Presidents and bankers / There is much to be said for Prins’ book, All the Presidents’ Bankers. It is a well researched and annotated history of the interconnections between U.S. presidents and private bankers from the days of President Teddy Roosevelt and the Panic of 1907 through President Obama and the Great Recession of 2007–2009. The book’s endnotes reveal a painstaking journey through a wide range of contemporary books, articles, and original documents drawn from the deep bowels of the archives of numerous presidents.
Much of the book focuses on the “Big Six,” a group of leaders of the largest banks that first came together in 1929 with representatives from Chase National Bank, Bankers Trust Company, Guaranty Trust Company, National City Bank, Morgan Bank, and First National Bank. Prins very ably traces the evolution of this group over time all the way through the megamergers of the 1990s and the financial crisis of the 2000s into today’s “permutations of the original Big Six”: J.P. Morgan Chase, Morgan Stanley, Citigroup, Goldman Sachs, Bank of America, and Wells Fargo.
Prins chose to undertake an unbroken history of modern U.S. banking. The upside of this approach is that, with a few exceptions, there is a feeling of completeness to the work spanning over 100 years. However, to me a downside of this approach is that some of the narratives are far afield from matters of banking, finance, and the financial industry. For example, the author chronicles a range of foreign policy issues, oftentimes simply because a key banker is involved in them in some official or unofficial capacity. An example of this is a section on the Shah of Iran seeking political asylum in the United States, which was included because it involved bankers John McCloy and John Rockefeller.
This approach made me curious about what methodology Prins used to choose the hundreds of topics that she covers in the book. She explained to me that the process started with each of the presidents and key administration figures and worked outward to the individual bankers whose names appeared in the presidential archives. Because this search led to an enormous amount of material, the analysis was then narrowed down to those individuals and events, domestic or foreign, where the strongest associations were apparent over time. (McCloy is a perfect example of this.) This is probably not how I would have approached this history, as I would have tended to focus more on key domestic banking events and the bankers’ influence upon them, but such decisions are the prerogative of the author.
One reason I would have focused on key domestic banking events would be to give more attention to important financial events of the past century that Prins largely ignores or treats only superficially. For instance, in her book the War Finance Corporation—a bank bailout program during World War I—only rates a very brief reference to its chairman, Eugene Meyer. The saga of Continental Illinois and its near collapse and rescue by the federal government during the mid-1980s does not even get a mention. And Fannie Mae and Freddie Mac are only briefly discussed as part of the string of bailouts in 2008–2009.
In some cases the analysis of the book appears to be based on innuendo rather than fact. For example, during the Panic of 1907 a number of significant financial institutions were on the brink of failure after experiencing a run on their deposits. Ultimately, the authorities facing tough choices on New York institutions closed down Knickerbocker Trust while other institutions such as Trust Company of America were bailed out by a consortium of banks. One history of the crisis explains that these decisions were based on a detailed review of the financial position of the firms, overseen by J.P. Morgan and undertaken by Benjamin Strong (who would later become the first president of the powerful Federal Reserve Bank of New York). Strong’s analysis determined that Knickerbocker was insolvent; Trust Company of America was solvent and worthy of backstopping. (For more on this, see Robert Bruner and Sean Carr’s The Panic of 1907 [Wiley, 2007].) Prins implies that the Trust Company of America decision was not based on an objective analysis of solvency, but rather that the firm was saved because it had “more substantive ties to the major banks” and “had been blessed by the sponsorship of the Morgan team.” In contrast, Knickerbocker “had not garnered similar banker support.” The precise meaning of those phrases, as well as any underlying analysis, is not well documented by Prins.
In other cases, she makes very clear her views of the lucrative nature of the connections between bankers and their presidents:
During the postwar phase of the 1940s, [Winthrop] Aldrich traveled the world in a triple capacity: as chairman of the Chase Bank, president of the International Chamber of Commerce, and chairman of the Committee for Financing Foreign Trade. The impact on the bank’s bottom line was substantial…. The volume of business handled in all divisions of the foreign department increased enormously. Chase commercial loans in London doubled that year. Aldrich’s dual work as public servant and private banker was reaping rewards for his firm, and for his status as a diplomat. His partnership with [President Harry] Truman assured him of both.
Like many progressives, Prins repeatedly stresses the deregulation bogeyman at numerous points throughout the 1980s, 1990s, and 2000s under presidents Jimmy Carter, Ronald Reagan, George H. W. Bush, and Bill Clinton, and blames this phenomenon for the “meltdown” of 2007–2008. Yet she offers little consideration or scrutiny of the bubble-inducing housing and loose-money policies in the lead-up to the crisis.
The detail on the 2007–2009 recession and financial crisis is not very deep. In a mere 4.5 pages, Prins addresses the full range of bank bailouts, from Bear Stearns in March 2008 through TARP and the bailout of Bank of America in early 2009. In her preface, she cites the information challenges of modern times and that the relationships between George W. Bush and Barack Obama and the leading bankers of today are just not as readily available because of the nature of modern communications. (“Bankers don’t put much in writing anymore, and there have been no tapes of White House conversations since Nixon.”) She also notes that a number of Freedom of Information Act requests at the Reagan, George H. W. Bush, and Clinton libraries were not responded to in time for the release of the book. As someone who has filed many FOIA suits to undertake my own writing projects, I can bear witness to these facts on information availability. I would add that the Obama administration, which had vowed to be the “most transparent administration in history,” is not really very transparent after all and its immediate predecessors would also not be in the running for that honor.
If you are drawn to the concept of a century-long walk through the relationships between U.S. presidents and bankers, I think you would enjoy All the Presidents’ Bankers. If you are looking for a history of those events with extended analysis of the policy-based decisionmaking process, I think you would be disappointed.
Glory of gold / Money: How the Destruction of the Dollar Threatens the Global Economy—and What We Can Do about It is predominantly a blend of history and economic policy analysis on the state of money, which includes a detailed analysis of a proposed gold standard for the 21st century. Near the end, it morphs into a personal finance book à la Suze Orman, diving down into detail on what the discussion of money means for investors on an individual basis.
The initial chapter of Money is an exploration of our current state of affairs with regard to the economy: we may be over the so-called “Great Recession” for now, but we have a pitiful and fragile recovery as evidenced by feeble growth, misallocation of credit through government policies, skyrocketing debt, and ongoing economic and financial volatility.
Forbes and Ames lay much of the blame for this state of affairs on unstable money:
Unstable money is a little bit like carbon monoxide. It’s odorless and colorless. Most people don’t realize the damage it’s doing until it’s very nearly too late. A fundamental principle is that when money is weakened, people seek to preserve their wealth by investing in commodities and hard assets. Prices of things like housing, food, and fuel start to rise, and we are often slow to realize what’s happening.
The authors offer detail in rapid-fire succession on a number of diverse topics at the core of our financial and monetary system:
- A detailed look at money and its three roles: measure of value, instrument of trust that permits transactions, and a system of communication. Most of this is basic Economics 101 and can be skimmed by most readers.
- Money and trade: The authors assess the distortive approach that many economic analysts take in addressing this topic by focusing solely on the level of the merchandise trade deficit. Again, this is basic Economics 101, updated for many of today’s monetary and financial events.
- Why inflation is not a good thing: addresses the phenomenon of quantitative easing (“The biggest monetary stimulus ever had produced the weakest recovery from a major downturn in American history”) and the question of why there has not been more inflation, notwithstanding all of the monetary easing. The authors’ answers to these questions focus on weakness in the methodology for the calculation of inflation; recent increases in the prices of commodities, in particular gold; and the fact that we are now in “uncharted territory” with regard to quantitative easing. The last point is the most important, as the jury is still out on the risk of inflation. Forbes and Ames properly focus on the economy in 2000 and the recession that began in 2001 as an inflection point for the monetary strategy that has so greatly contributed to the churning and volatility in the economy for the past 14 years of uncertainty. They end this chapter with the right question, “Should the Federal Reserve really be in the business of fine-tuning the economy?”
- Money and morality: chronicles the social unrest and instability that historically flows from debasement of currencies. Forbes and Ames note the oft-told story of the German Weimar Republic and draw from John Locke to support their contention that “the debasement of money drives a fissure into the core of society by defrauding both lender and borrower.” They then bring the moral issues to the most recent financial crisis, citing the social unrest in countries throughout Europe, tensions in the Middle East during the Arab Spring protests, the Occupy Wall Street movement in the United States, the expansion of government corruption, and the breakdown in what they call “trust assurance mechanisms” like credit review procedures and bond credit ratings. The authors complete this chapter on an ominous note by returning to a historical example:
By 476 A.D., when barbarians wiped the empire from the map, Rome had committed moral and economic suicide. Romans first lost their character. Then, as a consequence, they lost their liberties and ultimately their civilization. Will that be us?
For those who regularly follow the economic and financial industry (through the Wall Street Journal, Bloomberg, CNBC, etc.), most of this early analysis will be familiar and not particularly earth-shattering. But it represents a good review in preparation for the core of the book, which is the argument for a 21st century gold standard:
We need gold because, as we’ve emphasized throughout this book, gold is the best and the only way to achieve truly stable money. Relinking the dollar to gold would eliminate the economic volatility and monetary crises that have been the consequences of fiat money. It would stop the erosion of our wealth that is taking place today as a result of Fed-engineered inflation. With a gold standard, there would be no inflation.
The authors then summarize their ideas for a gold standard in list format, addressing in turn: four options for the gold standard, the recommended features for a gold standard for the 21st century, and some myths and misconceptions about the gold standard. The last section is probably the most useful as it counters gold standard critics by addressing one-by-one many of the common criticisms of the gold standard: the extent of price volatility for gold, limitations on the supply of gold to sustain a gold standard today, the gold standard being among the causes and prolongation of the Great Depression, and the ability of speculators to undermine a gold standard.
I should note that some of the authors’ responses to those concerns are not completely satisfying. For example, they lay the blame for the Great Depression on the Smoot-Hawley Tariff Act, which is a tremendous oversimplification.
The most convincing of their arguments for a gold standard relates to politics:
Gold takes decisions about the value and supply of money out of the hands of bureaucrats whose judgment is too often in error or driven by politics…. A gold standard puts the lid on the shenanigans politicians like to use for political gain. We’ve all seen the effects of leaving monetary and fiscal discretion in the hands of politicians and their appointees: chronic inflation and chronic government debt.
A few final comments on the overall style of Forbes and Ames are in order at this point. It is hard to measure with any type of metric, but the authors rely on the opinions of others a great deal, quoting them at length and to what seems an outsized extent. As a reader I generally expect authors to predominantly present their own interpretations and opinions on the topic at hand.
Additionally, the topic of money itself can be dense. Presenting the material in a variety of formats—not only with words but also with tables and graphs blended in—is ideal. Economist Alan Blinder effectively uses graphs and tables, although I do not agree with him on policy. However, Forbes and Ames almost exclusively describe matters of money through words. In fact, I could find only one graph and not a single table in their book.
Tales of HFTs / Flash Boys: A Wall Street Revolt is another in a series of Michael Lewis’s trademark genre of financial journalism. Like his classic book The Big Short, he absorbs himself in a topic by interviewing a myriad of people working in the industry segment under scrutiny and then weaves a narrative of the most interesting characters into an entertaining, humorous, gripping, and profanity-sprinkled read. It should be noted that Lewis’s stories are not heavy on financial sector policy; in fact, I purchased and began reading The Big Short back in 2010 when I was writing my own book on the financial crisis, but abandoned Lewis’s book less than halfway through.
His new book places the strategy of “high frequency traders” (HFTs) in the worst of lights. HFTs are traders who use algorithms to trade securities and, according to Lewis, “front-run” the trades of others—this is where traders are tipped off to the demand for a stock on one exchange and buy it at a lower price on another and arbitrage. Those who follow this strategy make mere pennies per trade, but cumulatively make massive profits in essentially risk-free trades. Lewis argues through his storytelling that because of HFTs, the market is “rigged” and is essentially a “fraud.” He puts the story in an “us against them” construct, where “ordinary investors” are getting screwed by the HFTs. This is ominously stated on the book jacket, which warns “if you have any contact with the market, even a retirement account, this story is happening to you.”
According to Lewis, HFTs dominate the market, not because they are doing a better job of delivering their services like true capitalists, but because of the convoluted business model and technological basis for HFTs’ trading. That supposedly gives an advantage to those firms who figure out how to cut milliseconds off trading times through time-staking placement of servers and fiber optic cable wires. As Lewis summarizes it:
The U.S. stock market was now a class system, rooted in speed, of haves and have-nots. The haves paid for nanoseconds; the have-nots had no idea that a nanosecond had value. The haves enjoyed a perfect view of the market; the have-nots never saw the market at all.
The heroes in Lewis’s one-sided saga are a motley crew of characters who work on putting together a platform to counteract the convoluted strategies of the HFTs through a competing stock exchange:
- Brad Katsuyama, the book’s lead character and a former trader for Royal Bank of Canada (RBC), who after years of working in the market had an epiphany regarding the inherent unfairness in the market:
That’s when I realized the markets are rigged. And I knew it had to do with the technology. That the answer lay beneath the surface of the technology. I had absolutely no idea where. But that’s when the lightbulb went off that the only way I’m going to find out what’s going on is if I go beneath the surface.
He later led the creation of the IEX in 2012, an exchange that is now competing head-to-head with the other exchanges tainted by HFTs, by leveraging its distinct business model.
- Rob Park, a former co-worker of Katsuyama’s when they developed RBC’s trading algorithm. He was hired by Katsuyama to help him investigate what was “beneath the surface.”
- Ronan Ryan, an Irish immigrant, who stayed behind in the United States after his dad returned to Ireland following a work stint here. A self-described “tech guy” who always had a desire to work on Wall Street, he joined Katsuyama’s cause because of his knowledge of “the frantic competition for nanoseconds.”
An additional featured character not connected with Katsuyama is Sergey Aleynikov, a Russian computer programmer who immigrated to the United States and ultimately worked at Goldman Sachs, patching up their old trading platform. He departed Goldman to work for a new hedge fund in order to develop an entirely new trading platform. He was later arrested by the Federal Bureau of Investigation and charged by the government with stealing code from Goldman Sachs. Lewis explains his focus on Aleynikov
I’d thought it strange, after the financial crisis, in which Goldman had played such an important role, that the only Goldman Sachs employee who had been charged with any sort of crime was the employee who had taken something from Goldman Sachs.
Lewis does not directly delve into the policy implications for HFTs, but it is clear from his narrative that he thinks something needs to be done about them. Throughout the book he takes shots at HFTs on a number of fronts: the two-tiered system that they reveal, the role of HFTs in causing so-called “flash crashes” where there is a dramatic drop in the stock price of a single firm or the market as a whole, and their role in undermining market integrity. Despite his complaints, I find Lewis less convincing than Holly Bell’s July 2013 Cato Policy Analysis (“High Frequency Trading: Do Regulators Need to Control this Tool of Informationally Efficient Markets?” #731) argument that HFTs in general are not bad things and they cannot be blamed for Lewis’s list of market ills.
Not surprisingly, Lewis’s book has caused a divide on Wall Street. The response of William O’Brien, president of BATS Global Markets, in a debate with Lewis and Katsuyama is typical (“The Great HFT Debate with Michael Lewis on CNBC,” available on YouTube): “The first thing I’d say is, Michael and Brad, shame on both of you for falsely accusing literally thousands of people and possibly scaring millions of investors in an effort to promote a business model.”
But Katsuyama gets it right when he responds that the “market [is] providing the solution,” as demonstrated by his IEX. If HFTs really are a problem, IEX will prosper and be copied; if not, it will fade away.
For me, the policy divide over HFTs is much ado about nothing. As a small, individual investor, I don’t feel like I have been cheated by the HFTs, as I am in the market for the long run. The best way to look at Flash Boys is that it is an entertaining read—but not an important policy analysis.
