The End of Wall Street by Roger Lowenstein - former reporter of the Wall Street Journal, writer, financial journalist and director of the Sequoia Fund - is a masterpiece that traces the fall of the markets in 2008 to events that began several years earlier. From the first page until the very end, no one is spared. Alan Greenspan is criticized for his dogged insistence that 'markets are perfect and self-regulating'; financial institutions are shredded for greed, risk taking, and excessive bonuses; home lenders are blasted for lax lending practices; ratings agencies are thrashed for inherent conflicts of interest; Republicans are called out for their visceral dislike to regulation; Democrats are exposed for their insane support of home ownership even when people cannot afford one; and ordinary citizens take blame for financing daily lives on credit and home equity.The crisis therefore was no accident, but an event waiting to happen....
The book highlights the tendency of the past three decades to glorify the wizardry of 'quants' (mathematical geniuses in Wall Street who construct elaborate risk models) and diversification (securitization) of risk. Of the former, Lowenstein's complaint is that they assumed perfect markets where home prices only marginally go down. Of the latter, he adds that 'in the eyes of each individual firm, risk was reduced. But the danger that a failing firm could bring down a host of others was slowly and steadily accreted'.
Books like these often offer lessons in humility (which may I add has been blatantly missing in Wall Street for a long time). Stan O Neal, the head of Merrill Lynch, comes across as increasingly aloof and playing golf - alone - for 100 days a year. His salary? $48M in 2006. Many of his fellow CEOs are no better, being highly disinterested in understanding the very complex instruments that they were peddling. Vikram Pandit of Citi orders a $350 bottle of wine in a fancy restaurant to savor just one glass (the rest is discarded). In Lowenstein's words, 'On Wall Street, the habit of extravagance is deeply ingrained'. Only Jamie Dimon of JP Morgan comes out looking clean.
Mortgage securities, CDO, default swaps, and synthetic derivatives - every topic is well explained. So is the underlying message that the crisis - unlike the Great Depression - was one of capital and not liquidity. The biggest takeaway however is that there is no such thing called a self-regulating, safe and rational market. In that sense, the book is not really a statement on the end of Wall Street as such, but a more measured viewpoint that the old ways of working at Wall Street are coming to an end.
Roger Lowenstein deserves kudos for taking a complex topic and peeling it layer by layer for all of us to see - and comprehend. If a fast-paced account on the last few months of the crisis in 2008 is what you are after, you are better off with Too Big to Fail (reviewed here). But if you really want to understand how the house of cards was built, The End of Wall Street is the right choice.
I am rating it 5 stars!!!
I am rating it 5 stars!!!