Funny Money
Of the four financial market books under review here, the one to go long on, as the security traders say, is “F.I.A.S.C.O.” This is a book that should be getting considerably more attention than it has gotten to date. In a society transfixed by and dependent on the movement of the markets, you fail to read “F.I.A.S.C.O.” at your peril.
Frank Partnoy has stocked his work with a nice sampling of the brawling obscene quotas and frothy-mouthed maniacs who have become standard in Wall Street books since the publication of Michael Lewis’ entertaining “Liar’s Poker.” Indeed, the title of Partnoy’s book, which is chiefly devoted to the quasi-criminal goings-on at Morgan Stanley, doesn’t refer to some great financial mess-ups but to the initials of the Fixed Income Annual Sporting Clays Outing, an event at which a gang of happy rogues from the company get snockered on alcohol and their egos as they blast away at clay pigeons with their 12-gauge shotguns. It’s a harmless day in the country, and from reading this book, one gets the sense that it may be the only activity at Morgan Stanley which is.
“F.I.A.S.C.O.’s” merrymakers are the men and women who trade in derivatives at the investment bank, which has epitomized white shoe probity and propriety for most of this century. If Partnoy has it anywhere close to being right, you may substitute “probity” with “piracy.”
Partnoy, a professor of law at the University of San Diego with additional degrees in economics and mathematics, probably does have it right. He worked at Morgan Stanley, inventing derivatives and selling them out of the New York headquarters and in Tokyo. Moreover, Partnoy has the skill to explain financial exotica so that a reader with none of his brains or training can understand what’s being said without needing Tylenol. Even for those only mildly interested in finance, there is reason to read “F.I.A.S.C.O.” The annual trade in derivatives is estimated to be $55 trillion, or “double the value of all U.S. stocks and more than 10 times the entire U.S. national debt.”
As the ratepayers of Orange County learned to their chagrin, losing at the game of derivatives doesn’t affect only the high rollers of finance. Often to their regret, San Diego and San Bernardino counties and the California Public Employees Retirement System have played the derivatives game, as have Proctor & Gamble, Dell Computers and Mead Corp. Gains and losses affect pensions, taxes, dividends, lay-offs and hirings.
Partnoy explains that one form of derivatives, called equity swaps, is used by many companies and very rich individuals to avoid paying capital gains tax, or any tax for that matter, on profits from the sale of securities. Hence, Partnoy writes, “There was no longer any need for wealthy shareholders to lobby politicians to repeal the capital gains tax; for a few, investment banks offered a top-secret individualized do-it-yourself capital gains tax repeal. In recent years, the capital gains taxes from wealthy individuals in the U.S. have been close to zero, in large part because of Equity Swaps.” (It makes one wonder why the Republicans keep up their incessant hullabaloo on the subject, unless it is to keep people from learning about what is actually going on.)
Unlike the easily recognized and understandable stocks and bonds, derivatives are financial instruments in which the word “derivative” never appears. Typically, they will have names like Dollarized Yield Curve Notes, Discrete Payoff Bull Notes, Constant Maturity Treasury Floaters, Prime-LIBOR (London Interbank Offering Rate, if that helps), Floating Rate Notes, Oil Linked Notes, Real Return Bond Strips and hundreds more. Few of them are exactly alike, so that you cannot assume that if you understand Constant Maturity Treasury Floaters you will have any idea how a Brady Income Government Security works.
Without the training of a Partnoy and the correct statistical model on your computer, it is impossible to understand what these various instruments are worth, how much risk they entail or how much they may yield day to day or week to week. Partnoy writes that they are frequently designed to obfuscate, confuse and conceal. Sometimes it is Morgan Stanley and/or its competitors who invent derivatives that, he says, are put together so that the people buying them really don’t know what they’re buying. Sometimes they are designed to conceal information from regulatory authorities, creditors or shareholders. These insecurities are often so complicated that the rating agencies can’t penetrate their contents.
“[The Orange County bankruptcy] filing made the rating agencies look like fools,” Partnoy writes. “Just a few months before [the bankruptcy], in August 1994, Moody’s Investor Service had given Orange County a rating of Aa1, the highest rating of any California county. A cover memo to the rating letter stated, ‘Well done, Orange County.’ Now, on Dec. 7, an embarrassed Moody’s declared Orange County’s bonds to be ‘junk’--and Moody’s was regarded as the most sophisticated ratings agency.”
Partnoy accuses Morgan Stanley of using derivatives to collude with Japanese companies to, in effect, doctor their books and hide their loses. In light of what has been happening to business in the Far East these last months, this is not a private act of betrayal affecting a few greedy businessmen. The possible ramifications of these transactions can be almost global.
He writes that Morgan Stanley was meticulous in staying within what it construed to be the letter of the law; “nevertheless, these deals involved plain deceit by the Japanese investors, and if Morgan Stanley ever ends up in court on these deals, disclaimer letters not withstanding, it may find its ass badly exposed.” Partnoy refers here to gigantic deals--in one of which Morgan Stanley pocketed $74.6 million for what he takes to be about two weeks’ work by a handful of people.
Taken together, the major points in this book are grounds for some sleepless nights. If Partnoy is correct, some Americans and American firms are partially responsible for that lack of transparency in Japanese and other financial markets, which American officials are saying played a large role in the mess over there. (Although Partnoy was middling high up at the bank, the names of Morgan Stanley’s Japanese customers were not revealed to him.) He lays out a picture of a multitrillion-dollar industry, touching on the fate and future of all of us, that is shot full of chicane, deception and fraud.
To cap it off, he tells us that this daily dishonesty is being perpetrated not by flitting fly-by-night, marginal bucket shop operators but by the creme de la creme of Wall Street--Morgan Stanley, Merrill Lynch and the rest of the platinum names we have been taught to honor.
Because Partnoy writes with authority and lucidity and because of the gravity of what he’s saying, a reader wishes his book were more detailed. Moreover, his conclusion is disappointingly meager: “What lessons did I draw from my experience selling derivatives? I believe derivatives are the most recent example of a basic theme in the history of finance: Wall Street bilks Main Street.”
Paul Stiles’ “Riding the Bull” has a lot more human interest in it but a lot less meat. Why it has less meat is revealed in its subtitle, “My Year In the Madness At Merrill Lynch.” When Stiles went to Merrill Lynch, he had absolutely no experience in the securities industry. He didn’t know diddly from squat, so his book is more or less a diary of a confused, overwhelmed man who becomes so morally repulsed at what is going on around him that he can’t think, only react.
Stiles paints, using a novelistic style, pictures of the demonic bond traders at their phones and consoles. All fine and good but hardly original and not enough to overcome the author’s paucity of knowledge. His work pales in comparison to a novel like Theodore Dreiser’s “The Financier.” In addition to its having the characters and plot that “Riding the Bull” lacks, Dreiser’s knowledge of the securities business gives his work a detailed authority Stiles doesn’t have.
When one puts this well-intentioned book down, one is left with a thrice-told tale of a young couple who go to New York to make their fortune and, instead, get turned into moral hamburgers. At the end, they pack their bags and leave town, sadder but not especially wiser.
In contrast to Stiles, Roy R. Neuberger knows all there is to know about Wall Street. He’s made enough money there, but he tells us nothing. His business career has been vastly successful. He established an important brokerage firm that bears his name. Outside of stocks and bonds, he has devoted a lot of his money to collecting art, practically all of which he has given away.
His account of the world of Wall Street is devoid of interesting or useful information. There is no analysis worthy of the word. Either he’s holding out on us or, at nearly 100 years of age, Neuberger is beyond that sort of thing. He includes his 10 rules for successful investing, however, which are the sort of flabby prescriptions for health, wealth and happiness you can read in any issue of Money magazine. One is also constrained to add that, though Neuberger is doubtless a fine, generous, family loving gentleman and an admirable philanthropist, his book seldom rises above the level of the vanity press.
The last book on our list was written not by a successful money man but by a newspaper man. “Where the Money Grows” is also the slightest of the four. It is a reprint of a few thumbnail sketches, written a century ago, of Wall Street archetypes. The reader is invited to cogitate on how little things have changed, but Garet Garrett’s style is annoyingly vague. His mildly sardonic and slightly haughty approach to his subject was a popular literary and journalistic pose then, but it tastes like powdered milk today. Readers who want that sort of thing may do better to consult “Men and Mysteries of Wall Street” by James K. Medbery, published in 1870.
Never before has the immediate financial health of the hard-working, middle-class family been held hostage to the ups and downs of Wall Street as it is now. Americans’ total investment in mutuals has hit $3.4 trillion. Thirty-seven million families, or 67 million individuals, own shares in mutual funds. Not in 1987, nor ‘57, nor ‘29, nor ‘07--at no time in the past have the middle classes been exposed to the kind of wipeout they face now if a financial avalanche should roll down the mountainside. The book we need the most, the authoritative, readable book on the financial markets and their connection with society, politics and the future of our democracy, remains to be written.
