Life As It Goes By

For the past few weeks, I have been juggling my time to read 3 most interesting finance books I have come across so far: When Genius Failed, Liar’s Poker and F.I.A.S.C.O. The books cover the span from 1992 to 1998 (though with some information on the late 1980s). This should give a very good understanding of how things are running on Wall St. Hence, they make a good primer on the Financial Crisis we face today. The misdeeds are still ongoing, I believe as there are no regulation or whatsoever to prevent them from happening again. No one wants to slow down the growth of the financial sector at the expense of the economy (for the common good).

“When Genius Failed” decribes the rise and fall of hedge fund Long Term Capital Management (LTCM) between 1994 and 1998. Tracing its roots back to Salomon Brothers (which also led me to the other book “Liar’s Poker), Roger Lowenstein laid the foundation of the style and culture that prevails in the hedge fund. Key concept that can be grasped is the idea of “spreads”. Using quantitative analysis, the group bet on the volatility of almost every type of securities available. This was very much aided by 2 Nobel Laureates based on their work on option pricing (using the Black-Scholes model). The chapter on Fed is particularly interesting. The bosses of the involved investment banks met up with the Fed to discuss ways to prevent the fall of LTCM to become a financial turmoil. These guys fought like children and displayed a very true side of Wall Street. It’s “dog eat dog” world. It’s a jungle out there, not full of monkeys really. The part on other investment banks holding onto their positions for LTCM’s losing bets also substantiates this point. Roger writes the story in such a flowing and easy-to-understand manner that you won’t find difficulty catching up. His research on the topic deserves credit. I didn’t hesitate to buy another book of his on Warren Buffett after reading halfway. I just get too used to his style after some time.

“Liar’s Poker” is the second book I read. I felt curious about Salomon Brothers and are more eager to find out more when I learnt that they created the first mortgage backed security (you can see the link now…). So, I bought the book and started reading the moment I put down the first book. No regrets. Michael Lewis was writing his own story as a salesman in Salomon brothers in the 1980s. The book was published in 1989 but it still a jewel. 2 key financial concepts can be learnt from his book: mortgage bonds and junk bonds (which led me to Drexel Burnham Lambert and hence books such as Predator’s Ball and Den of Thieves etc). Inner workings of the company were clearly described but in a more lively manner with on-and-off breaks of sarcasm. An Art graduate, Mike, has no problem of keeping his story clear and smooth throughout (comparable to Roger who is a journalist). One big getaway I have from this book is that the awareness of junk bonds or debts issued by corporations which are viewd to be less credible. The use of junk bonds was later upgraded to finance takeovers. This has an impact on the whole merger and acquisition industry. Private equity firms start springing up and bascially, any company can be a target for takeover. This means we, as the commoner, are affected…

“F.I.A.S.C.O” is the last book of the three. Similar to Mike, Frank Partnoy worked as a salesman in Morgan Stanley except that Frank is a law graduate. Frank tells a different story on derivatives. I am beginning to be convinced by the fact that today’s crisis is as much created by Mortgage Backed Security (MBS) as derivatives. You can learn about key technical details of derivatives on convexity, duration and spread (I need to check… Oops!) and how they are used practically. The house of Morgan has obviously changed its owners. You would not believe the stories told here and there is no reason why you should think that no more of such thing is still happening. There is simply, no regulation that prevent such acts from continuing and evolving. The book is dated back to the 1990s, about the same time as “When Genius Failed” (imagine there are actually many misdeeds happening at the same time). Today, the techniques and execution should have passed through the test of time. One funny thought crossed my mind:has this evolution grown to a stage that everyone in the firm is willing to give up the firm for his or her own profits? All I know, last year, everyone in the industry got a big, fat bonus, many times greater than the high paycheck he or she has.

I have attended Finance and a free elective, Security Analysis of my master course. To pursue further, I signed up for the CFA and took up the prep course. I am always overwhelmed by the amount of materials that I have to know by hard. I even think that this is really not my cup of tea. But after reading all these and realizing that getting a CFA is to serve this bunch of xxx. I lost all my motivation. Some money is not to be made. It’s ok to be considered dumb.