Å·±¦ÓéÀÖ

Crashed has been timed to coincide with the ten-year anniversary of the financial crisis of 2008.

Most books about the crisis have been written by

1. protagonists with a record to defend, such as Hank Paulson, Tim Geithner, Ben Bernanke, Neil Barofsky, Mervyn King, Adair Turner and Paul Tucker
2. economists who watched from the sidelines, such as Joseph Stiglitz, Paul Krugman, Bob Shiller, Atif Mian & Amir Sufi, Hans-Werner Sinn, John Kay, Bob Reich, Greta Krippner (genius!) and Simon Johnson
3. journalists who had reported on it, such as Andrew Ross Sorkin, Bethany McLean, David Dayen and the always incisive Martin Sandbu
4. people who fought in the trenches: practitioners such as the anonymous author of “Diary of a Very Bad Year�, the very eponymous George Soros, and the troubled genius that is David Stockman

Some wrote about the crisis in advance, such as the rather monothematic (but regardless 100% correct) Richard “balance sheet recession� Koo, some wrote in real time, like Simon “I saw your kind when I was at the IMF� Johnson did in the Atlantic, but most of these authors wrote in retrospect.

I’ve read them all. Some are better and some are worse, but all these authors are satisfied to cover one or two angles of the crisis, rather than the whole thing. None of them attempts to provide with a theme that could cover all of the causes and all the ramifications, from how housing went crazy in the US to how Europe lost its way to how the authorities may have done more harm than good and how we ended up where we are.

With a single exception, that is:

Alan Blinder did just that in his rather comprehensive (and uniquely readable) “After the Music Stopped.�

The problem with Blinder’s account is that, much as he acknowledges many factors that drove the crisis, much as he provides the most accessible account to a layman, much as he has (and succeeds in sharing) a deep understanding of finance, he holds the belief that a single event, the Lehman bankruptcy is what took us from a mere crisis to a disaster. Which simply cannot be true. In the words of Christopher Hitchens “If a great city or a great state should fall as the result of an apparent accident, then there would be a general reason why it required only an accident to make it fall.�

Enter Adam Tooze.

A historian!

Not to spoil it for you, but the conclusion to this 600+ page opus is that “politics drives economics.� Not the other way round, which is what we’ve always been led to believe! I don’t agree with everything Adam Tooze has to say, nor do I think he’s fully qualified to write this book. But of his main conclusion I am now 100% convinced, and Adam Tooze is whom I have to thank for this epiphany / realization / new conviction.

On at least one measure, therefore, “Crashed� is now the best book about the great financial crisis of 2008.

In short, an amateur has taught us a lesson here.

I don’t call Adam Tooze an amateur to disparage him. It really shows here that he did not live the crisis like I did from my trading desk and all those authors from their positions in government or on the sidelines. Among other things:

� he’s wrong about Mitsubishi and Morgan Stanley, I distinctly remember the Japanese almost lost everything. They decidedly did not have guarantees!

� he’s wrong to date QE on March 19, 2009: Bernanke blew a huge hole in my P&L in December of 2008. By March of �09, if anything, it was “buy the rumor, sell the fact� on QE.

� he glosses over the significance of the 2011-announced LTROs, arguably the biggest European “save� of all: Southern European banks were finding it impossible to roll billions and billions of 3-yr debt they’d issued mid crisis; not only that, but they were massive holders of BTp and Bono junk, hence the sudden stop, hence MF Global, hence the LTRO; he fails to mention most of this, let alone make the connections!

� on p. 241, I came across the following gem: “Everyone wanted safety. Treasury prices were rising, yields soaring, so too was the dollar.� It does not work that way, does it?

And yet, he’s written a book that’s well worth reading, for the following three reasons:
1. He makes a decent fist of looking at the crisis globally: US, Europe, EM, China and Russia
2. He’s not afraid to make some very strong judgements that go against the grain
3. He lays it all out so well that even if you disagree with his conclusions, by dint of having read his book you will be transported to a place you could not have reached on your own.

His first controversial insight is that the crisis caught the great and the good napping. The Stephen Roaches of our world could not get enough of telling us about the dangers lurking in the Chimerica structure’s imbalances and our leaders (from Larry Summers to a young Illinois senator called Barack Obama) could not get enough of telling the US to borrow less and the Chinese to spend more, when of course the danger was lurking at home.

His second controversial insight is that Paulson 1. made an explicit choice to look principled and teach everybody a lesson and let Lehman go, 2. was driven to this decision by a miscalculation regarding the impact the Lehman bankruptcy would have and 3. was quick to reverse gears and go down on his knees and ask Congress for the necessary funds to clean up his mess after he realized he’d miscalculated.

Three cheers for Adam Tooze!

His third controversial insight is that the biggest financial mess was in Europe, rather than the US. The boldest and stupidest trade of all bold and stupid trades entailed the crème de la crème of the European banking establishment holding trillions of dollar-denominated questionable US assets, which they funded by issuing short-term dollar liabilities. He calls out Steinbrueck and Sarkozy for being showboaters and liars in calling the crisis American, basically, and pays tribute to the Fed that stepped in with gigantic dollar swap lines to the ECB and the SNB, who covertly passed on stupendous amounts of dollar funding to the BNPs, Deutsches and UBSs of this world.

On the other hand, you distinctly get the impression that somebody told all this to Adam Tooze, that he did not dig it out on his own. His “deep throat� has left out some big stuff.

So nobody seems to have informed the author that a trillion dollar swapline is three orders of magnitude smaller than the quadrillion dollars of derivatives (that’s a million billion dollars of derivatives for those sitting in the back) that the authorities could have wiped out by going “Swedish� on the banking system and thereby making all those arrows start and end in the same place. He talks about how the banks were forced to beg for billions and how that was all for show because the losses were in the single-digit trillions, but somebody should show him the 100-odd trillion with a T of derivatives each of Bank of America Merrill Lynch, Barclays etc. had on their books that nobody did anything to remove when there was a genuine opportunity to do so.

Nobody other than the Swiss, that is: again, nobody seems to have informed the author that the SNB found an amazing way to shrink UBS and CSFB: they quite simply told them “any amount you’re up on a derivative you now need to treat as an asset� and “any amount you’re down you need to treat as a liability.� And that was that! Until last year there were fantastic jobs to be had killing the derivatives books of those behemoths :-) Deutsche, on the other hand, is still very much in the news�

The author does seem to comprehend that a “hero� in year 2005 was not a guy who had funds, but a guy who could “source product.� However, Tooze cannot connect the dots too well from there:

1. He somehow gets it into his head that your objective as a maker of CDO is to seek crappy product, in order to maximize the difference between what the meat’s worth and what you sell the sausage for! No, not really: all you want is to charge the borrower the rate that you charge to crappy borrowers, but you don’t care at all if he’s a good borrower or not. If it turns out he can pay, that’s a small bonus, actually. Indeed, some of the biggest fraud perpetrated was against African-Americans who were high-credit borrowers but were pushed into costlier subprime anyway.

2. More importantly, the biggest implication of this fact is that it was incumbent upon America to police the creation of assets and that this was something the US singularly failed to accomplish. Steinbrueck and Sarkozy were not all that off-piste to say the crisis of their banks was American in origin. The US is where the lax lending rules were to be found.

Much as I’m ecstatic that the current go-to book about the crisis boldly states that Paulson was a hypocrite, basically, the author gets a B- from me on all his revelations. He isn’t knowledgeable enough, bottom line. Sorry�

Fortunately, his account is not the biggest contribution!

From reading “Crashed� I took away two big messages; one intended by the author and one probably unintended!

The first message Adam Tooze managed to hammer into my head is that, once they had picked up their socks and dusted themselves off following the Lehman bankruptcy, (to use Obama’s parlance) the American authorities, from the President, the Fed and the Treasury all the way to the courts and the diplomatic service, resolved to fully restore the status quo: “no more bankruptcies anywhere, ever� became the mantra and the entire might of the state was put behind that goal!

� No more banking bankruptcies, US or otherwise
� No losses to Chinese investors in bad American paper
� No losses to anybody else who holds paper either: bondholders� rights trump homeowners�
� No European Government defaults
� No Grexit
� No breaking of ranks even on the method: you, the rest of the world, had better also print

Tooze does not argue that this was some type of plan. When you read his account, rather, you understand that there’s no turning back from Shock and Awe. So there wasn’t one!

You look at it that way and you understand there was no way the subprime borrower was ever going to get any help to stay in his home. The moment his money was pledged to the Chinese, his goose was cooked. Similarly, and Tooze says this explicitly, my country’s government was never going to default to the French and German banks that held its paper, because “the system� came first. I’ve always blamed Trichet for this, but with the wisdom I’ve now acquired I must now acknowledge he was but a first line of defense. And that the “hegemon� pushing this agenda was indeed the US, with Obama himself putting in the important phone calls.

The second major takeaway I took from reading Crashed is a dividend of its “universal� approach to setting the scene. The author takes you on a tour of the US, Europe, Eastern Europe, China and Russia. And you sit down, you do the graph and you come to a realization: a single country is connected to every node of the graph:
� The ECB was set up on the model of the Bundesbank
� German banks were up to their gills in American paper
� German investors of all stripes were up to their gills in BTp, Bono and GGB paper
� German industry had set up production across Poland and Hungary and the Czech Republic
� The former German Chancellor sits on the board of the Russian gas pipeline
� The current German Chancellor traded blows with Putin in their days in East Berlin
� Germany is by some margin the biggest exporter to China

I don’t know why I’d never made all those connections. So Angela Merkel is a “villain� in this book, but not at all from my angle. The way I see it, under Angela Merkel:
� German Landesbanken were forced to sell all their mortgage junk right away
� German investors, uniquely among their European peers, were forced to hold on to their GGBs till the bitter end, in a show of solidarity they never got any credit for
� The BuBa and the Laender were browbeaten into passing on banking supervision to the ECB
� Germany accepted more refugees than everybody else put together
� Real sanctions were imposed on Russia post the Ukraine / Crimean fiasco, with the French, the Italians and swathes of German business firmly in opposition.
� Europe made direct loans to a large number of insolvent nations, a policy that was extremely unpopular with the German public!
Yes, there are things that Merkel could have done better. But she was literally in the eye of the storm and is amazing enough a politician that she managed to steer through three elections and always deliver the goods with both her country and Europe in mind. I read this book and it reinforced my belief that no politician in history could possibly have played her awful hand as well as she did.

The book closes with two very strong chapters: one on Trump and the concluding chapter which lays out the author’s main thesis: politics trumps economics. Amen.

A couple last observations / grumbles from me:

Grumble #1:
“Crashed� was advertised as the book that draws the line from the bailouts to Brexit and Trump. It really isn’t.

Grumble #2:
I hope somebody somewhere writes a book / an article / a Tweet / whatever that exposes Draghi’s “whatever it takes� moment for what it actually was: one half of a bargain whereby:
(i) on one hand Germany allowed the ECB to lend money to Southern European governments via the printing press
(ii) on the other hand (under the false pretenses that this is to do with NPLs, rather than the suppression of hard money creation south of some parallel) no loan will be given ever again by a bank in Italy, Portugal or Greece.

Tooze does not grasp this at all and has been fed the story that Target 2 blew up when northern investors withdrew. What’s really happened is Germany regrets allowing Southern banks to create hard Euros and it won’t happen again. They will fund the governments instead, where at least you have some clue what happened to the money 😊

Grumble #3
My country's "young, charismatic, radical-left" prime minister is no different from any of his predecessors. Stop romanticising him!

Anyway, enough from me. Go buy the book, for Blinder’s reign as the best author about the crisis has ended.

Step forward, Adam Tooze!