Why He Left Goldman

It was the culture, he contends

Recall about a year ago. It was the op-ed piece heard all around the business world, when Goldman Sachs vice president Greg Smith dared to announce his resignation on the pages of the New York Times. After an 11-year stint in its institutional sales unit, Smith announced he had had enough and it was time to depart. He decided to share publicly why his disappointments in the business culture led to his decision to leave a fairly lucrative position.

(See  CFN: Goldman Sachs and the Letter, Mar-2012)

At the time of his departure, Smith was head of U.S. Equity Derivatives in Goldman's London office. (In London, he was an "executive director," which at Goldman was equivalent to a U.S. "vice president.") He had progressed swiftly through the ranks and was highly regarded for his expertise in markets, clients and derivatives in his special perch. By most accounts, he was not a difficult employee and colleague. He had made meaningful contributions in many ways--building a new business in Europe, preparing  market insight in the form of frequent, written commentary to Goldman salesmen around the world, and agreeing to transfer to the London office, when he didn't want to.

The revered culture of clients coming first had evolved, he said, at Goldman in ways he felt uncomfortable. The crisis was partly at fault.  Every partner, managing director, vice president, and associate, he observed, was out for him- or herself. Survival was the mission of the day.

It boiled down to this, he observed:  The trading culture had evolved into a massive mission of accumulating "GCs"--gross credits, sometimes at the expense of doing the right thing for the client.  The value of the employee to the firm was determined by the total amount of GCs he or she accumulated during the year.

Mindful of this, the employee overlooks teamwork, partnership, and support for other colleagues and focuses singularly on maximizing GCs and, therefore, the year-end bonus, even if it means swiping GCs rudely and unfairly from colleagues or being willing to unload "toxic waste" securities onto unsuspecting or unknowing clients. 

So after he had his apocalyptic moment (on a business trip to Southeast Asia while Goldman executives had been summoned to a Congressional hearing), he decided to quit. As many expected, after the  op-ed blast in the Times, Smith went into hiding. He emerged from a  self-imposed rest when he published a book last fall to recount his experiences at Goldman and explain his well-publicized departure more thoroughly.  The book, Why I Left Goldman, received lukewarm reviews.  Reviewers and industry-insiders, and perhaps Government regulators, were looking for something more, perhaps a hint of scandal, a more detailed account of mishaps and fraudulent business practice. He presented none of that.

The book is similar to other detailed accounts of a young banker or trader's venture onto Wall Street. They are views from the ground up, from the trenches, from entry-level positions as the novice tries to adapt to the ways of a zoo-like trading room.  Smith's book reminds us Michael Lewis' Liar's Poker."

Smith is fresh out of Stanford and thrust onto a derivatives-sales desk.  Lewis had just graduated from Princeton and encountered the bowels of Salomon Brothers' legendary trading floor and lived to write one of the most spectacular, humorous accounts of Wall Street ever.  Smith's book is also similar to a lesser known, recent book, A Colossal Failure of Common Sense, by Lawrence McDonald of Lehman, an up-and-coming fixed-income trader, who viewed his last days at Lehman, not with sarcasm and humor, but with anger and humiliation.

Notwithstanding the so-so response to a book we knew he would write, for the newly minted MBAs, those who contemplate career paths in sales & trading at major banks, those who are considering institutional sales, the book has its strengths. It is an invaluable introduction to the trading floor, describing the environment, work pace, client groups, and specific roles.  Institutional sales will have an important role at big banks, as regulation prohibits much of proprietary trading.

Reform and new rules, whenever they are finally implemented in full, will permit the big banks (from Goldman Sachs to Bank of America and Citigroup) to engage in trading on behalf of clients, not necessarily on behalf of themselves.  Proprietary trading is being eased out of existence. Trading for clients will be permissible.  (Trying to distinguish between the two will sometimes be a nightmare for banks and regulators.)

Some will argue that as technology advances and clients get more comfortable with it, electronic trading and execution will replace sales professionals.  But as the book shows, sales professionals will be necessary to bring clients on board, help them with best execution, guide them through rough markets, and present new trading ideas.

Thus, the book provides a day-to-day overview of institutional sales and explains a conventional career path from analyst to managing director.  It describes the structure of a sales & trading organization, the management, and the relationship among sales professionals, traders, researchers, and floor brokers. It shows how the firm generates revenues from trades, the more difficult or exotic trades generating the largest commissions or mark-ups.

The book is a reflection on firm culture from the vantage point of the trading floor. Firm culture is important, but what is more critical is how the culture penetrates all activity, roles, relationships and transactions in the firm. Smith, in the book, contemplates firm-wide goals vs. personal goals, how the two intersect, but how they sometimes collide. And he shows how bad, selfish personal goals can be inferred from vague firm-wide goals.

Especially in the wake of the financial crisis, he highlights how personal goals sometimes became a higher priority than firm goals. In a vivid, poignant scene in the days after the collapse of Lehman Brothers as markets nose-dived, Smith watches a senior managing director on the trading floor glued in a silent trance to the computer screen, studying his personal portfolio of assets, having no care in the world with what was going on elsewhere with his clients or with Goldman.

Thirdly, Smith demonstrates the impact of corporate politics on a personal's career success. He had learned quickly, perhaps in his first few weeks, that success at Goldman or at any large financial institution would not be a result of effort, hard work, and time commitment. To get promoted to vice president or managing director, to have the opportunity to work abroad (in London, in his case), or to transition into a different role all required special networking skills. He would either have to learn those skills or rely on buddies, mentors or managers to guide him.

In his case, Smith wasn't a schmoozer. He was, however, fortunate to have advocates nearby on the trading floor, champions on his behalf, people who liked him and were willing to grant a favor or speak up on his behalf.  Generating "GCs" (or client-related revenues) could lead to a big bonus, but finding someone to spread the word about him could lead to a promotion. Over time, he learned to win favors in bars, accompany managers on business trips and bachelor parties, attend social functions and farewell receptions, and even allow clients to look good in parlor ping-pong games.

Diversity. Smith's book hardly touches the subject.  He had the opportunity to address it, because he describes himself as an outsider trying to find his way within a powerhouse firm. (He is a foreigner who grew up in South Africa before coming to the U.S. to go to college.)  He might have been so consumed by his frustration with how he perceived Goldman had evolved that there was much he couldn't get to. (For example, he barely discusses other parts of Goldman, including its investment-banking machine or its sectors in asset management, private equity or private banking.)

It appears, nonetheless, that women in sales & trading have had scattered chances to reach the highest rungs.  A handful of his bosses or senior colleagues, over the decade, are women. And he observes how they have had to evolve to survive or change to battle the machismo ways of trading-room trenches.

The fanfare around the op-ed piece book will likely fade into memory and become a mere, colorful chapter in the history of Goldman. Smith will likely move on beyond Wall Street. He learned a lot about global markets, clients, derivatives, financial products, exchanges, and business management. You can bet he has another book in mind. He highlights the foibles of certain banking cultures in this one. In the next, he'll probably present solutions.

Tracy Williams

See also:

CFN: How Does Goldman Do It? 2010
CFN:  Goldman Tweaks the Ladder, 2012
CFN:  The Role Goldman's Board, 2010
CFN:  Morgan Stanley Tries to Please Analysts, 2012
CFN:  The Volcker Rules, 2011

A Summer Reading List?

Summer reading lists.  Everybody tends to have a list of books they want to read, they need to read, or they prefer to read, when the days and weeks before Labor Day mean half-hearted attempts to focus on work or dreamy moments of a planned vacation.

In finance the past few years, there has been an explosion of published accounts of the financial crisis. Just when we think there is nothing else to report or analyze as it relates to the collapse of Lehman, Bear Stearns or AIG, out comes another 300-pager.

Then comes the summer of 2011. Just when we thought it might be safe to escape for vacation and tote copies of what's on our reading list (in duffel bags or imbedded in a Kindle), the circus of Washington becomes more frenzied. And the markets behave as if it's 2008 all over again.

A summer reading list at a time like this? With the daily chaos of global markets, political fisticuffs over sovereign debt levels, S&P punishing politicians and the U.S.'s lackluster recovery, will there even be time to go on vacation before fall arrives?

Is there any point to combing through an old analysis of the Madoff scandal, Goldman Sachs' "big short" on mortgage markets, or Countrywide's massive buildup of subprime assets when nobody knows what today's markets and business confidence will look like next week? When much of the industry had hoped to be gazing at the horizon from a vacation rental?

Still, prospective students in finance will ask what's appropriate to read as they prepare for business school or gear up for a tough semester of corporate finance 101.  MBA alumni and other experienced professionals wonder what they can read to catch up on current issues.

What can they read to "stay ahead in the game" or have an in-depth understanding of specific topics? What should they read to comprehend the controversy of derivatives, CDOs, and mortgage-backed securities? What should they read to figure out what happened at Madoff, AIG, Merrill, and Goldman? Why did some hedge funds prosper during the old crisis? Could Bear Stearns and Lehman have been rescued? With pending reform, what will banking and finance look like in the next decade?

Publishing houses have flooded the book-reading public with new takes and versions on what happened in 2007-09. There are numerous viewpoints, analyses, and updated summaries of events. In the latest round, William Cohan follows his thorough accounting of the fall of Bear Stearns ("House of Cards") with a new book on Goldman Sachs, a book project he likely had in mind for years. But he might have updated his approach when Goldman suddenly became a symbolic punching bag as industry recovered from mishaps of the 2000s. 

Cohan's "House of Cards" was an excellent, day-by-day account of Bear Stearns' fall and explained better than others how lack of funding, liquidity and perhaps wisdom and morals caused the firm to sink.  His understanding of investment-bank operations, people, deals and history would make the new book "How Goldman Sachs Came to Rule the World" required reading.  Goldman, of course, doesn't rule the world, even if it tried to, but Cohan provides a solid accounting of how a top firm manages to remain perennially profitable.

Last year, Suzanne McGee hopped on the Goldman story-telling bandwagon with her book "Chasing Goldman Sachs." She argues the crisis of 2008-09 is partly due to other firms and funds trying to "be like Goldman." Everybody wants to achieve similar returns and approach businesses and markets in the way Goldman does. And they think they can do so--whether or not they have the capital or people.

In doing so, we got the near collapse of the financial system in 2008.  Her book, however, offers pages of solutions.  She suggests an overhaul of investment banking and recommends the industry be operated as a public utility if it doesn't learn to manage risks. McGee knows she won't win fans in the industry with this idea, but hints this may be inevitable if more crises ensue.

Joe Nocera, a New York Times op-ed columnist, teamed with Bethany McLean to write the consummate book on how mortgage markets spurred the crisis:  "All the Devils Are Here." They write fascinating accounts, for example, on the internal failings and politics at Countrywide, at Washington Mutual, at Merrill Lynch (before BoA acquired it), and among regulators.  They spare readers some of the technicals. Instead they present the drama of bankers and mortgage brokers hustling to become rich from originating and selling subprime loans.

For just one summer, the list is almost too much to choose from.  Gretchen Morgenson, a Times business columnist, and Joshua Resner paired up to pinpoint leaders who were responsible for the troubles at Fannie Mae and Freddie Mac in "Reckless Endangerment."   Times business columnist Diana Henriques offers her account of the Bernard Madoff scandal in "Wizard of Lies."  She was the first journalist to interview Madoff in prison. Roddy Boyd, not from the New York Times, jumped in to tell the tale of what happened at AIG, or more notably how its derivatives-trading unit contributed to the mortgage mess: "Fatal Risk."

One new book sought to explain the mechanics and virtues of high-frequency trading, although nobody has yet written the book on last May's "flash crash," a subject that might be too cumbersome for a general reading audience.

Even with the cascade of books, nobody has sufficiently tackled the pressing issue of how banks will evolve and be profitable in the face of new regulation and reform.  Many argue that greater amounts of capital help banks survive or withstand tough times.  But not many have figured out ways for banks to achieve reasonable returns, when more capital will be required.  Banks themselves are struggling to figure this out.

And nobody dared to touch the impact of the crisis and subsequent upheaval on diversity? Have the events the past few years discouraged those from under-represented groups from becoming traders, bankers, investors and researchers? Why does it seem as if there are fewer women and people of color in top levels in financial institutions?  Do banks, insurance companies, and hedge funds care as much? 

For now, for this late-summer period of stomach-churning volatility, most will agree on one thing: Not many right now will want to read a book about bipartisan quarrels and political jockeying occurring on Capitol Hill.

Tracy Williams

The Quants: In Search of the "Truth"

The Quants, the new book by Wall Street Journal reporter Scott Patterson, comes amidst the barrage of books attempting to dissect the crisis. Patterson focuses partial blame on a cadre of hedge-fund managers, Ph.d. types who over the past two decades developed well-known quantitative-trading methods.

They happen also to frequent the same social circles, distract each other by playing each other in high-stakes poker matches, and grew up and learned quantitative finance from some of the same professors and mentors.

Patterson provides a soft argument that these groups of traders (mathematical and computer experts with degrees in finance, economics or even physics) helped contribute to the financial crisis. He doesn't, however, provide a detailed proof--the kind that they (the Quants themselves) would appreciate if presented with polished, mathematical logic.

So don't read this book if you wish to (a) learn as much as possible about quantitative trading methods, (b) understand the direct links between some well-known finance theory (efficient markets, Black-Scholes options models, etc.) actual market behavior and (c) tap into the trading models and secrets that helped many of them make whopping amounts of money before the crisis.

The book is not a how-to or a thorough analysis of how exquisite financial models went awry. But the book is not necessarily a waste of time.

It's more a dissection of the cast of characters who were significant trading participants during the market collapse in 2008-09. It's almost up to the reader to determine whether the "characters" contributed to the collapse, took advantage of the collapse, or were victims of their own forms of market trading, trading based not on gut hunches and hubris, but on models, theories and black boxes. Patterson refers often to the models' recurring search for the "truth" in how markets are supposed to behave.

Hence, Patterson summarizes a few of the theories behind the models without scaring off the non-MBA or non-Ph.d. reader. He pays more attention to the hedge-fund traders' emotional roller-coasters, their innate drive to get models to present the "truth" correctly, and their stubborn confidence and devotion to their black boxes. He also describes their boldness and courage to take risks, tack on leverage, and stick with their models even when markets tell them they might be wrong.

Among the countless hedge-fund managers and quant types on Wall Street or in Greenwich, Connecticut, Patterson focuses on a few: Notably, Peter Muller at Morgan Stanley, Ken Griffin at Citadel, Cliff Asness at AQR, and Boaz Weinstein at Deutsche Bank. He shows how they are connected in many ways. They meet up in the same Poker-playing circles. They had some of the same professors at University of Chicago. And they watch, study, and follow study each other and sometimes learn from others.

In the book, we see less about how Griffin at Citadel grew obnoxiously rich from trading convertible bonds, more about how he was a hot-tempered, demanding, sometimes near-abusive manager of a fund that went through a near meltdown during the crisis.

We see less about how Asness at AQR had been a master at statistical-arbitrage trading, more about how he suffered during the 2008 collapse, going through episodes of destroying desktop computers or isolating himself in his office trying to understand why markets didn't behave they way he said they should or would.

Thus, the book is more a summary of how primary players in hedge funds battled their way through the crisis. Years from now, the book won't stand out among the dozens of crisis tales recently published. It can be regarded as a chronicle of survival from the vantage point of a handful of highly regarded quants.

Tracy Williams

The Big Short: Sequel to Liar's Poker?

"The Big Short." The book by author Michael Lewis that has raced to the top of the New York Times best-selling list only a month after publication. The book many in finance are talking about over the last week. The book that has become a must-read after last week's Goldman Sachs allegations by the SEC--if only to understand better CDO's and CDS's tied to mortgage markets. Collateralized-debt obligations. Credit-default swaps linked to subprime loans.

Several weeks ago, when the financial press hinted at the new book, one had to wonder what else was there to say or write about regarding the financial crisis. What could possibly be Lewis' spin on the collapse of mortgage markets and the subprime debacle after a dozen or so books have already attempted to pontificate over what happened in 2006-08?

In his epilogue, he acknowledges he thought of doing a soft sequel to his best-selling book "Liar's Poker." That book chronicled his experiences as a junior bond trader at Salomon Brothers. It reached the top of best-selling lists, describing with candid humor the sometimes-vulgar, wealth-generating culture of trading bonds at a major investment firm. That book, at least among finance types, is regarded a classic. MBA students today, who were barely toddlers when it was published, still discuss it or put it on their summer reading lists.

This book, "The Book Short," is "Liar's Poker" with a 2010 twist. In the 1980's, Lewis was a player and participant. In 2010, Lewis is an outsider--older, distant, and more confident in his survey and assessment of what happened in the subprime debacle. Lewis' prior stint on Wall Street gives him an advantage to explain the daily pressures, grind and intoxication of profits in derivatives trading. He has authored many successful books (including "Blind Side" and "Moneyball"). This experience and special skill allow him to tell a polished story and keep his readers intrigued, no matter the subject--even if the subject is shorting markets via the credit-default swaps.

Lewis tells how a handful of traders and fund managers painstakingly made hundreds of millions by betting on the collapse of the subprime mortgage market. Did they have special insight? Did they do proper homework or analysis? Did it take a special, neurotic character to forecast doom? Or were they just plain lucky?

It was as if he picked up decades later where Liar's Poker ended and described a more advanced, more insane (to him) chapter in bond markets--CDO's and CDS's in subprime loans. Or get this: synthetic CDO's, based on counterparties taking different sides in a credit-default swap tied to subprime mezzanine bonds linked to subprime loans.

If that doesn't make sense immediately, then some second-year MBA finance courses can delineate it mathematically. Or you can read Lewis' book, a primer on CDO's and CDS--without the math, without the fragile, bewildering deal structures, and without the bell-shaped statistical curves. He describes CDO's as a multi-floor office tower, where the sludge was supposed to be in the basement--not on the middle and top floors (where it turned up). At his best, he describes the opaqueness and whims of the market, the day-to-day "marking to market," the collateral required to maintain positions, the ugly pricing disputes, the highly paid dealers, panicking investors, and the general empty feeling that nobody is overseeing it all.

If you want to understand thoroughly the Goldman Sachs Abacus transactions the SEC has targeted, read this book.

This sequel is not a reflection of a disenchanted twenty-something trader. It is the wisdom of an informed outsider who decided to take a peek at his old world. Sardonic, cynical, drawing humor from chaos. Lewis explores motivation by greed, but zooms in on most people's disregard of the possibility that the worst case can happen.

The actual story centers around three disillusioned investment groups who aspire to find a way to bet their convictions that the mortgage markets will collapse at some point in the future. Meanwhile, they watch their positions, suffer anxiety attacks, and fend off investors.

Lewis explains derivatives with parables and analogies and tries to show how personalities and behavior can move markets. He describes the market with a talent to amuse and make any CDS pricing dispute interesting.

With Goldman allegations under watch for the next several months, Lewis may need to add a chapter or two. He's doing so with regular appearances in the financial media to sell the book and to present the chapter he would have written.

Lewis says there will surface more CDO and CDS deals (subject to SEC investigation or presented to the public for similar scrutiny) that will get headlines or be subject to public backlash.

And he knows he'll need to add not one, but two or three more chapters in the book's inevitable second edition.

Tracy Williams

Hot Topics: Keeping Up, Catching Up

In financial circles, no matter the times--in periods of boom or the abyss of a crisis--hot issues and topics are constantly flung at us. Keeping up and catching up are always a challenge, since day-to-day routines command attention. Nonetheless, for students and experienced vice presidents alike, it's imperative to keep abreast if you want to shine among the pack.



For those who do banking, trading, investing, brokerage or analysis, hot topics of the moment can be complex, amusing, frustrating, or mind-boggling. Some topics (like impending financial regulation) linger for months. Some are hot one quarter and taken for granted the next (auto-industry restructure, e.g.). Some come and go (Lehman's collapse and the cause of it, TARP funding, capital adequacy of banks, e.g.).


What are some of the hot topics, hot buttons, or current issues for the moment? What are a few issues that cause a buzz just below the headlines that we ought to be familiar with?


1. Networking Etiquette. Disgusted with how he observed people networking in business circles, Black Enterprise magazine president Earl (Butch) Graves, Jr. wrote in his monthly letter to readerss about networking etiquette in its latest issue (http://www.blackenterprise.com/). He says too many professionals practice what he called "drive-by networking," where in business or social settings, they introduce themselves, shake hands, slap a business card in his palm, and then move on. After such a swift "drive-by," he asks himself what he should do with the card; he mentioned how some men have approached him similarly while he's in the men's room.


Graves says too often when people attempt to "network" with him, they fail to follow up or don't follow up courteously or promptly. He says, too, that many professionals haven't learned how to maintain relationships outside the networking conferences they attend, nor do they see opportunities to network in certain social settings. In the issue, Graves makes suggestions on how people can be more effective, less callous, and perhaps more diplomatic the next time he's in a men's room.


2. On the Shelves. The flurry of books that try to chronicle or summarize lessons learned from the financial crisis continues. The latest flood includes "Too Big to Fail" (by New York Times writer Andrew Sorkin), "The Big Short" (from Michael Lewis, best known for "Liar's Poker" and "Blind Side"), "On the Brink" (by former Treasury Secretary Henry Paulson), "The Quants" (by Wall Street Journal reporter Scott Patterson). There are even more.


"Too Big to Fail" was published last fall, while the other books entered the marketplace within the past month. Lewis' book (featured also on CBS-TV's "Sixty Minutes") is already a New York Times best-seller, while Paulson's book will likely follow behind.


Many in financial circles are talking about the books. Some are actually reading them. Some deal-doers, bankers, traders, analysts, and researchers are probably sneaking peaks to see if they are mentioned, to see how colleagues or senior managers are portrayed, or to see if the authors were able to "get it right" in explaining the hodge-podge of CDO's, CMO's, CDS's, TARP, etc.


Sorkin's book "Too Big to Fail" is a long, day-by-day narrative of the events of late 2008, focusing on the collapse of Lehman, while changing the scenario occasionally to describe what happened at AIG, Wachovia, and Merrill Lynch. He handles adroitly the minutiae and gory detail of withering financial institutions and tells the story as if it's novel of suspense, although we know the ending.


What fascinates is not necessarily his command of all facets of the crisis, but his insider's knowledge of what happened behind closed doors, on cell-phone conversations, in car rides on FDR Drive, or on a walk over to the Federal Reserve building. How was that possible? And who are his sources? Once you get beyond that, it's an quick read of decision-making inside the doors.


If you examine the large cast of "characters"--Paulson, Geithner, Lewis, Barnanke, Willumstad, Mack, Kindler, Braunstein, and dozens of others--you notice that while the financial system was on the brink of collapse, few making decisions behind those doors were people of color or women. (Stan O'Neal from Merrill, Erin Callan of Lehman, and the FDIC's Sheila Bair have minor "roles" in the book).

3. Goldman and Greece. For many days in February, markets, market-watchers and analysts studied and reported on the debt crisis in Greece. Markets reacted and then bounced back when the rest of Europe promised to assist Greece.

Amidst the chaos, Goldman Sachs climbed into headlines after it was learned that the investment bank had advised the country on certain "currency swaps" that permitted Greece to borrow funds, but not report the transactions as debt. Once again, all eyes were on Goldman and many peer firms to determine whether the firm had intentionally (and illegally) helped its sovereign client to hide debt from outsiders. Yet the events forced finance types to revert back to texts to figure out how currency swaps can be funding transactions, to find out what the accounting rules permit, and to detect if these activities were properly described as off-balance-sheet activities in footnotes.

In recent weeks, in finance circles, fury around the topic has dwindled, partly because market-watchers have focused more carefully on Greece's plan to emerge from the crisis, the impact on other countries, and possible assistance by others in the European Union.

The topic has also receded partly because of the hot topic below.

4. Lehman and Repo 105. All across the globe, finance people learned from a bankruptcy investigative team that Lehman Brothers might have been hiding liabilities from its balance sheet. In the year or so below its collapse, the firm needed to show it was well capitalized, had ample cash to manage daily operations, and was not excessively leveraged.

It wanted to prove to creditors, counterparties and investors that it had a sturdy balance sheet. The team found out--to everybody's surprise--Lehman had engaged in transactions it called "Repo 105." This accounting maneuver permitted it to erase substantial amounts of assets and liabilities and show, therefore, lower leverage and a healthier balance sheet.

The transactions were typical broker/dealer "repo" loans ("repurchase agreements"). Financial institutions routinely borrow short-term funds in "repo" markets and pledge marketable securities as collateral. Lehman decided to interpret accounting rules to its favor by using "Repo 105" to avoid showing the borrowings on its balance sheet.

Accounting rules, in fact, permit some repo transactions to go off balance sheet. With the issue now a hot topic, many are asking questions; investors, counterparties, and creditors are considering taking action (whatever that could be toward a company in bankruptcy): Did others do the same thing? Did Lehman intentionally mislead outsiders? Is its accounting firm (Ernst & Young) responsible in any way? Who know what when at Lehman? (Lehman used "Repo 105" in the U.K., but not in the U.S.)

The topic, hot right now, will stay warm over the next few months, as investigators, counterparties, and investors figure out what is permissible, what is illegal and who is responsible.

5. Volcker Rule. A year later, after initial proposals by the Obama administration, financial institutions, markets and the public at large still await the impact of new financial regulation.

In one corner of Washington, an inquiry panel was formed to dissect the crisis, determine its specific causes and make recommendations in the way a team did so decades ago after the Great Depression. (Consortium alumnus Desi Duncker has been hired to work on the panel. The Dartmouth graduate previously worked at the Goldman Sachs and the U.S. Treasury.)

In other corners, the administration prepares to unveil details of regulation we've expected for some time. This includes the so-called Volcker Rule. The rule, still under review and contemplation, would prohibit deposit-taking insitutions from engaging in certain proprietary-trading, hedge-fund and private-equity activities--similar to the way banking had been before laws changed in the late 1990's to permit commercial banks and investment banks to do some of what the other does (trading, lending, underwriting, deposit-taking, etc.).

The rule, most say, will have most impact on firms such as Goldman Sachs and Morgan Stanley, who in 2008 became bank-holding companies (regulated by the Federal Reserve) and who, if the rule becomes law, may decide in the months ahead to revert back to becoming securities holding companies (under the auspices of the SEC).

____________

It's late March now. Some of the above will continue to be hot items, the stuff which finance people in interviews, in boardrooms, in client meetings, in corporate presentations, in social settings, and in finance blogs are bantering about. By June, some of the topics will fade, as new issues will take a seat at the front, and where it's expected that everybody will need to be up to date on, if not an expert in.

Tracy Williams






























Financial Regulation, Volcker rules

Summer Reading Lists

Anxiety still clouds the finance world. Few will say they have time to focus on the recently published tales that try to explain the causes of the crisis or dramatize the behind-the-scenes sequences of the implosion of Bear Stearns, Lehman, and AIG. But a handful of titles are making their way up best-selling lists or are being discussed or whispered about.

Consider adding them to your summer reading list. Or at least be familiar with them. That might make a difference in network circles, in the last round of an interview, or in impressing a senior colleague. They all help you understand how it was possible a collapse of mortgage markets led to a near depression in the economy.

Some might say it's too early to assess what happened. Others might contend it's best to tell (and sell) the stories when they are fresh. Most of the accounts are readable--free of arcane jargon, worthy of praise in their efforts to explain the alphabet soup of mortgages, derivatives and securitization (ABS, ABCP, CDO, CDS, etc.).

The best of the lot is House of Cards (by ex-banker William Cohan), which presents a riveting tale of Bear Stearns' history and its sudden downfall. Lack of capital and liquidity issues explain its demise. But Cohan will convince you that selfishness, greed, and short-sightedness among its top leaders in its last years (led by Jimmy Cayne) is just as much the blame.

The book chronicles well the day-to-day problems Bear had in funding itself in its last days, as a literal run-on-the-bank sacked it. Yet Cohan shocks you with tales of petty bickering and undercutting among senior managers. Building a well-capitalized, durable (and diverse) firm was less an objective; a mad, ugly scramble each year to grab multi-million-dollar bonuses was the primary, unspoken goal.



Fool's Gold (by journalist Gillian Tett) focuses on the evolution and astounding growth of credit-default-swaps (CDS), spurred by the inovation from a JPMorgan team in the early 1990's. CDS, she hints, might have ultimately led to the crisis. Tett goes inside to tell how CDS derivatives were nurtured, expanded, and then exploded.
Oddly, the book avoids the technical aspects of CDS (very little about settlement processes and mark-to-market accounting or how dealers make money trading them). And it strains to explain how CDS could be a direct cause of the current crisis.
Nonetheless, it tells a spellbinding story of the people who gathered to brainstorm and had a dream of financial innovation and credit derivatives.
The House of Dimon (by Patricia Crisafulli), a third book, is informative, but reads like a press release from the subject's publicist. A biography of JPMorgan Chase CEO Jamie Dimon. Sometimes it reads like a b-school case.



His up-and-down-and-up story about his climb to CEO has been told often. The book re-tells the story with more detail about his early years and his role as Sandy Weill's protege'/sidekick. You see how career decisions he made right after b-school influence how he got to the top of JPMorgan today. You see how his experiences at Commercial Credit and Primerica prepared him to be the shrewd businessman who happens to run a bank.
The book at times is unbalanced. The author is careful not to be too critical of Dimon's known brash style or any past failings, and she didn't give sufficient time to his detractors or other insiders.

These are all first drafts of history. Now we await to see how the same events will be described in b-school finance texts.

• Tracy Williams