Epic Banking Fail

The library finally got Malkiel's latest edition of Random Walk Down Wall Street to me earlier today (it took an inordinately long time; something like two weeks to inprocess the book. Dunno what's typical, but I'd think on the order of a day).

I must admit, I ended up feeling good that I'd gotten the previous edition (due to buying it a couple of months before this edition came out). I didn't go through the whole book looking for updates, but I looked for something on the mortgage crisis/bubble (there, but short and not very thorough) and to see if anything was updated in the derivatives section (actually removed). The rest of the changes appeared to be minor updates.

The reason I felt like I knew enough about the mortgage crisis to be disappointed with the handling of it in Random Walk was that I recently read Michael Lewis' The Big Short.

It wasn't the first Lewis book I'd read. I read about Moneyball, when it came out, on a number of baseball blogs; several years later, I finally read it. And a friend gave me The Blind Side when it came out, which I read very shortly thereafter. I've also read some pieces he's written for Vanity Fair.

He's a very funny and insightful writer. His descriptions of Michael Oher playing high school football had me laughing out loud repeatedly. But what really struck me about The Big Short was how good his analogies were. They really helped to simplify a very complex process.

And that's what I mostly got out of the book, was seeing the financial legerdemain that tried to follow the Yellow Brick Road. And that gave a great deal of insight into what happened on the way to the Emerald City.

But another good part about the book was being introduced to many of the major players (the big winners, as well as some of the losers).

One way that the book fell short, for me, was that his overarching thesis was that the 80s investment bank milieu (which he wrote about in Liar's Poker) had never really ended until this all happened.

My problem with that is that I don't see how it's actually ended, except, perhaps, in a sense so narrow as to be useless. The narrow truth is that all the big investment banks ended up as depository banks, or bought by same, or went out of business.

But the problem comes in in seeing how that actually made them change how they operate. The people who caused the problems still ended up rich (as Lewis himself points out) as Midas. There's no evidence that Too Big To Fail will not be the case in a subsequent crisis (you know, privatized profits with socialized losses). The banker's bonus money still flows like a river in flood. In fact, with the banking "reform" bill eliminating "mark to market", it could be argued that things are even worse now, systemically.

Another minor problem (minor because I'm sure Lewis would argue that it was beyond the scope of what he was writing, and my only counterargument to that is how big a deal this is) is that he doesn't get into just how close this mess came to bringing down the entire banking system. According to what I've read lately, we were days away from not being able to get money from an ATM, because the banks wouldn't lend to each other. Yes, it was that bad.

But despite those two issues, I thought the book was fabulous. I really appreciated how he laid out the trickery (and treachery), that built the house of cards. Next up on my reading list (for financial matters, anyway), is Matt Taibbi's Griftopia. We'll see how that adds to my understanding.

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