I’ve just finished reading “Fool’s Gold” by Gillian Tett.
After hearing theories about the causes of the economic collapse, this book explains it clearly, taking an historical perspective that shows the roots of the problem as they developed a decade prior to the event.
Tett explains how each of the companies became ensnared in complex financial instruments, how these transactions were so well hidden that even those in know on Wall Street were unaware of the details, and how the lack of visibility and the inter-connected nature of the financial instruments all lead to disaster.
While bragging about how the risk of loans going bad had been dealt with by distributing the risk, this was one of the root causes of the collapse, since almost no bank was free from the investments when they began to go bad. Tett explains how the companies needed to come up with cash, not because the cash was needed to pay for defaulted loans, but because the solidity of AAA rated derivatives came into question, and their value started to shrink, an event that no one had ever imagined happening.
I learned more from this book than from any explanation I’ve heard before. All of us need to understand what happened, so that we can put pressure on our representatives to ensure that this kind of thing does not happen again.
Read it: you will be glad that you did.
I’m off to start “The Big Short” by Michael Lewis, author of “Liar’s Poker”