Posts filed under “Books”

Misunderstanding Financial Crisis: Why We Don’t See Them Coming

In his new book MISUNDERSTANDING FINANCIAL CRISES: Why We Don’t See Them Coming, Gary Gorton explores how the economic “Quiet Period” from 1934-2007 left economists fundamentally unprepared for the financial collapse that was to come.

Gorton offers a back-to-basics overview of financial crises, showing they are not rare events caused by a perfect storm of unconnected factors.  Rather, he argues that financial crises are due to an inherent feature of market economies: the vulnerability of short-term bank debt.  He explains that the most recent crisis revealed this vulnerability, but this time, unlike in the Great Depression, the debt was in the wholesale banking market.  Regulations that prevented crises since 1934 did not keep up with the innovation in the financial sector, due largely to misunderstandings on behalf of economists.

A clear account of the intricacies of the financial market, MISUNDERSTANDING FINANCIAL CRISES provides an authoritative challenge to prominent schools of thought within economics in order to offer a better way for economists to think about markets and regulation necessary to address the threat of future financial disasters.

Misunderstanding Financial Crisis
Why We Don’t See Them Coming
By Gary B. Gorton

(Oxford | Nov. 1st | Hardcover | 296 pages | $29.95 | ISBN: 9780199922901)

Advanced Praise:

“The book offers essential insights into the mysteries of the recent financial crisis. Gorton has the rare depth of understanding to explain the elements and similarities of a wide array of historical crises. Fascinating reading.”
—Robert J. Shiller, Arthur M. Okun Professor of Economics, Yale University, author of Irrational Exuberance and Finance and the Good Society

“Professor Gorton has produced an excellent, readable and incisive account of the recent financial crisis in historical perspective. We, as economists, have an obligation to understand our own profession’s failings in the policy framework leading up to the financial crisis. Gorton shows us that blind faith in mathematical models of idealized economies can lead to blind spots in regulators’ view of economic reality. This phenomenon had disastrous consequences during the 2008-2009 financial crisis, as intricately documented in this book. The book presents important lessons for how financial regulatory reform should be designed and implemented in the future. In addition, it provides a cautionary tale for economists to rethink their approach to policy advice more generally.”
—Justin Yifu Lin, Chief Economist and Sr. Vice President, World Bank

“Financial Crises have been a feature global finance for centuries, but economists and other analysts still struggle with the subject. If anything, since the events of 2007-2009 and the more recent crisis in Europe our fears have only grown larger. In this timely new book Gary Gorton reviews history, theory and evidence concerning financial crises, their causes and possible research and policy responses. It is at the same time very thorough and very interesting, and will no doubt appeal to academics and practitioners.”
—Arminio Fraga Neto, former President, Central Bank of Brazil, Founder, Gavea Investimentos

Praise for Slapped By the Invisible Hand:

“To understand the actual moment and mechanism of crisis, the definitive take is Yale economist Gary Gorton’s, in the delightfully titled Slapped by the Invisible Hand. Gorton’s is a challenging book for a non-finance type, but there is no better technical explanation of the panic.”

“Slapped by the Invisible Hand tells us that there were bank panics—systemic crises—in 1873, 1884, 1890, 1893, 1896, 1907, and 1914. On the other hand, there were no systemic crises from 1934 to 2007. The problem, as Gorton makes clear, is that the Quiet Period reflected a combination of deposit insurance and strong regulation-undermined by the rise of shadow banking. So we have a choice: restore effective regulation or go back to the bad old days.”
-Paul Krugman, New York Times “Conscience of a Liberal”

“It’s must-reading for anyone who wants to understand the recent economic unpleasantness.”
-Matthew Yglesias, Think Progress

“Slapped by the Invisible Hand is essential to understanding the deep weakness in the banking sector that led to the financial crisis. Like consumer banks before the Great Depression, the ‘shadow banking market’ is vulnerable to runs and panics and hysteria, and we are all, in turn, vulnerable to it. By looking beyond this financial crisis to the systemic flaws that make us vulnerable to all sorts of crises, Gary Gorton has created a necessary guidebook for what’s happened, and what needs to be done.”
-Ezra Klein, Washington Post

About the Author:
Gary B. Gorton is the Frederick Frank Class of 1954 Professor of Finance at the Yale School of Management. He is the author of Slapped by the Invisible Hand: The Panic of 2007.

Category: Books

Books Bought By Big Picture Readers (September 2012)

Click to enlarge: Once again, its time to peruse the data to see which books TBP readers bought last month. Amazon’s embed code lets me track every click from these links — how many people look at the page, how many books get seen, and/or collectively purchased. Its anonymous — I don’t know who bought…Read More

Category: Books, Consumer Spending

Review: Bull by the Horns by Sheila Bair

Book Review:  Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself. By Sheila Bair Free Press (2012), 415pgs   “Bull by the Horns” is a really excellent book. Former FDIC Chairman Sheila Bair accurately describes the conflicted world of bank regulation in our democracy. Her well-written narrative…Read More

Category: Bailouts, Books, Regulation

Scott Patterson’s Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System is as insider view of the world of Algos, HFT, and software driven markets. Patterson does a great job of taking a dark, highly complex subject as the basis for a compelling, character driven narrative. The book reveals the historical evolution of High-Speed Traders, making it easy to understand how the modern stock market is what it is today. Patterson also explains the dangerous microstructure of modern markets, how they are increasingly subject to “flash crashes” disruptions, and volatility.

Dark Pools is an up close account of the global stock market’s subterranean battles and the rise of the “bots” — artificially intelligent systems that execute trades in milliseconds and use the cover of darkness to out-maneuver the humans who’ve created them. It is a fascinating story of how global markets have been hijacked by trading robots – many so self-directed that humans can’t predict what they’ll do next. And it shows how the new players moving into artificial intelligence are on the verge of tipping the entire system toward a global meltdown that could happen in minutes – maybe even seconds.

I loved Scott Patterson’s first book, The Quants. Patterson will be speaking at TBP conference next month.


“Scott Patterson’s Dark Pools is about the most important financial issue no one talks about—how high-frequency traders have rigged the market.” –Mark Cuban

“Remarkable…even long-time participants in electronic markets will learn a lot from this book.” –Forbes

“Richly reported…an invaluable piece of timely journalism that should be read by regulators and anyone with a cent in the stock market…You will never look at the opening bell in the same way.” –FT

“An engaging narrative…DARK POOLS is easily the most entertaining and accessible book to cover the new world of stock trading.” –Fortune

“An entertaining account of the key battles in the “algo wars” and the colorful math geeks who fight them—some of whom are now fighting to rein in the monsters they created. Dark Pools is an alarming account.” –Canadian Business

Scott Patterson is a staff reporter at the Wall Street Journal, covering government regulation from the nation’s capital.

Full chapter after the jump.


Read More

Category: Books, Trading

Oliver Sacks on Hallucinations, Drugs

Via The New Yorker, Oliver Sacks new book is called Hallucinations:     Out Loud: Drugs and Oliver Sacks

Category: Books, Psychology

Books Bought By Big Picture Readers (August 2012)

Click to enlarge: Once again, its time to peruse the data to see which books TBP readers bought last month. Amazon’s embed code lets me track every click from these links — how many people look at the page, how many books get seen, and/or collectively purchased. Its anonymous — I don’t know who bought…Read More

Category: Books, Consumer Spending

The Romney Files: From Bain to Boston to White House Bid

Wall Street Journal writer Brett Arends takes a closer look at the Massachusetts Governor and Bain Capital CEO in his new ebook: The Romney Files: From Bain to Boston to the White House Bid.

Note: This was just published on August 5, 2012.

In addition to his work at WSJ and Smart Money, Arends is also the author of Storm Proof Your Money: Weather Any Economy, Rebuild Your Portfolio, Protect Your Future.

Excerpt follows:


* * *


“If there is one thing everyone seems to agree on, it’s that Bain Capital under Mitt Romney was one of the most amazingly profitable and successful investment companies in history. Romney was “a brilliant businessman,” according to the New York Times’ David Brooks. He was “coolly brilliant,” agreed his biographers, Kranish and Helman.

How brilliant?  Published reports cite fantastic performance figures. Some media reports say the firm earned “50% to 80% a year” for investors over fifteen years. The Real Romney cites reports that put the figure even higher, at an incredible 88% a year. The American Enterprise Institute think-tank in Washington, D.C., went even further than that. In a glowing profile of Mitt Romney published in its magazine, The American, in 2006, it claimed: “During the 14 years Romney headed Bain Capital, the firm’s average annual internal rate of return on realized investments was a staggering 113 percent.” The magazine added: “At that growth rate, a hypothetical $1,000 investment would grow to $39.6 million before fees. Few, if any, VC firms have ever matched Bain Capital’s performance under Mitt Romney.”

These are amazing numbers.

Alas, they are too amazing.

My job involves writing a lot about superstar investment managers. I’ve met many over the years. I view them like chess grandmasters – rare, fascinating geniuses. But I had never heard of a manager, or a firm, producing returns of 88% a year – let alone 113% – over fourteen or fifteen years. Not even in a boom. I decided to do a little digging.

The first thing to know about private equity is that the industry operates behind closed doors. Private equity firms don’t comment on their investment returns in public. Academic researchers have to sign the most stringent anti-disclosure forms in order to get access to data. “Private equity funds,” warns the Harvard Business School overview of its own course on the subject, “jealously guard their privacy.” Brian Cheffins and John Armour, two experts at Cambridge University, say that “privacy has been a hallmark of private equity,” and add that big firms like Bain Capital operate “as secretive partnerships.”

The best overall account of Bain Capital’s performance under Mitt Romney is a prospectus produced in 2000 by Deutsche Bank as it sought to raise money for a new fund. This is  the main source relied on by the Wall Street Journal, the Los Angeles Times, the Boston Globe, and other publications. It’s the one cited by the Romney campaign itself when discussing his record.

It tells a story. And one of the first things I noticed was that a few things didn’t add up. For example, the prospectus showed that Bain Capital’s clients invested about $900 million during Romney’s fifteen year tenure. The firm made investment gains of about $2.4 billion.

Yet if you invested $900 million in steady amounts over fifteen years and earned “80%” a year, by the end you would have about $900 billion. If you earned “113%” a year, you would end up with about $9 trillion – or nearly three quarters of the size of the U.S. economy’s annual output. Such are the miracles of compound interest. Bain Capital is a wealthy company. But if it now owned three quarters of the nation’s annual economic output, I think we might have heard.

Professor Ludovic Phalippou at Oxford University’s business school, a leading expert on private equity, has a simple verdict for some of the sky-high figures being bandied about. They are, he says, “absurd.”

“These returns…are vastly overstated,” he told me. “The ‘star’ returns are overstated, sometimes to absurd magnitudes like in the case of the 80% of Bain.” Such numbers, he said, bear little relation to what investors actually earned.

Why? Put simply, there are lots of ways of calculating annual rates of return for an investment fund. Should you use a geometric average or an arithmetic one? Time-weighted rates of return, or dollar-weighted? Should you calculate your returns based on all the money committed to the funds, or just the money actually invested? Should you use simple returns, or annualized ones? Gross or net? Private equity managers and Wall Street bankers, for obvious reasons, tend to prefer numbers that make them look best.

To take one example: In 1996 Bain Capital bought Experian for about $80 million and then sold it for about $250 million. To you or me this would count as a 200% gain: Bain Capital trebled its money. But according to the 2000 prospectus issued by Deutsche Bank, this deal is described as having an “implied annualized internal rate of return” of “6,636%.” The reason? The deal went through in seven weeks. On an annualized basis, it’s amazing. But that’s only relevant to investors if Bain Capital were able to come up with a string of identical deals for a full year.

Read More

Category: Books

Books Bought By Big Picture Readers (July 2012)

Click to enlarge: Once again, its time to peruse the data to see which books TBP readers bought last month. Amazon’s embed code lets me track every click from these links — how many people look at the page, how many books get seen, and/or collectively purchased. Its anonymous — I don’t know who bought…Read More

Category: Books, Consumer Spending

10 Behavioral Economics/Psychology Books for Investors

As a species, we are notoriously bad at understanding our own thinking and emotions. We are even worse at predicting our own behavior. Understanding your own mind and those of your fellow investors is crucial to successful investing. These books will go a long way to helping you understand your hardwired weaknesses and blind spots….Read More

Category: Books

Wait: The Art and Science of Delay

Frank Partnoy’s Wait: The Art and Science of Delay has been described as “counterintuitive and insightful.”

The book weaves together a fascinating series of research findings and scientific studies in the fields of cognitive science, bio-mechanics, and psychology to create this fascinating book.

In a world that is too impatient for even instant gratification, Partnoy paints a very different picture of optimizing  decision-making that runs counter to the usual go-go-go approach. Think of Wait as an effective bit of counter-programming to Malcolm Gladwell’s overrated Blink.

Using varied time frames — milliseconds to years — Partnoy describes how to take advantage of controlling your response times to obtain better results.

Its fascinating stuff — I am only a third of the way through, but felt compelled to post this because how much I am enjoying it.

Selected reviews are below, and a section of the book is after the jump.



Roger Lowenstein, author of When Genius Failed and The End of Wall Street
“Having mined the best of American research in fields as wide-ranging as finance, behavioral economics, and law, Frank Partnoy has written a beguilingly readable treatise that boils down to a single, easily digestible conclusion: in our busy modern lives, most of us react too quickly. Wait will naturally and rightly be compared to Daniel Kahneman’s Thinking, Fast and Slow as a trail-blazing book exploring the hidden crannies and the treacherous pitfalls of human decision-making. I whole-heartedly recommend it.”

Bethany McLean, co-author of The Smartest Guys in the Room and All the Devils Are Here
Wait is one of those rare books that will change not just the way you think, but the way you act. The book is full of ideas that are fascinating, useful—and at times mind-blowing. I was captivated.”

Daniel H. Pink, author of Drive and A Whole New Mind
“Frank Partnoy turns conventional wisdom on its head with this counterintuitive approach to decision-making. Rather than telling us how to make decisions faster and faster, he mines and refines a rich lode of information from experts in a surprising variety of fields to demonstrate the power of delay, whether measured in milliseconds, days, or decades. Wait is a great read, chock full of fascinating insights.”

Margaret Heffernan, CBS Money Watch
“Marvelous … Wait is an impassioned and thought-provoking book.”

Christopher Chabris, Wall Street Journal
“Mr. Partnoy’s intention in Wait is to take on those who evangelize the power of thinking quickly, ‘getting things done’ and leading an organized life. We can praise efficiency but fail to take note of what is sacrificed in its name. Wait offers a valuable counterweight to this attitude, reminding us that quality should matter as much as speed.”

“Mr Partnoy argues that too many people fail to recognize what good public speakers and comedians all understand: that success depends on knowing when to delay, and for how long.”

Financial Times
“A superior example of the genre. It is a departure from his earlier books about financial crises, but written with the same easy elegance. … Partnoy makes mincemeat of the idea of ‘thin slicing’ – the art of making snap decisions based on very little information – that was made so popular by Malcolm Gladwell in Blink. … As a collection of fascinating case studies, Wait is a gem.”
Winnipeg Free Press
“While the breadth and the depth of his research gives the book’s rather straightforward message its complexity and rhetorical power, the book’s charm comes from Partnoy’s ability to juggle such seemingly disparate topics as, on the one hand, an engaging discussion of recent science on animals and their conceptualization of future time and, on the other hand, an unabashedly doting analysis of the comic timing of Jon Stewart.”


Read More

Category: Books, Psychology