Extreme Money: Masters of the Universe and the Cult of Risk Hardcover – Aug 7 2011
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“A true insider’s devastating analysis of the financial alchemy of the last 30 years and its destructive consequences. With his intimate first-hand knowledge, Das takes a knife to global finance and financiers to reveal the inner workings without fear or favor.”
–Nouriel Roubini, Professor of Economics at NYU Stern School of Business and Chairman of Roubini Global Economics
“Das describes the causes of the financial crisis with the insight and understanding of a financial wizard, the candor and objectivity of an impartial observer, and a wry sense of humor that reveals the folly in it all.”
–Brooksley Born, Former Chairperson of the U.S. Commodity Futures Trading Commission (CFTC)
“This is the best book yet to come out of the financial crisis. Das is a graceful, witty writer, with an unusually broad range of reference. He is also a long-time master of the arcana of the netherworlds of finance and nicely balances historical sweep with illuminating detail. Extreme Money is lively, scathing, and wise. ”
–Charles Morris, Author of The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash
“Like Hunter S. Thompson’s Fear and Loathing in Las Vegas, Extreme Money launches you into a fascinating and disturbing alternative view of reality. But now greed predominates, the distorted world of finance is completely global, and the people making crazy decisions can ruin us all. This is an informative, entertaining, and deeply scary account of Hades’s new realm. Read it while you can. ”
–Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship at MIT Sloan School of Management and Author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
“You know when Lewis Caroll, Max Weber, Alan Greenspan, and Sigmund Freud all appear on the same early page that you are about to read an intellectual tour de force. Das is an authoritative and colorful critic of modern markets, and here he weaves financial history and popular culture into an entertaining and blistering social critique of how so many people have come to chase endless financial reflections of the real economy. Extreme Money speaks truth to power. ”
–Frank Partnoy, George E. Barrett Professor of Law and Finance at the University of San Diego and Author of F.I.A.S.C.O, Infectious Greed, and The Match King
From the Back Cover
The human race created money and finance. But our inventions re-create us. Mankind mistook money—a lubricant of society and human well-being—for an end in itself. Finance, the monetary shadow of real things, came to dominate human reality. Extreme Money tells the story of how this happened—and, in so doing, it tells the story of the modern world.
Bestselling author Satyajit Das draws on 33 years of personal experience at the heart of modern global finance to narrate this story. Das reveals the spectacular, dangerous money games that have generated increasingly massive bubbles of fake growth, Ponzi prosperity, sophistication, and wealth—while endangering the jobs, possessions, and futures of virtually everyone outside the financial industry.
You’ll learn how everything from home mortgages to climate change has become financialized, as vast fortunes are generated by individuals who build nothing of lasting value. Das shows how “extreme money” has become ever more unreal; how “voodoo banking” continues to generate massive phony profits even now; and how a new generation of “Masters of the Universe”
has come to dominate the world.
The new financial fundamentalism: false gods, false prophets
Faith in money, faith in risk, faith in shadows
The cult of risk and the growth engine that isn’t
How financial engineering replaced real engineering and illusions replaced reality
Financial alchemy and the “Doomsday Debt Machine”
The rise of the global financial machine we cannot escape
The new global oligarchy—and the nihilistic games they play
Too smart, too fast, too greedy, too self-absorbed—and far too dangerous
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The author himself is a financial advisor with over 30 years of experience. The basic thread or meta message through the book is the inability to analyze and sometimes the resistance to accept the inherent risk in the investment structures that were producing huge returns for their customer base. The book provides the culture and attitude of those working in high financing which is pivotal to understanding the reluctance to understand the long term risk of the analyzed investment mechanisms. The author is probably complicit as a financial advisor for over thirty years, but that really isn't discussed in any great detail. He provides sage wisdom after the fact, but really was not the "ethical fighter" in the battle against the balloon ready to pop (not at least in this book).
So who might want to read this book?
This book probably will appeal to anyone who reads the Business section or listens to the news and sees guys with suits talking about how derivatives were responsible for the demise of someone, something, or even some country, and wants to understand what all the double talk means.
Also, anyone who wants to better understand his own investment strategy should read this book. There is one important thing that has not changed, the availability large pools of retirement funds. A great deal of 401Ks and other retirement funds are still out there with large pools of cash looking for investment opportunity. This was the starting point for the last calamity. These contrived financial structures (and opportunistic financial engineers) were just waiting to take a piece of America's retirement funds. This is really contemptible when you really think about it. There are few people that are immune while the financial "criminals" still on the loose looking for a way to manipulate the system yet again. The author spends considerable time illustrating how the "system" enabled this in the name of economic growth.
In addition, anyone who is wondering how the sub-prime mortgage problem occurred with a desire to understand the structures and mechanisms that created and enabled these financial disasters.
Finally, anyone who wants to know why countries like Greece and Iceland (you can add Ireland and many other countries to the list) have and continue to have financial problems. Everything seems great and then suddenly a single event creates a financial avalanche of bad debt.
Why I personally liked the book.
You almost always need an insider to get to the guts of the matter. In this case, an insider is needed that has tracked and analyzed all the problems worldwide. Many smart people fell into financial traps including Harvard University with all their financial and economic advisors. With that happening, what chance does the every day guy have of saying "no" to possible big returns using risky financial mechanisms? The chance is bettered with an education of what has failed. It goes without saying that Harvard now understands as does many governments, institutions, and other large mechanisms that felt like they could win big because they play big. Sounds like a professional gambler in Vegas, doesn't it?
I have to admit that I'll need to reread this book to really pick up the subtleties and nuances. The material is complicated at times and often the author makes it overly-complicated (my main complaint about this book). The diagrams in the book were generally not helpful because they parroted the text almost verbatim and really didn't provide any additional insight into the structure. I do believe that better diagrams would have been very beneficial in this book.
Overall, I'd recommend this book for those interested in how the practical financial world is evolving. The material will take some mental work, but worth the effort if the interest is great enough.
Fittingly, his Prologue is entitled "Hubris." As indeed it was (and is). I was recently at a dinner in Orange Co. CA., and the consensus was the 2008 debacle was all Barney Frank's fault! Well, Das has a more nuanced, and comprehensive view. Starting with George Bush, who wanted home ownership to be as widespread as possible in America, and that meant more "affordable" products which led down a very slippery slope to a toxic asset cesspool that was somehow labeled "Triple A." The author fleshes out this story with abundant anecdotes; certainly the one most referenced is über-hedge fund manger Steve Cohen's $12 million purchase of a shark stretched over a weighted fiberglass mold entitled: "The Physical Impossibility of Death in the Mind of Someone Living." And, no doubt as intended, the shark was a wonderful metaphor for the business.
The book is divided into five parts. The first looks at the sheer faith involved in money transactions, and how it has involved from shells and silver coins to bits and bytes. The second part looks at financial "fundamentalism," an all too apt term, with the ground center of such thinking, which has come to dominate the world, being at the University of Chicago, with its arch-gnome, Milton Friedman. Personally, I think Naomi Klein, in The Shock Doctrine: The Rise of Disaster Capitalism covered this ground much better, but Das is incisive too, with a chapter entitled "False Gods, Fake Prophecies." Imagine being dominated by the thoughts of an individual who believed government should not be involved in the business of education or the national parks, as a small sample (ah, but it should be involved in enforcing contracts). Yet that has come to pass, since the so-called "free market" is the magic elixir that fixes all. The third part focuses on how we have become enthralled with debt (and drowned in it), all because one makes a higher percentage return when less actual equity is retained in a company (well, when one makes a return at all). In this part there are numerous diagrams which readily explain to the non-financial "layman" how those mortgages were "sliced and diced," and what the actual underlying assumptions were that governed the "tranches." In the fourth part, on the oligarchy that now governs us, Das explains how Ayn Rand has dominated the thoughts of so many of the elites, and reminds us, fittingly again, of a particular S-M scene in The Fountainhead (Centennial Edition Hardcover). And I shuttered to learn that now Fed Chairman Bernanke was attending Milton Friedman's 90th birthday party. More frightening still, is Bernanke's thesis that the real problem is a GLUT of global savings! The concluding part, and epilogue are not optimistic; featuring Bernanke's comment that the future will be "unusually uncertain."
Das repeatedly references his financial story to both the popular and academic culture. There are plenty of "bon mots," like: "Greenspan excelled at lacquering a slate of ignorance with a thin coating of knowledge." Das also refers to the "Greenspan put," meaning that there was always an assumption the Fed would bail Wall Street out of any folly; an assumption that came to pass. Das quotes Martin Baker on the magic formula of hedge funds: "Take a speculative cocktail shaker. Add four parts public ignorance, and 33 parts greed. Toss in a little perceived genius...Season generously with mystique. Add apparent publicity shyness to taste. Serve in opaque tumbler of awed, to ill-informed media coverage." Das even works in my favorite quote (and proverb for paranoids) from Thomas Pynchon's Gravity's Rainbow (Penguin Classics Deluxe Edition): "If you have them asking the wrong questions, you don't have to worry about the right answers."
But that is also the problem with this book. I hate to say it, since in general I like the references, but there are simply TOO many, madly tacked together at times, and they simply don't work. And Das throws them at the reader staccato style, bam, bam, processing the relevant and the irrelevant like the trader he once was. For example, one paragraph of three sentences goes from an expert at the Heritage Foundation to another commentator on the 2008 Beijing Olympics to Lillian Hellman. He does this repeatedly. Another swings from Arundhati Roy to John Steinbeck. He ties in Edward Abby's comment about growth and cancer cells; aphorisms from Yogi Berra and Mark Twain, and obscure 16th century Portuguese writers. Erudite yes, but also slap-dash, lacking a central thesis that holds it all together. At times, it dazzles; at others, it was simply exhausting, and seems to reflect Baker's comment above about tossing in a little perceived genius.
Overall, though, a book well marked-up, with passages that will be reviewed, and re-reviewed in the future. 4-stars.
At the book's core is a solid chronology and a lot of detail, and the book is valuable for that. But it disappointed me in a number of ways. First, the story begins with mood and atmosphere, then lurches into finance and back to atmosphere without a clear alignment between one and the other. There is no guiding structure (eg. atmosphere-event-atmosphere). Second, the level of detail is inconsistent, alternately glossing over details of financial instruments and swamping the reader in them. Often the reader is left searching for an explanation of how a financial instrument works, and how it is supposed to work. (An appendix might help here, or else a more complete introductory section on the topic.) Third, the role of government in the mess is treated quickly and forgotten. The careful reader will realize that the government not only created the mess and set up the incentives, but also punished the people who tried to stop the avalanche. The reader immersed in atmosphere will forget it in the parade of horribles of greed and irresponsibility.
Fourth, and perhaps most damning for the reader uneducated in financial matters, there is almost no description of the proper and responsible use of the financial instruments in question. What is "hedging"? When are CDOs the right instrument to use? Before reading this book, the reader would be well-advised to prepare by reading Thomas Sowell's Basic Economics 4th Ed: A Common Sense Guide to the Economy and Peter L. Bernstein's Against the Gods: The Remarkable Story of Risk, at least. Without such preparation, the reader gets the idea, apparently shared by many members of Congress, that every derivative financial instrument is the work of the devil.
Finally, the author admits to having acted as a hired gun during the crisis, fighting for one party on one side and another party on the other. This involvement ought to have been admitted up front, and squared with the condemnatory tone of the book as a whole.
Extreme Money reads as a moral condemnation of bankers, brokers, traders, speculators, regulators, and elected officials. It fails to examine the other side of the coin. In this it is like a book condemning the various problems of motor vehicles without recognizing that they contributed mightily to public health by removing millions of tons of horse manure from city streets and that they contribute to prosperity and quality of life by harvesting food quickly and moving that food--still fresh--quickly from farm to consumer, by moving heavy firefighting apparatus quickly to where it is needed, by transporting the injured and sick swiftly to treatment, and by allowing people more freedom to work at jobs for which they are better suited, improving productivity and making all of us more prosperous.
In other words, it makes a moral case without preparing the reader to make a serious moral analysis of the financial system, the financial collapse, and the players in it. It paints an incomplete picture that is liable to lead to wrong conclusions and wrong actions, to the harm of us all.
Postscript: As an alternative to this book, I recommend Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon. It avoids the problems I find in Extreme Money and paints a very clear picture of the actual paths of money and power.
And, the creators of this mess were bailed out by everyday taxpayers. If you are a fan of Ayn Rand and free-market capitalism, embraced by Milton Friedman and Chicago economists, you probably will be critical of that part of the book, as the author finds much fault with them, including Greenspan, but does also cover that blame extends pretty much everywhere - everyone wanted to prosper. But, it really was a phony prosperity.
The last words in this terrific book, as an epilogue to the financial mess we are still going through...."Extreme Money, the idea of universal wealth and prosperity engineered by financial alchemy, was immensely powerful, impossible to resist. Was it possible to turn back? As Leonardo DiCaprio understands in the film, 'Inception,' 'the hardest virus to kill is an idea.'"
Das is one of the few people in the world who has the knowledge, skills and practical experience to go substantially beyond making generalized and unsupported pronouncements. He's a details person and these details help the rest of us understand aspects of market behavior that are not self-evident. For instance, read of why (swap) derivative transactions are off balance sheet transactions (page 242) and of Lehman Brothers' flip clause in its legal documentation (page 255).
Das' book is outrageously critical of virtually every entity that has been associated with "extreme money" creation over the past 25 years, regulators included. But his criticism is warranted. The financial leverage the western world has experienced in recent years has been extraordinary and most of us have been happy to ride the wave of (apparent) prosperity for all it was worth ... until now.
A sense of the vigor and breadth of Das' thinking can be gleaned from a selection of sentences in the book:
Rather than using derivatives to manage risks, dealers structured transactions to create risks, disguise true values, delay competition and prevent clients from unbundling products (pg 272)
Risk models underestimated volatility and used incorrect correlations (pg 289)
Extreme money created a powerful coalition of financiers, business interests, regulators and politicians that increasingly dominated the economy. This oligarchy set the agenda and set policies, which benefited them and their constituencies. Similar backgrounds, education and interests, especially a common cognitive view of the world shaped the oligarchy (pg 305)
The new liquidity factory .... was based on financial alchemy. Securitization and derivatives provided most of the money, around 79 percent of total liquidity. ... The astonishing growth in global liquidity was driven by financialisation. (pg 312)
Complex chains of transactions allowed risk and debt to move from a place where it was observable to places where it was hidden and unregulated (pg 313)
Risk managers with the `brain the size of a caraway seed and the imagination of a parsnip' slavishly used inadequate techniques (pg 318)
Mathematical finance lent credibility and false precision to the dismal reality of risk management (pg 318)
Financial economists and risk management just replaced oracles and soothsayers (pg 318)
The Greenspan put ensured that at the first sign of trouble central bankers - `pawnbrokers of last resort' - flooded the system with money, lowering interest rates to protect risk takers" (pg 326)
Central bankers' assumption about securitization and derivatives reducing risk were wrong (pg 327)
Modern accounting struggles to provide tolerably accurate, reasonably objective and meaningful information about financial positions (pg 333)
When things were going well, regulators favoured self-regulation, which bears the same relationship to regulation that self-importance does to importance (pg 341)
Well-meaning and ineffectual hearings, irrespective of topic, typically conclude that any failure was systemic, not attributable to any individual. The inadvertent, unconscious clan and class sympathies of men and women dressed in similar attire on both sides of the bar are a factor in the outcome. (pg 352)
The economic and financial models were deeply flawed and had failed. The available tools and knowledge were insufficient to manage the crisis and restore the health of the global economy (pg 391)
Short-term profits were pursued at the expense of risks that were not evident and would only emerge later. Financiers entered into increasingly destructive transactions, extracting large fees and leaving taxpayers to cover the cost of economic damage (pg 422)
By October 2010 the fees paid to lawyers, advisers and managers involved in the bankruptcy of Lehman Brothers reaches over $1,000 million (pg 432)
New instruments emerge, being traded in huge volumes among institutions essentially trading with themselves. They undertake transactions, price them and book fictitious earnings, neglecting to establish whether any of it is real or makes economic sense. (pg 438)
The deadly pathology of finance - the gaming of bonus systems, manipulation of valuations and accounting tricks - continues (pg 443)
Over the last 40 years, financial fundamentalism and financial oligarchs changed the world (pg 447)
Although not an easy read (how could it be so?), Extreme Money is a tour de force.
The book's faults are relatively minor, but one is worth noting. Das makes extensive use of illustrative quotes throughout the book. There are probably hundreds of them. Although sometimes interesting, I generally found them to distract me from the book's messages. Maybe their inclusion was the publisher's idea to lighten the read (?!)
Still, a terrific book .... a five-star read!
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