I’m not sure if providing the source or inspiration of every book does add any useful information to the book review. But it helps me keep track of which recommendations work and which don’t. In the past, there have been some recommendations that have proven to be very wrong. These include recommendations by one of the richest men in the world today, and by one who is a maverick entrepreneur in multiple industries. But I guess no matter what the source, it’s a hit or a miss considering the sheer number of books available in the market today.
I picked up this particular book as a recommendation from one of the leading portfolio managers in India today, Raamdeo Agarwal. He heads Motilal Oswal, and I came across this book in one of his interviews.
This book closely mirrors another book that I’ve read recently – Makers and Takers. Both the books are about the same topic – the rise of finance as an industry from a supporting sector to businesses and entrepreneurs to an end-in-itself. The book traces the birth of modern finance during the 1960s when the Eurodollar market was set up as a “work-around” to the strict Regulation Q that limited the amount that American banks could give out as interest. The author talks about the early days of banking, when it was considered as a stewardship of people’s savings. Now a majority of the revenue for banks comes from trading and investment. The dropping of the Glass-Steagal Act in 1999 only served to hasten up the inevitable crash that would happen some ten years down the line, when financial institutions were up to their neck in exotic and complicated derivative instruments that ultimately resulted in the sub-prime crash.
Modern Finance is no doubt very complex, but it is ironic that this complexity was once considered as its strength. This, by no less than the doyens in the Finance field, names such as Alan Greenspan and Tim Geithner. The part about the Jackson Hole conference, where Raghuram Rajan made a fervent plea to check the excesses committed by the financial sector. Of course, he was ignored.
The excesses went on unabated and it caused the government to bail out these too-big-to-fail institutions by using tax payer money. And what’s worse, many of the executives of these financial institutions went home scot-free. After all, the financial sector does not have the same accountability that other sectors, such as airplane manufacturers may have in case of a major goof up from their side.
The book argues that part of the strong interconnectedness between the financial sector and the government is that many government officers have transitioned into high-level private sector jobs, and also the other way round. Robert Rubin, who served as the Secretary of the Treasury during Clinton’s term, was a Co-Chairman at Goldman Sachs.
The book concludes by setting out the urgent need for reform in the financial sector. The different aims of a commercial bank and an investment bank should be recognized and followed diligently. Firms that sell extremely risky or complicated products to the general public should be allowed to fail if the need arises. After all, most of the money in the financial system today is “other people’s money”. For example, “in a modern institution such as Deutsche Bank, around 3 percent of the capital at risk is the bank’s own: the other 97 per cent belongs to lenders and depositors”. Making managers more accountable, like in other industries, for their decisions will help straighten out the creases as well.
All in all, this is a good book for someone wanting to learn more about how the finance sector has changed over the years. We can already attribute at least one crisis due to this changing nature of Finance. And in absence of major reforms, there certainly will be more. As I’ve mentioned earlier in my review, the book touches the same topic as one other book that I’ve recently read. You can choose either one of these books as both provide a similar if not the same perspective towards financialization. Check out Other People’s Money here or Makers and Takers (and my review) on Amazon.