Thursday, April 29, 2010

Book Review: Kwak and Johnson's "13 Bankers"

Well, finally today I'm going to give my official review of "13 Bankers" James Kwak and Simon Johnson's book on the financial crisis of 2007--2009.  Not a minute too soon since I've already recommended the book for purchase before I had read it (I'm a very very perceptive person you know).

Dim the lights to roughly the amount of light in an above average drinking bar in China at 10pm, cue theme music from Harry Lime: The Third Man....

I ordered this book through one of the more famous internet suppliers, and if you order over $25 dollars of books you get free shipping.  This book cost me $15.75, so I ordered a couple old novels for myself and some paperback garbage for a relative to go with it, so the total shipment took some time (one of the books has yet to arrive, but it's not important to my little review here).  I ordered it around April 2 and I want to say it took about 20 days to arrive.  I was quite excited when it arrived through U.S. Post Office Mail.  Grinning like some 5 year old with his red fire engine toy he had just opened.

The cover seems good quality (although the color is more midnight blue, not the dark turquoise it seems when you look at the internet image of the cover).  The paper is of the quality you would expect of a good quality hardcover book and the book feels like something of substance when you hold it in your hand.  Pantheon is the publisher, which I guess is part of Random House and it says it is printed in the USA.  Just inside the back cover we can see respective photos, in black and white, of both authors.  Both looking like amiable fellows.

The main body of the book is 222 pages long.  It reads quite fast.  Chapter One covers some American history, which gives the book quite a different feel than 99% of the other what I would call "econ crisis books" coming out recently.  It talks about a battle between Thomas Jefferson and Alexander Hamilton.  A battle over both ideology and power.  Basically Thomas Jefferson was fighting a virtuous fight against too much concentrated power.  This battle against concentrated power would rage on over scores of years between different "point men" if you will.  Andrew Jackson vs. Nicholas Biddle,  Theodore Roosevelt vs. the trusts (J.P. Morgan and John D. Rockefeller),  Franklin Delano Roosevelt vs. the Big Bankers of the 1930s.  This struggle for power is part of human nature, and it moves ever onward, as Kwak and Johnson express so well.  But the battle against concentrated power has been won before, and so this reading of history can give us great caution as to how the dangers of concentrated power are almost always there.  But also this reading of history can give us confidence that we had courageous men in America who fought this battle before, and we most likely have those few courageous men somewhere in our society presently (President Obama, do you hear the call???  The call to be a great and courageous President??? A leader people will remember with great fondness???).

Chapter 2 covers oligarchs and emerging market crises.  This Chapter feels like it was written mainly by James Kwak (but obviously I don't know that, so apologies if I am mistaken).  The main example focused on here is South Korea.  South Korea had had a great deal of economic success during the 1990s but hit a brick wall in late 1997.  Economic contagion had started in Thailand and eventually worked its way through other Asian countries to South Korea.  Foreign investors got the jitters and yanked their capital out.  There are a surprising amount of characteristics with parallel America's crisis of 2007--2009. And here is where authors Kwak and Johnson make an extremely valid and sound point which is difficult for some American ears to receive:  America has been extremely arrogant and hypocritical when providing economic assistance to countries going through turmoil.  The IMF (which is largely influenced by U.S. funding) and the U.S. Treasury forced prerequisite conditions on South Korea which were very heavy handed (such as foreign bondholders and banks being paid in full while South Korean companies were struggling).  Now the authors' point it seems is not that these forceful conditions for monetary assistance were wrong, but why the U.S. Treasury didn't prescribe the same disciplines on its own country (America) during the bailout of 2008--2009.  The book also includes a fascinating quote by Larry Summers on this hypocrisy, which is fascinating since he was in U.S. Treasury at the time of the South Korean crisis of 1997 and also played a large part in the planning of the U.S. bailout in 2009 as a member of NEC (National Economic Council) with the President's attentive ear.  This chapter also touches on economic crises in Russia and Indonesia.

Chapter 3 covers the ushering in of "Reaganism" around 1981.  During Ronald Reagan's presidency, deregulation became more popular in the 1980s than disco in the 1970s.  The deregulation was also driven by fascinating characters such as Donald Regan.  This eventually and indirectly led to the Savings and Loan Scandal of the late 1980--early 1990s (does the name "Keating Five" ring a bell??).

Chapter 4 largely addresses regulatory capture and the revolving door between Wall Street and Washington.  Regulators are much less likely to enforce laws in the industry they are regulating when they know they will have a high paying job in that same industry in the near future.   Very very few regulators were willing to walk up to the plate and perform their actual duties, and when they did perform their duties they were muffled and cast aside like a piece of trash.  Brooksley Born was one of the few heroes here (or heroines). Raghuram Rajan also wrote a paper questioning the wiseness of deregulation and was shot down for heresy by the Federal Reserve hierarchy.  The fact of the matter is saying Alan Greenspan absolutely failed at 50% of his duties (regulatory official) as Chairman of the Federal Reserve would be overly kind.  Towards the end of the Chapter 4 also talks about how homeownership was oversold as part of the "American Dream" to people who couldn't afford it, and only paid many monthly mortgage payments with high interest rates to end up with nothing.

Chapter 5 gets into the passage of the Commodity Futures and Modernization Act and how it eventually resulted in fraud on the American taxpayer, by having to subsidize large banks' risky behavior  creating and trading credit default swaps, CDOs, naked CDS, synthetic CDS, and the sale of Option-ARMS mortgages to people the banks full-well knew would never be able to pay the entire mortgage.  One of the best parts of "13 Bankers" is at the bottom of page 127 to the top of page 128.  Here Kwak and Johnson explain how the large banks scurried to purchase and swallow up sub-prime lenders.  In fact, although this is superb writing here, I wish Kwak and Johnson had followed through on this part of the story more. Large bankers and Republicans have often used the old canard, tired argument, and red herring that the Community Reinvestment Act (CRA) forced them into mortgages they didn't want.  Like Uncle Sam was holding a gun to their head to make loans.  This is pure garbage.  And the fact is, as the authors show here, that the large banks swallowed up and craved sub-prime lending companies like it was the last meal on earth.

Chapter 6 goes into great detail of the bailout/TARP program and the numerous problems, contradictions, and friendships that greased the wheels of this great sham on the American taxpayer.  Including Secretary of Treasury Timothy Geithner giving AIG's creditors 100 cents on the dollar, when AIG had already been negotiating with their creditors (other large banks) for a settlement as low as 60 cents on the dollar.  Ratings agencies like Moody's and Standard and Poors (S&P) being paid money to stamp AAA ratings on bundled (packaged) garbage (ARMS loans that would never be paid, combined together and sold as a security).  These bundled (packaged) garbage loans were securitized and labeled CDOs (collateralized debt obligations).  Another interesting gem from this chapter is one of the people often defined as a heroine in this saga (not the book but the entire crisis) was Sheila Bair. And yet Miss Bair (along with other regulatory agency heads) didn't hesitate to shoot down the creation of the Consumer Financial Protection Agency when she felt her Agency (bureaucracy??) turf being threatened.  Maybe Bair was giving us a flash of her true colors??

Chapter 7 goes back to the authors core argument---that large banks (extremely high market share) equal concentration of power, concentration of power leads to regulatory capture, and regulatory capture leads to publicly funded (taxpayer) bailouts.  This 3 step process is one which is incredibly obvious and simple to grasp, and yet some Nobel Prize winners cannot grasp it's simple truth/factuality.  It gets back to core American values that we hold (and even Brits such as Martin Wolf hold) in our hearts as virtuous.  Thomas Jefferson wouldn't have it any other way, and neither will James Kwak and Simon Johnson.

GrahamBrokeTheMold book rating on 1 to 10 scale, 10 being best:  "13 Bankers" gets a 9 rating

Special Notes:  

Positives: I want to outline some things I especially liked about the book, and some small problems here.  4 things I really love about this book: 1--the book has an index. 2--the book is very well annotated. 3--Kwak and Johnson avoid personal attacks. They stay tunnel-visioned in their core philosophical and ideological arguments. 4--The graphs in the book are superb and well selected.  The graphs were terrific.

Small negatives (nitpicking):  I wish the authors had said more about the Canadian banking system, and why their system seemed to be much less affected by the credit crisis.  I think whatever their views are on this, they could have and should have said more about the Canadian banking system and how it differentiates from the American banking system.  And I wish the book had a little more of James Kwak's humor.  His wry humor is one of the better parts of his blogging.  My guess is the graveness and seriousness of the topic (the future of America) kept Kwak away from using humor, but a little in the right moments would have been great.

It's a great book!!! Be a patriot, a knowledgeable voter, and go out and buy it NOW!!!!

No comments:

Post a Comment

Please Give Your Thoughts