Lowenstein’s ‘End’ Whets Appetite for More

Friday, June 11, 2010

BOOK REVIEW

As Roger Lowenstein says, the “end” in his latest book’s title, The End of Wall Street, means the repudiation and cessation of Wall Street’s last, big phase. Consider it an evolutionary step that didn’t quite work out as planned.

Roger is a skilled researcher, interviewer and reporter And he has a good knowledge of Wall Street, investments, financial workings and what makes Wall Streeters tick.

Thorough, well organized and readable

His book is a succinct, well ordered examination of what happened, who did what, how those in charge reacted, and why events unfolded as they did. His source material is extensive: 180 personal interviews combined with in-depth research (he lists almost 500 references).

In spite of cast of characters exceeding 100, multiple organizations, a chess match of actions involving “creative” securities, Lowenstein does a masterful job of giving us a highly readable, flowing narrative. We see and learn painlessly (well, not so painlessly regarding the actual events).

Action is in context

Importantly, Lowenstein doesn’t just throw us into the turmoil. From the Introduction and Prologue through Chapter 5, he sets the stage, providing a needed understanding of important trends, beliefs, people and organizations.

The real action then takes over. You know you’re in for it when you read, “The early stages of an investment bubble are patient and pleasant,” as the lead-in to a chapter named, “Desperate Surge.”

As we know, the early stages of a trend reversal tend to be met with calm and expectations of the old trend resuming. Lowenstein provides the right pacing as the speed of deterioration picks up, finally becoming desperate and dire, as company survival becomes questionable and the financial system malfunctions.

The Climax

Chapter 18, “Reluctant Socialist,” describes October 2008’s hectic, desperate events and actions. Lowenstein moves us through the daily worsening of the financial markets to the crucial Monday, October 14, meeting between Paulson and the heads of the nine largest US banks. Paulson told them that the US Treasury would be investing $125 billion in the banks. All bank heads agreed “voluntarily.” As Lowenstein says (page 271),

“In other words, the United States was rescuing both Wall Street and the banking system. It was the greatest intervention in the financial system in seventy years, and perhaps ever, enacted under a conservative president, a Treasury secretary who hailed from Goldman Sachs, and a Fed chief reared on the virtues of financial models and the supposed perfectibility of the market.”

Lowenstein immediately follows this with an explanation showing why the rescue was especially noteworthy – and why, after the financial system recovered, the rescue would be galling to many observers and investors.

“The markets, or the capitalists who plied it, were indeed smart, but they were not perfect. They had thought of clever ways to reengineer securities; they had stripped balance sheets of their assets and mortgage banks of their mortgages. They had invented derivatives that let banks flip risks like baseball cards; they had lent long and borrowed short. They had overleveraged and, while their profits rolled, they had paid themselves astronomical and often shameful sums. They had invented mortgage products designed to circumvent the banking wisdom of the ages, and they had peddled these mortgages with a willful disregard, bordering on fraud, for whether their customers could repay them. They had bullied the Congress and their regulators into ignoring all this, or into accepting their methods and their models. Clever as they were, the capitalists had forgotten one thing. Capitalism requires capital. No amount of leverage, not even record quantities of liquidity from the Federal Reserve, can obviate this need.”

Aftermath

Chapters 19 (“Great Recession”) and 20 (“The End of Wall Street”) are the weakest part of the book – not because they are poorly researched or written, but because they are subjects still in the making. It will take a historian writing some years from now to put this episode in perspective and judge the effectiveness of the actions taken.

Conclusion: Perhaps not the end

Roger Lowenstein, in interviews (see links below), has stated that the “end” in his title meant the passing of the flawed beliefs upon which the bubbled was based. From that standpoint, Wall Street moves on, once again evolving into the next “modern” form.

Interviews- Important Companions to Lowenstein’s book

The following interviews with Lowenstein are valuable. They provide added insights and understanding of his thinking and conclusions.

CNBC – “Wall Street Exposed” (Squawk Box, April 6 – the day the book was released for sale)

CBS News/Business – “Roger (Lowenstein) And Me: Roots Of The Financial Crisis” (Jill Schlesinger, April 28)

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