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.

  . 

 

Good to Great - James C Collins (Harper Business, 2001)

A big ideas management book that attempts to identify the basis for some companies' market success.  [658]

I cannot really recommend this book.  I question the methodology and I question the conclusions.   I have the sense that the methodology depends on "survivorship bias" the way books like The Millionaire Mind do.  That is, we choose a group of "winners" and ask how they differ from others.  Although one may identify a difference, it is a great leap to argue that that difference is necessarily the critical factor.  Further, it must be shown that the identified factor is both necessary and sufficient for success.  That is, no firm which also had this same factor must be seen to fail and all that do must succeed.

Further, I do not accept the criterion for identifying winners.  Collins appears to use stock prices as his guide.  Although there may be a justification for this, it also must ignore random stock price movements; in any such cohort, there will always be a winner regardless of the cause.  (Just as any competition among individuals tossing coins as to who can toss the most "heads" will certainly produce a winner.)  I am not convinced that stock total returns tell the whole story sufficiently to play the critical role they do in this study.  

As a final note, this book was published just 15 years ago.  The title would imply a certain durability over that period of the firms that made the "great" category.  Of the eleven companies in the list, one - Circuit City - went bankrupt and disappeared within five years of publication.  A second "winner" is Fannie Mae, about which nothing more need be said since eight years ago.  I will agree that Walgreens and Wells Fargo have shown continuing strength, but the list is now wrong at least 20% of the time.

This is a management book aimed at CEOs.  Even if its conclusions are valid, it is unclear how this helps 99.9% of the potential readership to make the fundamental changes needed in their place of employment.

This book is not recommended - except for those who wish to compare the other winners against their current track record.

Exit, Voice, and Loyalty - Albert O. Hirschman (Harvard University Press, 1970)

Societies build systems and entities to meet social and individual demands.  What do we know, or what can we hope to know, about how members of society react when those constructs fail to meet their goals?  The answer may be beyond economic reasoning.  [302.35]

In this book (written in the late 1960s), Hirschman contrasts two ways of resolving customer dissatisfaction with performance by an organization. 
These are 1.) the way economics see the solution - exit, as in buy from another seller, and 2.) the way political science does - voice, as in protest or complaint. 

In the past forty years, the intellectual and policy trend has been to interpret more and more social issues as fundamentally questions to be addressed by market-based analysis.  We now generally take market solutions as the answer to almost any public policy issue.  We do so even when the basis for a market analysis is weak or provides no guidance.  For example, even if a perfectly competitive market exists, using it as the basis for analysis provides no information about how outcomes or products might be improved.  A firm with higher costs or a defective product should, according to the competitive model, immediately loses all customers and ceases to exist.  Nothing can be done.  Further, in those situations not characterized by the idealization known as a competitive market, forcing the analysis to rely on that model can miss critical aspects of the problem.  It is in the most acute case, a pure monopoly, that a different approach is called for.  Most such monopolies are often thrown into the hands of governments to manage, such as school systems and utilities. The author reminds the reader of the value of the alternate analysis and its broad applicability in many cases where markets may fail.  The author attempts to analyze the means by which customers may respond to failure to deliver satisfactory outcomes: by exit or by voice and how loyalty may impact those decisions.  

The book is worth reading as a reminder of the complexity of public policy and our responses to organizations.  It provides a useful counterexample for mindless application of microeconomic principles to situations that cannot support the required assumptions.  (It should be noted that Kenneth Arrow endorsed this book.)

The book is recommended for anyone concerned about public policy who can accept a noneconomic analysis.

Deluxe: How Luxury Lost Its Luster - Dana Thomas (Penguin Books, 2008)

A history and criticism of the transformation of luxury goods from its traditional role of social demarcation based on quality and design to another mass market niche driven by advertising, cost control, and mass market appeal. [338.47]

Luxury goods are, in general, no longer the province of ateliers and small, family-run factories.  The old houses of Chanel, Dior, and particularly Vuitton, represented the tradition of well-made goods in the Parisian market.  Globalization, however, has created a market beyond the capacity of the old production system and with a potential for great profit from sales to rising elites worldwide.  Only corporations can procure the financing and capacity needed to meet this demand, but corporations have a different focus than the traditional family atelier.  The great fashion houses and designers have been democratized through the development of corporate marketing that stresses brand awareness and packaging.

As conglomerates have taken over old houses, cost control has become critical.  This has moved many workshops to China and other emerging markets and placed their goods on assembly lines next to pedestrian goods.  It has led to the development of the outlet mall where goods are sold that were made specifically for the outlet shop.  It has led to the creation of cheap goods, such as tee shirts and key rings, bearing only the trademark or logo of some fashion house.  The intent was to widen the market to households who could not justify the expense of traditional designer goods; now, they too can buy into the dream.  And, of course, the growth of a mass market for luxury brands has encouraged counterfeiting. 

Now one may ask oneself if the appeal of the product lies in its exclusiveness, its quality, or its solely its brand marketing.  The clearest sign of decline must be that for many goods, the distinctiveness of the product is not necessarily to be found in the quality of materials and workmanship or execution of design, but in the label which has moved from inside the item to the outside for all to see.

I found this book irresistible and as I read on, it radically affected my views on luxury goods. 

It is strongly recommended.

Hamilton's Blessing - John Steele Gordon (Walker and Co., 1997)

Ostensibly, a history of the national debt; unfortunately, the narrative devolves into a diatribe against an economic straw man and into an extended speculation about a flat tax.  A promising start that loses sight of its worthy goal. 
[336.340973]

This book begins as a needed history of the National debt.  The first half of the book explains what benefits the national debt provides and, with less detail, why it was part of Alexander Hamilton's fiscal plan for the new nation.  The author particularly likes to focus on individual incidents such as the compromise that set the capitol in Washington, DC and the assumption of many states' Revolutionary War debts.  The book then addresses the general problem of financing the young United States.  That brings in topics such as our first two central banks, the First, and Second, Bank of the United States, the difficulties caused by a taxation system reliant almost exclusively on customs duties, and the costs of Jackson's Specie Circular.  The selling of the government's debt during the Civil War and the currency adjustments in the post-War period are also well-written.   

As it shifts to the beginning of the 20th century, the narrative drifts far from an analysis of the debt.  The author discusses the income tax amendment and invests some effort in covering the differences between the corporate and personal income taxes.  Although this is an interesting topic, it is a digression from the main subject and, even worse for the book, becomes a springboard for the author to go in a new direction.  No real rational for an income tax is presented; the author doesn't acknowledge that the gathering momentum of the Prohibition movement will mean that the government will need an alternative to the alcohol excise taxes that helped fund the government.  Instead, the author becomes fixated on thinking of the graduated tax as an experiment in social engineering.  Forward from that point, questions about the debt fall to a secondary topic. 

Much of the last section of the book becomes an extended critique of Keynesian economics.  The usefulness of any observations is thrown away, however, because the author focuses on a caricature of Keynes' thought.  It is treated as a policy spending and borrowing no matter what the economic situation.   (The bibliography reveals that the author has consulted some free market economists who are unlikely to give an unbiased critique of Keynes.)  The rest is a description of the benefits of the Flat Tax, particularly as a means of avoiding what the author refers to as "social engineering" or using the tax code for progressive taxation as a means of combatting income inequality.

This book advertises itself as a history of the national debt.  In truth, with its forays into central banking and a central government with the ability to tax, it summarizes more of Hamilton's design for the United States than just the debt.  The entire plan may be Hamilton's Blessing.  If only the author had maintained focus.

The first half of the book is recommended as a useful summary.

The Big Short: Inside the Doomsday Machine - Michael Lewis (W W Norton, 2010)

An engaging story of the challenges facing a few individuals who bet against common wisdom  to profit on the 2007-8 housing market collapse. [330.973]

One path to good storytelling when dealing with complex issues is to report from the point of view and actions of someone involved in the events.  This doesn't necessarily make the event itself any clearer; instead it trusts that the reader may appreciate the challenges the protagonists face and it conveys a feeling about the events.  This look at the financial implications of the housing market collapse in 2008 attempts to explain events by following three hedge funds and a banker as they try to make sense of what appears to them to be an asset bubble and to find a way to take the opposite side of the trade.  It takes great self-confidence, or foolhardiness, to take a short position when the world is convinced prices can only move upward.

The uninitiated reader is unlikely to come away from this book with a clear understanding of derivatives trading, credit default swaps, or collateralized debt obligations, but this book is not intended as a CFA textbook on derivatives.  In fact, this book should be read alongside Gillian Tett's book Fool's Gold to really understand how such a market developed.  The pair of books gives a richer context to the trading.

Michael Lewis is, nonetheless, a talented writer.  The traders and bankers he describes are complex personalities.  They are not heroic; they see an opportunity to make money and have to develop a way to exploit the situation.  They have to keep their financial backers and investors behind them while the action they propose violates accepted wisdom.  They have to abandon any faith in the leading names in the financial community.  Once events begin to run their way, they have to decide how long to hold the trade before it becomes worthless.  Here is Lewis' talent: giving the reader a sense of the inner workings of these people.

We are still living with the results of the crisis.  It still plays a role in the political campaigns this year because it has affected how we interpret the work of Wall Street, the government, and the markets in a broad sense.  This book is still timely even as it describes events that are a decade ago.

(NB.  The movie of the same name is equally enjoyable and should be watched in conjunction with Margin Call to see both sides of the story, but it has fictionalized some parts of the story and simplified other parts.)

This book is recommended although with the suggestion that the experience improves if one takes time to learn more about the derivatives and the securities discussed.

The Paradox of Choice: why more is less - Barry Schwartz (Harper Perennial, 2005)

We live in an economy capable of generating countless variations of a product to meet individual tastes.  The problem arises when we find that we are not capable of managing mentally so many choices.  [153.83]

This book poses an interesting paradox: we live in a world that offers us ever more choice in even our most mundane goods, yet they ability to choose from such a variety makes us less happy with our choices.  Every decision disappoints.  This is particularly true for persons who seek to optimize based on their actions rather than to satisfy some need.

The author invokes a broad range of research in highlighting how too broad a range of choice can lead us to regret decisions because we had unrealistic expectations of the outcome or to constantly compare them with choices not made.  The impact of this paradox is greater stress in our personal lives. 

It also has implications for marketing where product line extension has become the norm (contrary to the warnings of Ries and Trout in the book Positioning of thirty years ago.)  What is a Coke today?  Is it Classic Coke, Coke Zero, Diet Coke...  Schwartz hints that we may become paralyzed by our inability to choose.  Thus, by offering more selection, we get consumers who take no decision or are ultimately dissatisfied with the product they have chosen.

This book is recommended to anyone interested in our consumer society.