I've had a lot of time to kill over the last few days thanks to busy travel schedule made even busier by the volcano. We were due to fly from Vancouver at 4 on Thursday via the cheapo Canadian Affair (Thomas Cook airlines). The website kept saying the flight was due to leave for Gatwick at 7.15 PM, just 3 hours delayed. Several phone calls to their customer service claimed the same. This was despite everyone else in the entire world knowing that Gatwick was closed unlikely to open in time for us to land.
Shoddy customer service is par for the course in my experience with Canadian affair. With low expectations we arrived at the airport, walking past the closed BA desks to a small but confused mob of people at the Canadian affair desks.
One hapless chap was trying to tell us what was going on, not helped by the fact that not a single Canadian affair central office bod had deemed it useful to stay up late, so no-one at their end could be contacted.
The plan was to fly via Glasgow then a 12 hour coach ride down to London. People we confused as to why crappy little Thomas cook was flying and not BA etc. The captain was brought out to explain that Glasgow was open and the cloud had lifted over that airspace. We had been given one of the slots in the lottery.
Eventually we took off for Glasgow, but landed in Manchester with a mercifully shorter coach ride to London. We didn't realise just how lucky we were to make the wedding on Saturday until we saw the news in the UK and saw the full extent of the flight ban.
Anyhoo, on to the book review....
The delays over the weekend weren't too bad and with all the travel we've been doing, I've been able to finish off too very good books.
The first is Reckless: The Rise and Fall of the city by Phillip Augar. I was a big fan of his previous book - Merchants of Greed, written about the dangers of investment banking from a first hand perspective. It was very well researched and prescient given what was to come with the Credit Crunch.
Reckless (also released as Chasing Alpha), takes a wider look at the City of London and how it rose to prominence in the last couple of decades and the implications this had during the credit crunch. Augar takes a look at the political, regulatory and geographic factors that all contributed to the city's success. The FSA's light touch regulatory environment played a crucial role in ensuring business took place through London.
With the election debate raging in the UK, the political implications are fascinating. The book is apolitical, explaining how previous governments all played their part. The biggest blame has to go to the most recent labour govt though as the city boomed to dangerous levels under their watch. It seems the govt was too entranced by the money pouring into public coffers to dare question the risks that over reliance on this sector posed. Rather like the banks and hedgefunds themselves who were quite happy to dance until the music stopped.
I enjoyed the book and thought that the sections on regulation and the history of the city were particularly strong. Some sections were disappointing though with the section on Northern Rock revealing nothing more than has already been reported elsewhere.
I'd recommend it though particularly with the UK general election round the corner. This and the next book I'll be mentioning both give lie to Gordon Brown's claim that Britain has been an innocent victim of a US led global credit crunch.
Far from being an innocent victim, consider the following:
- 50% of the dangerous OTC derivative trades went through London thanks to the light touch regulation. The recent Goldman's headlines involve a trading working from a desk in London.
- The same regulation played a role in the collapse of Lehman brothers thanks to the use of their repo 105 accounting sleight of hand, made possible by lighter UK accounting rules.
- Many British traders were involved in the creation of the Credit Default Swap market as Gilliant Tett outlines in her book I review below.
- AIG Financial Products was the division of AIG responsible for the Lion's share of the firm's losses due to taking on CDS liabilities. This division based mainly in London.
With irony, I finished Gillian Tett's Fool's Gold, just as the news was breaking on the Goldman Sach's charges. The story chronicles the creation of Credit Default Swaps and other OTC derivatives by focusing on the small JP Morgan team responsible for their creation.
I was absolutely gripped by the narrative. Not only is the book well researched, it is a heck of a good read. We start with the tales of the close knit group excited by the financial game changer their created and move forward through the years as other banks latch on to the idea without fully understanding its implications.
The JPM team originally applied CDS to commercial loans but couldn't figure out a way to apply to mortgage securities due to lack of past data and concerns over correlation. Other banks quickly out paced JPM with their derivatives trades as they applied CDS to the one area JPM couldn't get to work - mortgages. Three times they tried to figure out what they were missing, what other banks had spotted that they couldn't and each time stepped back from the deals.
The truth was quite simple as the Goldman's case implies. Other (investment) banks either did know about the risks and pushed through deals anyway, or just didn't understand what they were buying and selling.
The are some incredible lessons to be learned for ones personal trading such as not trading markets, ideas or strategies you don't understand.
I found Fool's Gold to be absolutely fascinating and highly recommend it.