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.

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Making Sense of the Dollar - Marc Chandler (Bloomberg Press, 2009)

The Chief Foreign Exchange Strategist at Brown Brothers Harriman takes a critical look at ten myths about the balance of trade, the labor market, and globalization and the dollar. [332.4560973]

Marc Chandler takes the reader through a critical review of ten myths about exchange rates, the dollar, and international trade in a well-written 200 pages.  The book might have been suitably named, "Against the New Mercantilism."  The author completely takes apart the commonly held picture of a world in which the U.S. runs huge trade deficits that lead to an accumulation of dollars overseas that will weaken the U.S. standing in the world and that its manufacturing can be saved only by a weak dollar policy.  In every point, Chandler presents a fresh perspective to show how the common view is wrong.  

His first key point is that trade statistics do not capture how American firms compete in global trade.  Rather than producing everything in the US and shipping finished goods, US firms establish foreign subsidiaries to produce locally.  Much of what is measured in trade statistics is actually intra-firm movements of goods in production.  This means that trade data understate US competitiveness.  His second point is that dollars overseas serve more functions than simply being used to purchase goods made in the US.  This strikes at the commonly held notions of the proper exchange rate or the role of the dollar in the world economy.  Finally, he addresses the impact of institutions on the development of markets in modern societies.  This includes an insightful look at the myth that there is only one way to capitalism. 

The book is a fresh and much-needed antidote to the facile assertions about the US economy and its future in global trade.

This book is highly recommended.

The (mis) Behavior of Markets - Benoit Mandelbrot (Basic Books, 2004)

One of the pioneers of fractal analysis reviews the role of randomness and turbulence in nature with particular emphasis on financial markets.  [332.01]

This is an important and useful text.  Too often, analysts have swept everything under the rug of the Gaussian (i.e., Normal) distribution.  It represents the victory of ease over analysis.  Assuming the Normal distribution puts tables and easy computations of probability at hand.  Mandelbrot presents evidence that taking the Normal curve as given in many cases when distributions have tails that follow power laws is to err seriously.  In this regard, he presents a critique of much of modern finance that hinges on the Gaussian distribution.      

In fact, one might argue that the real nature of the Black Swan problem is one of misspecification of the underlying probability distribution.  If one reasonably assumes that one probability distribution holds, then an error in selection of that distribution can have significant consequences, especially at the extremes of the distribution.  The Normal distribution, in particular, has quite thin tails: the probability of an event six standard deviations from the mean (the 6 sigma criterion) at 3 per million events is small beyond any plausibility.  All that is guaranteed under Chebyshev's rule, however,  is that the probability of an occurrence at that extreme in no more likely than about 3%.  The difference represents an increase by 10,000 times in probability.  What is assumed rare might, indeed, be disastrously common.    

Unfortunately for this book, its author's personal problems  and history detract from the text.  He insists on reminding the reader that he was a pioneer in the field of fractal analysis.  He revisits previous positions where he was denied tenure or a chair or recognition for his achievement.  Dr. Mandelbrot's reputation is secure; he is not alone in having some of his best work overlooked.  The repetition of these old hurts adds nothing to the text.

This book is recommended with some reservations.