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One Good Life: My Tips, My Wisdom, My Story fNow then let s not tell the boss about this This will just be our thing rightRight I have readour books recently on the credit crunch with the desire to understand better what went wrong why and who is to blame and to marshall my own arguments These books were Gillian Tett s Fools Gold Ha Joon Chang s 23 things they don t tell you about Capitalism Michael Lewis s The Big Short and this John Lanchester s Whoops Lanchester s is the best of this group I had been reading Lanchester in the London Review of Books in 2007 and 2008 when he wrote about the early stages of the credit crunch about CDO s and CDS s securitisation and the Ratings Agencies He is described by critics as a writer who has studied the subject in order to present a comprehensible overview of the crunch or the inancial novice But although he is not an economist or mathematician himself and has never worked as a trader unlike Lewis Lanchester presents a clear picture and has a grasp that differs rom the others He also unlike the others articulates the reasons why we should all be very angry indeed and ight to get redress and stop the bankers paying themselves obscene salaries and bonuses Tett largely avoids such conclusions probably because such a stance would conflict with her role as an independent inancial journalist So in a way it is Lanchester who speaks or the novice and or everyman but his is than eual to the other books It5 is a brilliant achievement and worth re reading and using as a reference I note that another reviewer says Lanchester makes some actual errors and would like to know what So ar I have seen no conflict with the acts in other books I ahve read on the subject As Natural Blonde for what is to be done I despair sometimes that the mass of people in the UK are ignorant of theorces that affect their lives and avoid learning about the causes of what will badly affect their own lives and the lives of their own offspring or years The writer Will Self in reviewing the book said he ound it hilarious Personally I did not ind the metaphors and analogies Lanchester uses that unny For me they get in the way However I can understand why he peppers the narrative with supposedly amusing phrases and analogies as the title Whoops itself indicates he is trying to communicate and popularise a subject to which novices are averse He wants to make what might otherwise appear to be a complex and impenetrable subject accessible to the lay person But he is by no means patronising so I make allowances Land of a Thousand Hills: My Life in Rwanda for it All together excellent He should write on the subject because this story isar rom over In act I think there is an insatiable demand among a reasonably large group or well written books on this subject at the moment and don t think that there has been a glut Far rom it I really enjoyed this book about the If My Love Were a Fire Truck: A Daddy's Love Song financial crisis by a UK novelist This isn t a typical journo tick tock hack jobs that are littering book store windows these days Mr Lanchester aancy pants writer who writes Write It When I'm Gone: Remarkable Off-The-Record Conversations with Gerald R. Ford for New York Review Of Books and London Review Of Books writes with humor and clarity two traits neededor a subject like thisThe book begins by putting the Ready for Summer financial crisis in historical context Mostinancial books take a Battlestar Galactica approach to crashes All this has happened before and all this will happen again The roots
of this crisis are traced back to the Cyberselfish A Critical Romp Through The Terribly Libertarian Culture Of High Tech fall of the crisis are traced back to theall of the Wall and of the Soviet Union in which communism is discredited as a viable economic model Capitalism now A coerência textual freedrom even having to pretend to make concessions to the socialists on the left begins a 20 year end zone victory danceA culture of douchebaggery as he calls it soon runs rampant in the Write Your Novel!: Tips from a Bestseller financial sector systematically bullying governments into repealing laws passed in the wake of the Depression and passing lawsorbidding regulation of newly invented Dogs Behaving Badly financial products Derivatives are used to amplify gains instead of hedge risks International borders become legal loopholesor large corporates to do what they want Risk is put in neat little "packages given ridiculous ratings by agencies and passed on to third partiesMr Lanchester compares the actions of the inancial industry "given ridiculous ratings by agencies and passed on to third partiesMr Lanchester compares the actions of the inancial industry the past ew decades to discovering that cameras used to detect speeders don t work if you drive ast enough and then using that knowledge to drive 70mph through residential streets Eventually someone bad is going to happenThere are some sections about Balti and Detroit and how a bunch of people lost their houses I m probably a jerk April 16th: Virginia Tech Remembers for saying this but Iind this to be the least interesting part of the book because I ve already heard this story a bunch of times in the NYT and in Michael Moore moviesThe book ends with a prediction of decades of unrest and even violence once society starts to absorb the cost of this crisis The author reminds us that the bill or all these bailouts won t be presented until we are safely out of the recession When the bill does come due there will be inflation and ewer jobs at least Mindful Living with Aspergers Syndrome fewer government jobs the tax base won t have enough left over to support the load of retirees infrastructure will be minimally maintained cats and dogs will be living together It will be chaos but I ll bet it will have a very interesting music sceneCanada is held up as an example showing that things didn t have to turn out this way That s good news because it s looking like I may want to move there in aew years. Ith the City 'Cityphilia' generated much response on its publication in January 2008 and indeed predicted a worldwide crash based on the misuse of inancial derivatives In October 2008 he charted the crisis as it had developed over the year in 'Cityphobia' which also attracted much attention as a piece that explained not only what had happened but how we elt about it John was raised in South East Asia and now lives in Lond. Me mortgages and what the bankers wanted was some way to use the magic of CDOs to turn them into safe bets And now we come to the piece of alling oam a part of the story that I previously hadn t heard at all Another very smart mathematician thought he d Space Kid found a solution using the so called Gaussian copulaunction Here it is the Circumstantial Evidence: Death, Life, and Justice in a Southern Town formula which nearly destroyed Western civilizationThe Gaussian copulaunction it was claimed did the magic trick and let bankers combine all those risky bets into sure ire propositions The credit rating agencies were so convinced that they gave the resulting CDOs triple A ratings they thought that they were as secure as US Government debt Alas it turned out that the mathematics wasn t as clear cut as the bankers had believed Well hardly anyone understood it and it had never been seriously tested Worse the CDOs had hidden the original debts so thoroughly that people buying them didn t actually know what they were based on And worst of all the bankers had somehow persuaded the US and British governments to deregulate the market in CDOs which by now was worth tens of trillions of dollars an amount comparable to the whole world s GNP Unrestricted trade in CDOs was legal but it obeyed the letter of the law while completely louting its spirit As Lanchester said it was rather like discovering that if you drove at than 70 in an area where the speed limit was 30 the speed cameras couldn t see you That s roughly what the bankers were doingWhen the US housing market went into a downturn the subprime loans started defaulting The Gaussian copula Every Drop for Sale: Our Desperate Battle Over Water functions didn t model this situation correctly because the statistics used to make the estimates were all very recent and camerom a rising market The sure Down We Go: Living Into the Wild Ways of Jesus fire bets weren t sureire at all and unrestricted trade in CDOs had spread these bad bets everywhere For a Reach for the Rainbow: Advanced Healing for Survivors of Sexual Abuse few days it seemed possible that the entire world banking system would collapse And what was it that made this whole absurd adventure possible in theirst place How could the CEOs of the large banks risk the Troubled Waters futures of their corporations and indeed their countries on a piece of untested mathematics that they didn t even understand Lanchester has two answers One is plain oldashioned greed They had a lot and they wanted and they didn t think that they personally were risking very much Indeed these people are still mostly in their jobs and the ones whose banks have collapsed have retired with at pensions They called it right The second answer was the aith many people had that markets were the correct answer to everything Markets were smarter than people and people shouldn t presume to try and control them But with the answers now in it seems that Adam Smith Milton Friedman and the rest of that crowd were wrong Markets aren t always smarter than peopleMy personal eeling is that the credit crunch concluded the story of the 20th century which was largely a demonstration of what happens when people believe in
things without adeuate grounds to support those beliefs An absolute belief in without adeuate grounds to support those beliefs An absolute belief in excellence of the ree market turned out to be not very much sensible than an absolute belief in the superiority of the Aryan race or an absolute belief in the dictatorship of the proletariat I m completely with Kurt VonnegutSay what you will about the sweet miracle of unuestioning aith I consider a capacity or it terrifying and absolutely vileHaving seen the above examples it would be nice to hope that people will be sceptical in uture But I wouldn t count on it I had very high expectations of this book and how could I not have given that both Manny and David were so ull of praise Owls: Birds of the Night for it The best thing about this site is that hearing praiserom certain people on certain topics can really mean the book is goi FROM DrManu KalaThe Head of File and Auditing Department BANK OF AFRICA BOA Ouagadougou Burkina Faso West Africa REMITTANCE OF US205 BILLION CONFIDENTIAL IS THE CASE VERY URGENT ATTENTION My dearest SirThis message might meet you in utmost surprise however it will be my Urgent need Bon Bon Voyage (A Carolyn Blue Culinary Mystery, fororeign partner that made me to contact you Bon Bon Voyage for this transaction I am banker by professionrom Burkina Faso in West Africa and currently holding the post of director Auditing and accounting unit of the bank This is major opportunity which riend have given to me your email so pardon or that I have the opportunity of transferring the left over Funds 205 billion of one of my bank clients who died Along with his entire amily in the plane crash All expenses incurred by you and me in this transaction will be deducted out rom the 10% of the total und before the sharing of the und according to the "Part Of The
Percentages Agreed Please I Agreed Please I the percentages agreed Please I you to understand that a stitch in time saves nine so write back and tell me This payment will be effected through Swift Telegraphic Transfer Your Urgent response is needed A Look Over My Shoulder: A Life in the Central Intelligence Agency for immediate transfer of thisund in to your receiving bank accountWith most deep wish or a speedy transaction enriching both partiesDr Manu kalaHey Carl look at this email I just got this sounds great We should do this This is just what Citibank needs It could really get us out of the hole we dug ourselves in Shit Dave this could save our asses 20 billion This guy is is just walking into our lives with his 20 billion and he s going to make everything good again Dr Manu Kala I love youHe don t know who he be dealing with brotherHe sure don Lanchester has mastered the iner points of inance so you don't have to In Whoops he explains in language everyone can understand what really happened and what on earth we do next About the Author John Lanchester is a journalist novelist and winner of the Whitbread First Novel Award He is a regular contributor to the London Review of Books and the New Yorker with a monthly column in Esuire John's piece on our love affair This brilliant scary little book is the irst account I ve seen of the credit crunch which truly made sense I read it in a day and if you re at all interested in politics economics or current affairs I can t recommend it too highly Lanchester is an acclaimed novelist which shows in the witty and stylish writing here he also proves that he s a great investigative journalist The credit crunch was a irst magnitude disaster and at several points I ound myself comparing Whoops to the magisterial report written after the Columbia Shuttle crash in 2003 The Columbia Investigation Board looked at the accident rom three perspectives First they had to determine the proximate cause of the accident in engineering terms what specific mechanical Old Yeller failure made the Shuttle break up over Texas and crash Second they wanted to know what went wrong at the managerial level how did this problem slip through the elaborate net of safety checks that preceded the launch Third and mostar reachingly they tried to understand the problem at the level of the whole NASA organizational ethos Why was management Flying by the Seat of My Pants: Flight Attendant Adventures on a Wing and a Prayer focussing on the wrong targets to the point where safety standards could erode and allow a catastrophe like this to happen As everyone now knows their answers were asollows The proximate cause of the accident was a piece of Lincoln: An Illustrated Biography fallingoam which cracked the On Being Human: Reflections on Life and Living front edge of the Shuttle s wing allowing incandescent gas to get into it on reentry and melt everything inside The managerial problem was in a nowamous phrase NASA s broken culture of safety Even when things had previously been considered dangerous a tendency developed to assume that they were in Frommers Irreverent Guide to Walt Disney World fact safe if they had been seen to occur before without an accident having happened Finally the Board concluded that NASA had lost its way No one knew any what they were trying to achieve and the artificial nature of their main goal to keep building the probably useless Space Station meant that senior managers were unable to prioritise sensiblySo back to the credit crunch The Western World s banksilled up with toxic debt and very nearly ell rom the skies Why And how I d heard many of the pieces before subprime mortgages CDOs deregulation excessive leveraging But I couldn t put it all together Some American and British banks had lent money to people who rather too often weren t capable of paying it back Was that such a bad mistake that it had the potential to break the whole world s inancial systems And if it was how could they have been so stupid as to allow it to happenHere s a pr cis of Lanchester s explanation I ll start as he does with the broken culture of safety You deposit your money in the bank and they lend it out at interest As long as they do this carefully and are sure enough of getting the money back they make money or you and money or themselves The bank s business is to manage the associated risk of not getting back the money that it s loaned out A crucial issue is leverage The bank would ideally like to lend out as much money as possible so that it can make as much profit as possible At the same time caution dictates that the bank shouldn t make bets that are too large because that increases the probability of something going wrong If too many people default on their loans the bank will run out of money The leverage is roughly the ratio between how much money the bank loans out and how much it s keeping to cover loans that default By 2008 British and US banks had a leverage of about 50 So they had to be very careful because if even a small proportion of their loans went sour they would be bankrupt Evidently they weren t sufficiently carefulWhy Well some very smart "People Had Recently Invented These Complex Financial "had recently invented these complex inancial called Collateralized Debt Obligations CDOs They let a bank package up a bunch of debt pull it apart into various pieces with different associated levels of risk and sell those pieces on to other banks The CDO was basically insurance on the debt The banks loved this idea because once they d turned their debts into CDOs and sold them to other people those debts weren t ormally counted as debts any They could still pick up interest on them but they were ree to loan out money and make larger profits Unfortunately the mathematics of CDOs is incredibly complex Even if you have a PhD in statistics you won t necessarily understand it very well I m pretty sure that the CEOs of these big banks who were making the key decisions didn t all have PhDs in statistics The banks loaned money to every home owner they could ind who might be considered a reasonable risk but they still wanted profits They started to wonder about the other people the ones who normally wouldn t be considered reasonable risks people with bad
credit histories or unsafe jobs or no jobs histories or unsafe jobs or no jobs all I had not previously come across the phrase ninja mortgage no income no job or assets Bankers astonishingly decided that they could sell ninja mortgages It was all a uestion of managing risk Suppose there was some mathematical way to combine a lot of risky propositions and turn them into a safe bet It s not as ar Mookie: Life, Baseball, and the '86 Mets fetched as it seems You d be insane to bet your life on the toss of a coin But suppose someone said that they dlip a coin 100 times If it came up heads at least ive times you d collect a million dollars but if there were 96 or tails you d die I d definitely consider this offerSo there were all these uncertain subpri. We are to use a technical economic term screwed The cowboy capitalists had a party with everyone's money and now we're all paying or it What went wrong And will we learn our lesson or just carry on as before like celebrating surviving a heart attack with a packet of Rothmans If you want to know but are the sort of person who inds it hard to tell the difference between a CDO a CDS an MBS and a toasted cheese sandwich John. .