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David Callaway
Jan. 28, 2010, 12:01 a.m. EST · Recommend (2) · Post:
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By David Callaway, MarketWatch
SAN FRANCISCO (MarketWatch) -- The short list of who's to blame for the global financial crisis grows longer with each Congressional hearing, as the collective fear that gripped the financial markets a year ago slowly yields to a natural desire in society to find a scapegoat to pin it on.
Alan Greenspan, Ben Bernanke, Henry Paulson, Timothy Geithner, Dick Fuld and Lloyd Blankfein have all come under fire for stoking the financial bubble that burst in late 2007 from Wall Street to London and Riyadh to Reykjavik. Like Enron's Ken Lay and Wall Street's Ivan Boesky before them, they are convenient, flesh-and-blood targets for baying politicians and people to blame for a series of unprecedented events that nobody -- least of all them -- can still completely explain.
A new book out next month seeks to lend some much-needed perspective to the crisis, and place it in the proper historical context of generational outbursts of collective madness, such as the Dutch tulip craze in the 17th century, or our own Internet stock frenzy a decade ago. "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable," by Mark Gilbert, comes out on Feb. 10.
Gilbert is a journalist for Bloomberg News, a longtime friend and former colleague of mine when I worked at Bloomberg in London in the mid-1990s. He's London bureau chief now, but when I met him he covered the European bond market, and for my money he knows more about the global fixed-income and derivatives markets than any journalist on the planet.
The very globalization that bound markets together and was supposed to make them more transparent and less risky instead obscured a series of inter-related warnings and red flags that could have prevented the crisis if recognized.
One of the original Bloomberg reporters in Europe when the news service began growing there in the early 1990s, Gilbert one day realized he had served a decade under Mike Bloomberg when he researched a story about a 10-year bond that had come due and noticed his byline on the story when it was first sold.
In "Complicit," published by Bloomberg Press, Gilbert uses his expertise in markets and in international reporting to paint a unique portrait of how the bubble in derivatives grew before almost shutting down global markets in September 2008, and why nobody noticed until it was too late. In short, the very globalization that bound markets together and was supposed to make them more transparent and less risky instead obscured a series of inter-related warnings and red flags that could have prevented the crisis if recognized. And everybody, from regulators to bankers to politicians to good old American home buyers, was so busy making money that they chose to not even bother to look.
"The credit crunch wasn't caused so much by a confederacy of dunces, as by a silent majority of the well-rewarded," Gilbert writes in the introduction. It's not only the bankers who were greedy, but Gilbert shows how lack of regulation and a misguided attempt to keep global interest rates low by central banks turned the financial industry into a money-spinning circus.
Using Bloomberg's well-established "show don't tell" editorial philosophy of providing evidence of something rather than just saying it, Gilbert weaves a plot across international markets that Dan Brown or Robert Ludlum would be impressed with.
He shows -- not tells -- how China's rise led to a flood of cheap goods across the world that lowered prices, almost killing inflation and allowing banks to cut interest rates to almost nothing. He shows how this led to an explosion in free credit, which caused the mad rush for derivative products. He shows how credit rating agencies jacked up their ratings to drive the stampede onward, and how the conflicted practice of financial firms paying the ratings agencies for the ratings made things worse, asking the reader, "you wouldn't trust a restaurant that paid for its Zagat rating?"
He lists the warnings signs that were missed, from the collapse of hedge fund Amaranth in September 2006, to Ecuador's 2007 warning that it might default on foreign debt, to a surprise rise in interest rates in India in the spring of 2007, to the American subprime lending crisis. He describes with great color the panic at a London hedge fund conference on the day in February 2007 when the Chinese stock market fell 9% in a single session, effectively starting the crisis, though nobody would realize it for months.
As the warnings mounted, the derivatives industry was turned on its head. Bankers, "like sharks who have to keep moving to stay alive," churned out more and more risky products. In June 2006, Dutch bank ABN Amro created the CPDO, or constant proportion debt obligation, a derivative tied to high-rated debt that was supposed to change the world with a "heads you win, tails you don't lose" promise. Instead, Gilbert wrote, they carried the "whiff of a Nigerian banking scam," and even Wall Street gave up on them within a year.
"In the process, banks manufactured financial menace, rather than attempting to mitigate existing dangers," he wrote. "That became the principle activity hallmark of the derivatives industry, storing up trouble for the future."
He shows how Wall Street bankers, rather than recognizing the crisis and "circling the wagons," in late 2007, turned on each other, making it worse as one by one they attacked Bear Stearns, Lehman Brothers, Merrill Lynch, Bank of America /quotes/comstock/13*!bac/quotes/nls/bac (BAC 15.43, +0.24, +1.58%) , and Citigroup /quotes/comstock/13*!c/quotes/nls/c (C 3.25, +0.05, +1.56%) .
Sprinkled throughout the book are a series of charts, presumably taken off the Bloomberg system, that go even further to show the size of the derivatives bubble and the impact of its collapse. One particular chart, of the total market value of all the world's stock markets, shows the doubling in value from 2005 through 2007, and the near vertical plunge markets took in the fourth quarter of 2008, wiping out three years of growth as the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 10,122, -113.96, -1.11%) fell 400, 500, 600 points a day for several weeks.
Readers looking for color, amusing anecdotes and stories of tension among some of the players in the crisis will be disappointed. There are no frantic, late-night phone calls, foul-mouthed executives yelling at each other, or Treasury secretaries puking in between meetings because of the pressure, as some of the other books about the crisis have described.
Instead, readers are presented with a "just the facts" case for how the worst financial bubble since the Great Depression was allowed to build for several years under everybody's noses, and how when it finally blew, it took everybody by surprise. This is not a tell-all book for the gossip columns. It's for students of the crisis and anybody else who really wants to know how it all went down and where.
As such, it will have appeal to readers long after Blankfein has left Goldman Sachs, Geithner is no longer Treasury Secretary, and the next generation on Wall Street begins making its own mistakes.
Yet considering how just a year out from the crisis, banks are already taking big risks again and are again overpaying their staffs, it's probably better to read it right away.
David Callaway is editor-in-chief of MarketWatch.
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