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Fool's Gold

How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe

Gillian Tett

Free Press, 2009

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This ranks as one of the most thorough, accessible explanations of how the global financial system nearly disintegrated during the great financial crisis that broke in 2008. Gillian Tett traces the development of credit derivatives from their inception at an alcohol-fueled Boca Raton corporate retreat in the early 1990s. She shows how the pioneers struggled with risk management, turning down business that other financial institutions with less regard to risk sought eagerly. She elucidates the building and breaking of the wave of institutional crises – Bear Stearns, Lehman, AIG – during 2007 and 2008, and takes readers inside tense meetings between bankers and regulators at the New York Federal Reserve and the U.S. Treasury. This is capital financial journalism, which getAbstract highly recommends to any reader who hopes to get a better understanding of the forces at work in the financial crisis.

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Hatching the Idea

Pinpointing where and when credit derivatives were born is difficult, but a 1994 party for J.P. Morgan bankers at Florida’s Boca Raton Hotel could claim that distinction. Between pranks and drinking games, the young, aggressive financiers considered new ways to profit from derivatives, which are essentially wagers on future values. Users often regard them as insurance. For example, a company may expect to receive income in foreign currency, but it pays vendors in its domestic currency. Currency markets fluctuate continuously, so how can the company make sure the foreign currency it gets will cover its obligations? The company can use a derivative to ensure that the foreign currency coming in tomorrow, next month or next year will be worth at least as much as it is today in domestic currency. The many kinds of derivatives share one trait: their value and risk depend on changes in some other asset price, like an interest rate or credit rating.

By 1994, the global interest rate and currency derivatives market already had grown to $12 trillion in volume. In its early days, during the 1980s, bankers earned rich fees on relatively simple derivatives. Yet...

About the Author

Gillian Tett, Ph.D., runs global coverage for the Financial Times. She was named British Business Journalist of the Year in 2008 for her coverage of the financial crisis.

Fool's Gold

How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe

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