Crash Course

We should have known after the economists Fisher Black and Myron Scholes,almost forgotten now. We should also have known after the collapse of Long-Term Capital Management in 1998. At least,the American Nouriel Roubini has known. But “it (Wall Street) wasn’t doing its best to ferret out hidden warning signs. Instead,it seemed to be relying exclusively on a handful of quantitative risk-management models to save the financial system from disaster”. The problem is that,no matter how low the probability,the probability of collapse is zero and this is akin to Nicholas Taleb’s Black Swan proposition. This incendiary concoction makes for a compelling account and in tracing the origins,McGee tells a good story,though not a pretty one. Unfortunately,the style is too journalist. The book meanders through three parts and nine chapters. Of these,the first two parts are on the antecedents,while the last is on the new face of Wall Street,the future,so to speak.

There is a conscious attempt to make the story anecdotal and personal. So when an actual person cannot be quoted,a fictitious name is given to him or her. On the face of it,the seven chapters in the first two parts have a thematic division. But it doesn’t work that well and the book could have done with better structure and greater logical continuity. And one becomes increasingly sceptical about whether this factionalising and personalising is a good artifice,as opposed to a clear and coherent account. What works for a newspaper story doesn’t necessarily work for a book. But the stuff is all there.

From there,we move on to the future. How do we get Wall Street back to its core objective,if at all? The global financial crisis was a window of opportunity for reform,unless one believes in the Marxian maxim that capitalism will occasionally go through crises and there is little one can do about it. That’s not quite the negative message this volume has in mind. The subtitle is “How the Masters of the Universe Melted Wall Street Down… And Why They’ll Take Us to the Brink Again.” Unless,there is reform. Moving away from the book,while the future of the global economy is uncertain,Wall Street has revived and it is back to business as usual,the status quo ante. In that sense,aided by publicly funded bailouts,the trigger for reform has vanished. In any event,it was never quite clear what one meant by reform.

Arguments for regulation are fine. But the key is regulatory content. It is one thing to say investment banking should be de-linked from commercial banking or that there should be norms for leverage ratios. It is a completely different thing to say that there should be ceilings on remuneration or norms for the behaviour of credit-rating agencies. Because of this lack of clarity,the window has passed. That’s not the McGee thesis though.

She begins with the Obama proposals of more oversight powers to the Federal Reserve,monitoring of financial products like mortgages and restrictions on proprietary trade with the own capital of banks,stretching even to restrictions on compensation. Approving the thrust of these,the author adds,“the threat of market discipline in the shape of bankruptcy”. Yes,indeed. Very few people have approved of the publicly funded bailouts,but one understands the reasons why they were introduced.

However,beyond this,the argument in the book is really a moral one and as with Wall Street,there is a big difference between ex ante and ex post. “Ultimately,we will get the Wall Street that we deserve.” That’s the last sentence in the book and at one level,it is the most profound. As an interesting nugget,one of these Wall Street firms helped Greece window-dress its debt,preparatory to joining EU. There is a mine of nodes and nuggets in this volume,but it requires patience to read.