  There are several projects or goals set by the participants for the last week in October that the reader knows will never come to fruition.  The stories include the standard players such as Michael Meehan, the pool operator; Thomas Lamont and George Whitney, partners at Morgan; Richard Whitney, George's brother, embezzling from his customers for one bad investment after another while president of the NYSE; Jesse Livermore,  who often blamed for the Crash because he often sold short; Charles Mitchell, famous for placing bids on behalf of the bankers' group to try to stabilize the market, but who also was selling short the stock of his own bank; and Professor Irving Fisher, the economist whose serious work on the money illusion has been swept aside by his Panglossian pronouncements.  

The authors go further and include other characters to give a broader sense of the easy riches mania that seemed to carry away the country.  There are also Henry Ford, eccentric and living in an America that is fading into the past; Joseph Kennedy, snubbed in his visit to the House of Morgan, but having a better sense of the market than his "betters"; John J. Raskob, focused on his plans to build the Empire State Building; A. P. Giannini, laboring against the fear that his Transamerica Corporation might become a tool for speculators and also seen as an upstart by the J. P. Morgan firm; the "league of gentlemen," fifteen clerks and officers of Union Industrial Bank of Flint, Michigan, each of whom was embezzling from the bank to invest in the stock market; and the Vargo family, immigrants in Flint and bootleggers who trusted their savings to the Union Industrial Bank.

By following each of these stories, the reader is reminded that the Crash did not happen on just one day; the market's collapse took place over several days.  At the end of each of those days, there was a hope that the rally might undo the damage.  The reader will likely feel a pang of sympathy for the characters because we know the end of the story.  That is something too often missing from economic history: the sense that no one at the time knew how the story would end.  We can empathize with their frail hopes.

This book is recommended for a sense of the mania for easy money that swept through society during this period.

Last Call - Daniel Okrent (Scribner, 2010)

A thoroughly entertaining history of Prohibition: the motivations of its proponents, its social impacts, and how government policies were implemented.  [363.41097309042]

Prohibition has a certain image in the popular mind: Elliot Ness, passwords at speakeasy doorways, terrible liquor.  This book provides a comprehensive and highly readable history of one of the strangest legal periods in US Constitutional history.  The author also gives a very different view of our history - how quickly the population gave up on enforcement, how little it was wanted anyway.  It is ironic that Prohibition became truly unpopular generally once President Hoover took enforcement seriously.  

He also examines the very modern interest group dynamics that led to the 18th Amendment and places them in the context of a much broader platform of social legislation.  Women's suffrage was supported by the dry forces because of the certainty that women would vote for dry candidates.   Prohibition was intimately linked to tax policy, for example, with the income tax a necessary prerequisite.  Alcohol could not be banned unless an alternative source of revenue could be found to make up for the loss of liquor excises.  (No wonder the author, in a book discussion, once mentioned that his original title might have been "How the Hell Did This Happen?")  This same argument would lead to the drive for repeal of Prohibition by classes hoping to end the income tax. 

In a certain sense, Prohibition is seen as the last struggle by a disappearing America - rural, WASP, and religious against a tide of change to the modern, urban and ethnic culture that America was becoming.  The fighting went to the last ditch when the "Dry" forces delayed re-apportionment of Congress after the 1920 Census until 1929 because they knew that the composition of Congressional representation would change radically when urban, ethnic districts began to appear. The parallels to social legislation driven today by the same fear of change makes this more than just a history of a curious period deep in the past.   

This book is highly recommended. 

Fool's Gold - Gillian Tett (Free Press, 2009)

The other side of the story that ends with The Big Short.  The history of the development of CDS and their limits as tools for risk and how those limits were overlooked in pursuit of profit buy some banks with catastrophic consequences.  [332.660973]

The Financial Times columnist offers a history of the development of the credit default swap (CDS), the derivative financial instrument that cost so many banks so much in losses as to bring on the financial collapse of 2008.  Gillian Tett focuses on the derivatives team at JP Morgan while tracing developments at other banks to create new financial instruments. 

Along the way, Ms. Tett points to the pieces of the history that combined to make the disaster.  She recounts the efforts by the Wall Street banks to leave the derivatives business essentially unregulated (or, at most, self-regulated.)  She covers the work by industry committees to draft ISDA rules, including avoiding creating a third-party clearinghouse, as a way to put off regulation by the Federal Reserve and their further work to lobby against four separate bills in Congress in the 1990s to regulate derivatives trading.   

The other great problem was how to keep these instruments from impairing the balance sheet: if they carried any risk for the bank, the bank would have to maintain adequate reserves behind them.  By breaking the CDS into separate tranches according to the risk implicit in the underlying securities, it would be possible to find buyers who matched the level of risk of each tranche with their own preferences for a balance between yield and risk tolerance. There was, however, a particular problem with the "riskless" tranche, the most senior and lowest risk tranche since it was difficult to imagine that this tranche would ever be at risk.  Fortunately, the insurance giant AIG was willing to take on this instrument as an asset.  The return would be small, but with sufficient scaling up, the total would be significant.  Eventually, lobbying by the industry convinced regulators that the senior tranche was sufficiently safe that it didn't need to leave the balance sheet or impair operations by requiring reserves behind it.  Since there was much to be made by selling CDS, the banks went into it fully and this meant they were accumulating a lot of the senior tranche.  Thus both AIG and the banks were set up to take on risks they could not measure.

The key problem was whether the underlying logic of the instruments was correct; there was no way to be sure.  The assumption was that each security (mortgage) had an independent probability of failure.  Even if they were not perfectly independent, the correlation among the constituent securities was assumed to be low.  Experience with corporate failures made the assumption seem safe; the assumption was on far shakier ground when new instruments were designed to use only mortgages.  It was difficult to calculate the probability of general collapse in real estate.  The problem was ignored or assumed away.

The collapse came, quietly at first, but with increasing fury as derivatives began to melt on the balance sheet.  When it was over, few banks were left standing firmly.   Although there were heroes whose rationality and ability to avoid jumping in to the risk pool saved their banks much grief (and Jamie Dimon appears to be one of Ms. Tett's heroes), most banks were caught by the very instruments that had been paying them so well.  The cost in wiped out value reverberated throughout the markets and into the real economy.  The recovery continues eight years later.

This book is highly recommended.

The Match King - Frank Portnoy (Profile Books Ltd, 2009)

In a time of economic exuberance, even sophisticated investors, bankers, and brokerages were not too interested in where the dividends came from.  This is the story in detail of one of the greatest collapses - or was it fraud - of the 20th century.  [364.1680924]

It would seem that every book about the 1929 Wall Street crash makes passing reference to Ivar Kreuger and the collapse of his "Match Empire."  Although, his name is often teamed in such histories with those of Samuel Insull and Charles Ponzi, there is a critical difference.  Ponzi's scheme was limited and had no hope of being a legitimate investment; Insull's network of utilities and holding companies was merely regional; Kreuger built an international enterprise that was capable of lending funds to sovereign governments, that developed new financial tools (such as nonvoting Class B shares and convertible debentures), and that could rival the House of Morgan.  Ivar Kreuger and his match monopolies were in a different league - almost appropriately the same league as the South Sea Bubble.

This book is more than a recounting of some facts; it is the biography of an enigma.  How much about Kreuger's life or business dealings was real?  how much was sleight of hand?  Further, why would a old banking house like Lee Higginson participate so willingly in raising funds for International Match or the firm of Kreuger and Toll when they really knew so little about the business?  How could the most cursory of financial data be trusted as a guide to understanding a complex firm?  Here is a look at how financial markets operated before requirements for audited financial statements or registration of securities became standard.  In good times, as many subsequent market booms have shown, investors do not really want to look too carefully under the hood of the engine that is generating profits.  It did not seem to trouble investors that their investments paid a 25% dividend on money lent to Germany for 6%.  In  the absence of solid accounting data, funds could be raised and shifted among a number of off-balance sheet vehicles and firms without the knowledge of investors or the firms' bankers.  Today, an investor will study the 10-Ks and 10-Qs of prospective investments.  These tools only came into being after, and partly because of, the collapse in 1932 of Kreuger's empire once the search for remedies for the losses that all came with the end of the 1920s bull market began. 

After every collapse, there is a desperate search for a single, simple cause or villain to blame and widespread human greed or blindness is never really an acceptable explanation because it spreads guilt too broadly - it might include ourselves.  Although the International Match shares held their value for almost two years after the crash of most other share prices, when they fell, they became the focus of blame.  Suddenly, the now-dead Kreuger could not defend himself against harsh, self-interested accusations.  Some of these charges are believable.  (The forged Italian treasury bills that Kreuger had used argue that.)  Time, however, would reveal that many of the assets of International Match and its associated companies were genuine.  The author leaves his conclusions mixed: part blameworthy, part exculpatory for Ivar Kreuger.  That is, perhaps, the most satisfactory approach.

This book is recommended with the note that some readers may wish to reconstruct some basic accounting statements to better understand the whole.

  .