Books

In the New Yorker, John Lanchester writes of books on the world of high finance. (“Outsmarted”) – he brings in “Fool’s Gold” by Gillian Tett, a book on my must-read list.

 

Lanchester writes on the history of the Credit Default Swap:

The Boca Raton meeting first bore fruit when Exxon needed to open a line of credit to cover potential damages of five billion dollars resulting from the 1989 Exxon Valdez oil spill. J. P. Morgan was reluctant to turn down Exxon, which was an old client, but the deal would tie up a lot of reserve cash to provide for the risk of the loans going bad. The so-called Basel rules, named for the town in Switzerland where they were formulated, required that the banks hold eight per cent of their capital in reserve against the risk of outstanding loans. That limited the amount of lending bankers could do, the amount of risk they could take on, and therefore the amount of profit they could make. But, if the risk of the loans could be sold, it logically followed that the loans were now risk-free; and, if that were the case, what would have been the reserve cash could now be freely loaned out. No need to suck up useful capital.

In late 1994, Blythe Masters, a member of the J. P. Morgan swaps team, pitched the idea of selling the credit risk to the European Bank of Reconstruction and Development. So, if Exxon defaulted, the E.B.R.D. would be on the hook for it—and, in return for taking on the risk, would receive a fee from J. P. Morgan. Exxon would get its credit line, and J. P. Morgan would get to honor its client relationship but also to keep its credit lines intact for sexier activities. The deal was so new that it didn’t even have a name: eventually, the one settled on was “credit-default swap.”

The book seems to contain more – about CDOs, swaps and all sorts of innovative weapons that made the world suddenly dependant on Wall Street.

My friend Amit Varma has released his first book, My Friend Sancho. The Delhi launch is on Wednesday and I shall go.

I've read a tiny part of it, and liked what I read. I'm a sucker for fiction and Amit writes well, so this one's going to be bought and hopefully signed by the author as well. If you're wondering why I'm posting this to an investing blog, this signed book could well prove to be my best investment. (And he's the 49th "most powerful Indian"!)

My potentially biased recommendation is to please buy the book. More details after the book is launched and read by yours truly.

I just read "If God was a Banker" by Ravi Subramanian. It's an easy-read kind of story of a bank, called "New York International Bank", and the tale of two people who eventually became the Country heads of the bank for retail banking. One, Sandeep Srivastava, a person who would do a lot of things that would benefit his career - even if it hit below the belt. The other guy, Swami, a nice tam-brahm who was extremely virtuous, by the look of it, and got stuff done the "right" way.

The writing is horrendous - the lack of punctuation apart, sometimes it leaves you completely confused about time, with very few data points to pin point the year when an event occurred, or such. Some parts of the book are confusing - I remember well about a Gujju, Ram Naresh, speaking in pukka Punjabi in Calcutta, which I had to turn back pages to confirm. There is a lot of talk about sex - how SS would use his personal assistants, or how the Gujju/Punjabi in Cal supplied good looking women to people in the bank for favours. Unfortunately the author uses a lot of bad language where it is not necessary, and balks from expanding into some where he should.

There is a far more vitriolic comment from Aadisht - he feels lousy that such a product should emerge from someone with an MBA, which therefore vilifies all MBAs. I don't quite agree - when someone asks me where I did my MBA from, I usually reply: "I'm not an MBA. I became an asshole all by myself."

But I digress.

The reason, I think, for the anachronicity (if there is such a word) and the lack of detail is that this is an account of a series of events that actually occured, suitably fictionalized. It seems, from the comments on Aadisht's posts and my knowledge, that nearly all characters were drawn from real people. And if you put too much detail, it doesn't go too well with the people concerned.

So it looks like New York International bank is Citibank. Sundeep I think is based on Sarvesh Swarup, the (ex?) Citibank retail head, UK, whose colourful life has probably been rendered even more so by this book. (Stories in organisations are always about who's sleeping with who, and some stories are grossly exaggerated) Swami is likely to be based on P.S. Jayakumar who was the Country manager for Citi India. "Aditya Rao" - the "god" who was a saviour to them all types - sounds dangerously like Jerry Rao of Mphasis.

The storyline is only interesting for those who're in for some extremely light reading. For those of you who are interested in some really good, well researched, nicely written books on real events: Here's a few:

• A Conspiracy of Fools by Kurt Eichenwald. On the Enron crisis - fantastic book, even has details of how the whole thing happened down to emails, individual excesses and so on.
• Confessions of a Wall Street Analyst by Dan Reinhold. About the stuff that happened with Worldcom, Bernie Ebbers, Jack Grubman. One sided, but fascinating.
• Bull! From Boom to Bust, by Maggie Mahar. Interesting, well researched book on the stuff that happened from 82-99, but tends to be over-conclusive at times.
• What goes up by Eric Weiner. Fantastic book of only quotes - all the way back to the great depression.
• Liar's Poker by Michael Lewis: The rise and fall of Salomon Brothers/Michael Milken.
• The Scam by Sucheta Dalal - about our own two crises, 1992 and 2001. I actually know some of the people written in this book, so it's all the more fascinating for me.

Back to Ravi Subramanian's book. Well, it's only 195 rupees, so it won't be a drain on your pocket...but if you don't know anything about banking or have not lived through the "Citibank years" in India, you may not find it remotely fascinating. Still, the fellow has sold some 20K copies - according to his comments in Aadisht's blog (which I found were in poor taste, but they may not be him). Which is a gross earning of Rs. 40 lakhs - so after paying margins (50% for most books!) and costs and all that he will probably end up getting a few lakhs. That's not much reward - but then there's not much of a story in there either so perhaps not too much effort either. Isn't it sad that Indian authors don't earn a killing by just writing? And 20K would qualify you as a "bestseller"?

Maggie Mahar talks about the last big bull run in the US and how it dramatically ended. It's interesting because I like to see where we are - are we in the beginning, the middle or the very end? Or are we in a bear market?

The answers may not lie in there, but it's important to note that the equity culture in the US revived in the early 80s, and by the mid 80s it had really started to move. This is where hedge funds started to come in big time as well. I think that's where we are - looking at the lack of massive local institutions (pension funds and other funds in the US are simply huge), the lack of high quality hedge or risk funds, the unorganised analyst camp and overall, the liquidity issues in the futures and options market.

Intermediate blips aside, we are probably headed for the best, and then the worst, that our investors will ever see.

I'll write more about Maggie's book as I go along.