Fools’ Gold

Howard Davies reviews Gillian Tett’s book on the banking catastrophe in today’s Financial Times. Excerpt:

The thesis of Fool’s Gold is that a small group of clever quants at JPMorgan invented credit derivatives, all those dangerous acronymic creatures – CDOs, CLOs and the like – that we have come to know as the crisis has evolved. But it was other, greater fools, in other banks, who misunderstood and misused them.


She introduces us to the individuals who made it all happen: Bill Winters, Peter Hancock and Bill Demchak in the US, Blythe Masters and Tim Frost in London. Winters and Masters are still with the bank; the others have moved on. Masters is still the high priestess of securitisation as chair of New York’s Securities Industry and Financial Markets Association, though when she speaks in public these days, notes Tett, “in deference to the dark mood of the times, she wears a sombre, chocolate-brown suit, instead of her usual jewel-toned hues”. Such subtle semiotics are not available to men – it’s not fair. Frost emerges as a kind of Macavity the mystery cat: now a firework inventor, now a trader, then creatively salvaging a structured investment vehicle (SIV), and today an advisor on restructuring to the Bank of England.

The innovations that emerged from the fertile minds of this talented team were supposed to make the world safer. They allowed risks to be sliced and diced and spread around the globe, held by those best able to bear them. This narrative, assiduously promoted by the banks, was generally accepted by the financial authorities at the time. In its 2006 annual report, the International Monetary Fund (IMF) noted that: “The dispersion of credit risk by banks to a broader and more diverse set of investors … has helped to make the banking and overall financial system more resilient … improved resilience may be seen in fewer bank failures.”

But in the wrong hands these fireworks proved to be, well, explosive…