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'Fool's Gold': The Banking World's Responsibility
TERRY GROSS, host:
This is FRESH AIR. Iâm Terry Gross. Those unregulated, infamous
derivatives and credit-default swaps may soon be regulated if the Obama
administration gets its way. Yesterday, the administration proposed
regulations that would bring some light to the so-called shadow banking
Weâll talk about that proposal later, but first, why did the bankers,
regulators and ratings agencies collaborate to build and run a system
that was doomed to self-destruct?
My Guest, Gillian Tett, asked that question at the beginning of her new
book, âFool's Gold.â It examines how the financial catastrophe happened
by looking at the story of J.P. Morgan, a pillar of banking, that
developed and marketed credit-default swaps and synthetic,
collateralized debt obligations, which played a critical role in the
credit bubble and bust.
Tett runs global markets coverage for the British international
newspaper, the Financial Times. In March, she was named journalist of
the year at the British Press Awards. The award cited her for being
consistently in front of the curve as the worldâs economy went into
Gillian Tett, welcome to FRESH AIR. Your book is really an overview of
what went wrong through the case study of J.P. Morgan. Why did you chose
Ms.Â GILLIAN TETT (Author): Well, I wanted to tell the human story of
some of the bankers whoâd been involved in developing these products,
and I wanted to go back to the time when many of the ideas and products
that have come to play such a crucial role in this financial crisis
sprang into life, and J.P. Morgan were very, very involved in the moment
of creation in a lot of these products.
You can actually see the way that the ideas were developed were
initially intended to bring about great good for society and the
economy. They thought they were building a more efficient, safer, better
financial system, but unfortunately it went very badly wrong.
GROSS: So J.P. Morgan, among other things, popularized derivatives. So
before we take the next step here, why donât you give a crack at
explaining what derivatives are.
Ms.Â TETT: What derivative really refers to is a product whose value
derives from something else. So imagine you had a bar of gold, and you
thought that the price of gold might rise or fall in the coming weeks.
You could either try and trade that tangible gold, or you could actually
write a contract that actually mimicked the way the gold price might
behave. And essentially whatâs happened in the last few years is that
bankers have realized itâs easier to trade contracts which mimic the way
that prices behave, rather than trade the underlying tangible instrument
GROSS: So what are some of the new types of derivatives early on that
J.P. Morgan created and popularized?
Ms.Â TETT: Well, the first types of derivatives that ever emerged were
the commodity derivatives, the contracts that allowed, say, wheat
farmers to try and hedge or protect themselves against future
fluctuations in wheat prices.
Then in the 1980s you had interest rate derivatives, which - and
currency derivatives, which J.P. Morgan got very involved in developing.
The key creation moment, if you like, for what has driven the current
crisis occurred in the early 1990s, when the J.P. Morgan group took some
of the ideas that had been floating around in the interest rate
derivative world and applied it to the banking sector and above all else
applied it to the idea of making loans and used derivatives to start
trading the risk that somebody who had taken out a loan might not be
able to repay or the risk that somebody whoâs actually had a bond out
there might not be able to honor those bond payments. And that was
really the key shift that occurred in the early 1990s.
J.P. Morgan wasnât the bank that actually invented that idea. It was
Bank of Trust who first actually had that bingo moment of trying to
apply the interest rate concept to the credit concept. But what J.P.
Morgan did was basically take that concept and build an entire
marketplace that allowed it to go from simply being a sort of mad idea
in one corner of a room somewhere into a fully fledged financial market
that later grew to staggering, staggering proportions.
GROSS: Now, are you talking about credit-default swaps here?
Ms.Â TETT: Yes, Iâm talking about credit-default swaps, which basically
fall in the category of instruments (unintelligible) derivatives, and
what those essentially do is say here we have somebody whoâs got a loan
or a bond outstanding, and there is a risk that that might not be
repaid. Now, that risk can either sit with the person who actually has
made the loan or issued the bond, or you can try and trade it between
investors and pass that risk on.
GROSS: So why is that good for the bank if you pass the risk on?
Ms.Â TETT: Well, the original theory that drove the whole development of
this market was that in the old days banks had made loans and they were
on the hook if people didnât repay those loans. So back in the savings
and loans crisis, say, of the late 1980s and early 1990s, the banks that
had made a lot of dumb loans which then went sour basically went bust,
because all their eggs were in one basket.
They might have an awful lot of loans, say, to a particular place in
Texas, and if something hit that Texas economy, then that bank would go
bust. But the theory was that if you could actually start diversifying
your portfolio, if you could start sharing the risk that you had to a
particular pool of, say, mortgage holders or companies and spread that
out amongst a whole group of banks, say, or spread it out amongst a
whole bunch of investors, then you would actually have less concentrated
risk to one particular region and one particular sector of the economy.
It kind of worked on the basis of a problem shared is a problem halved,
that itâs better to actually have risk spread out in the system rather
than just concentrated in one place.
MARTIN: Now, as you were saying, the premise behind this was that it
would minimize risk for everybody and that risk shared is risk halved,
but thatâs not the way it worked out in the long run. So, like, where
did that go wrong?
Ms.Â TETT: Well, where it went wrong was on a number of different fronts.
Firstly, when loans got sliced and diced and passed around to a bunch of
investors, it became very hard to work out who was actually responsible
for checking out that the original loan was good quality or not.
Back in the old days, when you had a small-town banker, when they made a
mortgage, they might go and actually meet the household that was taking
out the mortgage, look them in the eye, check out that they were
credible or not, and keep a close eye subsequently on whether or not
that loan was being repaid. And they had an incentive to do that because
that loan was on the books of the bank. There was a sense of
responsibility and accountability.
The problem came that when loans were being sliced and diced and chopped
into pieces and passed around to lots of different investors, the end
investor who actually held that loan in its chopped-up form didnât
actually know who had taken out the mortgage originally, had very little
way of actually monitoring whether or not they were going to repay that
mortgage, and if they were passing it around the system, they might not
actually feel much responsibility for actually checking that the
mortgage was being repaid or not.
There was a real breakdown in a sense of direct responsibility or
accountability, and that basically encouraged bankers just to make more
and more loans to - you know, if somebody could pass the loans and chop
them up and slice and dice them, there was no reason not to make the
loan so long as they could pass it on to someone else. So that was one
The other big problem, though, was that as loans got sliced and diced
and chopped around, it became very hard for an end investor to monitor
the risks attached, and initially no one really worried about that
during the years of 2004, 2005, 2006, because there was a feeling that
the housing market was okay and the credit markets were booming, and
sure, people might not know what lies inside their bundle of debt, but
it should be fine because - guess what? You can always sell it onto
But when the mortgage market began to turn in 2006 and evidence piled up
that actually the housing prices were starting to flatten off and there
were reports that some mortgage-holders, particularly in the subprime
arena, were not paying back their mortgages, many investors who were
holding bundles of debt linked to subprime mortgages started to sell,
well, how do we know if this is safe or not?
And then you had the equivalent of a food-poisoning scare, a financial
panic break out, as suddenly everybody went on strike and said, well,
what do we think is safe? What is not safe? How can we trust anything?
And that had devastating consequences, as we all know.
GROSS: If youâre just joining us, my guest is financial journalist
Gillian Tett, and she writes for the Financial Times. Her new book is
called âFool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan
Was Corrupted by Wall Street Greed and Unleashed a Catastrophe.â Weâll
talk more after we take a short break. This is FRESH AIR.
(Soundbite of music)
GROSS: My guest is Gillian Tett. She writes about finance for the
Financial Times, and in March she was named journalist of the year at
the British Press Awards. Her new book is called âFool's Gold: How the
Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street
Greed and Unleashed a Catastrophe.â
I want to ask you about why the J.P. Morgan team that was creating some
of these products in the â90s worked out of the London office as opposed
to the New York office.
Ms.Â TETT: Well, thereâs a very interesting story about regulation there,
which is that because of the Glass-Steagall Act that came in in the
1930s, essentially banks like J.P. Morgan had been limited to doing
banking business, which is basically the business of gathering in
deposits and lending it out to companies or consumers, and theyâd been
barred from going into the securities market.
In London, by contrast, there hadnât been that kind of distinction, and
so institutions were able to blur the lines much more effectively. And
in the 1980s and 1990s you had a lot of banks, a lot of American groups
went over to London, built up a business that was not just making loans
but also getting involved in underwriting bonds and then increasingly
got involved in derivatives as well, which seemed to be a fairly natural
So the fact that J.P. Morgan had a London office as well as its New York
office, and in fact it had a very big London business, allowed it to
start playing around with concepts in a more creative fashion than might
have been possible back in America.
GROSS: Now, you mentioned the Glass-Steagall Act that prevented banks
from engaging in certain activities in the United States. That act was
repealed in 1999, and the bill repealing it was signed by President
Clinton. So did that change things at J.P. Morgan? Did a lot of the
derivatives people move to New York after that?
Ms.Â TETT: Well, that trend had already been happening, and in fact the
key development to the credit-derivative market happened in the mid-
1990s, actually in New York, because even before the act was actually
formally repealed in 1999, there had been quite a steady loosening of
most of the rules before that.
So in some ways what happened in 1999 was really just a confirmation of
a bigger trend that had been underway. But once the act was repealed,
really under the heavy lobbying by Citigroup and J.P. Morgan, as well as
some of the other big banks, two or three things happened.
Firstly, the whole idea of mixing up banking business with securities
business and being very innovative in the way you handle bank loans,
which is what cuts to the core of credit derivatives, that concept
really took off with a vengeance.
But secondly, because the walls were coming down between the different
types of banks, and suddenly they were all competing on the same playing
field, and because that coincided with the explosion in the use of the
Internet, and you had globalization, you had this kind of world-is-flat
mentality coming to the fore, suddenly you had what had been quite a
carefully segregated and controlled marketplace turn into this crazy
free-for-all whereby everybody was competing with everyone else and
really scrapping away, trying to become the biggest, the best, to grab
more market share. And if one player in that pack was doing very well â
say, like Goldman Sachs - suddenly everyone wanted to be the same. And
there was intense business pressures, intense demand by shareholders for
all the banks to chase whatever profits as much as they can, as fast as
they can, and to as big an extent as they could.
GROSS: What problems did that competition lead to?
Ms.Â TETT: Well, the problem in banking is that in a capitalist system
banks are a business, and they are there to make money for their
shareholders, and so thereâs always pressure on them to do that. But at
the same time, finance plays a utility function. If you canât push money
around the economy, then basically the rest of the economy wonât work.
Now, in an ideal world, you hope that bankers are rational, common sense
beings who are able to balance off those two functions and to chase
profits for their shareholders but also not to go completely crazy and
not to forget that they also have a utility function as well.
But in the new, crazily competitive landscape that was ushered in at the
beginning of this decade, many banks just didnât have the luxury of
saying, well, we would like to have some profits but not too many
profits, and maybe weâd better take a long-term view. Maybe weâd better
try and work out whether the business weâre chasing is going to be
sustainable in the long term.
You had these shareholders clamoring for impressive quarterly earnings
growth, and you have impressive quarterly earnings growth quarter after
quarter if youâre being cautious.
GROSS: So you think that the competition helped lead banks to excesses?
Ms.Â TETT: Absolutely. There was intense - a frenzy of competition where
basically most of the banks for years felt under enormous pressure to
deliver constant increases in profits almost at any cost or any long-
term cost. And coming back to the issue of why I focused on J.P. Morgan,
one of the really interesting aspects of the story is that although the
J.P. Morgan group created the marketplace for credit derivatives and had
many of the original creative moments, if you like, they spotted very
early on the dangers that were inherent in the application of some of
So for example, although they put corporate loans into these new
structures theyâd developed, they tried doing it with mortgages as well
back in the late 1990s and they realized after a couple of attempts that
it was too dangerous. They couldnât get the data they needed to judge
whether or not these credit derivatives on mortgages were safe or not.
So they stopped. They didnât carry on pursuing that idea, even though it
might have been profitable, and the reason for that was partly because
J.P. Morgan had a slightly unusual corporate culture.
Although it was driven by the need to make profits, it was less overtly
commercial than most of its rivals, partly because it had this very long
history and partly because it had a very team-orientated internal
dynamic. So J.P. Morgan walked away from some of the riskiest, craziest
manifestations of its own brainchild, if you like.
But subsequently, if you look at what happened in this decade, a bunch
of other banks came in, saw what J.P. Morgan had done, and copied it,
and they didnât have the same caution at all. They took the mortgages,
stuffed it into these products, and basically went mad in order to chase
profits, and thatâs really where the trouble started and set in chain a
series of events which weâre all living with now.
GROSS: Now, we were talking a little bit about some of the special
products, the derivatives and credit-default swaps that were created,
and the good that some people thought they would do and the problems
that they ended up creating.
Something else that was created within this whole system of the
derivatives and the credit-default swaps were shell companies with names
like SPV, special purpose vehicles, and SIV, special investment
vehicles. Would you explain the purpose of these shell companies and
what they are?
Ms.Â TETT: Well, the best way to explain it is probably to imagine a
house with a garage, and inside the house you have all of the nice bits
that you like to live with. Thatâs what people regard as actually being
the house. But imagine youâve got a garage as well in which you stuff
things you just kind of donât want sitting inside the house.
So maybe youâve got a bit of junk. Maybe youâve got a few things you
want to hide from your visitors. Itâs sort of a place to put things that
you just donât think are part of the main, everyday life.
Now shell companies tend to operate in the same way as banks. They had
what they call their balance sheets, the books where they actually
recorded their activity that they showed to regulators, showed to
investors. That was the official part of the bank. And then you had
these shell companies, which were linked to banks but sometimes wouldnât
appear on the balance sheets of the banks, sometimes would be holding
assets that the banks just didnât really want to have inside their main
There was a connection between the shell companies and the banks, but it
wasnât formal, it wasnât always visible, and importantly, it often meant
that in terms of the regulations that the banks needed to adhere to, the
regulators would kind of ignore what was sitting inside the shell
companies when they judged whether banks were safe or not.
GROSS: And thatâs in part because of these shell companies were
offshore, like in the Cayman Islands, Bermuda, where they werenât
taxable. And were they subject to regulation?
Ms.Â TETT: They were generally not subject to much in the way of
regulation. I mean, the precise details varied enormously from country
to country, and some banks were more open about their shell companies
than others, but basically they werenât. This was the hidden side of
banking, the hidden face of banking, and originally nobody worried too
much about it because they seemed to be pretty small in scale. The banks
were much bigger than the shell companies and that was where most of the
activity actually happened, was inside the banks.
What essentially happened, though, this decade was that the activity
inside the shell companies began to expand exponentially, and you got to
a point where, by the middle of this decade, the type of credit that was
being created through the shell companies and the financial flow through
these shell companies was often almost as big as that actually occurring
inside the banks.
GROSS: So it was kind of off-limits to regulators and also investors.
Investors in the banks really didnât know the full story of the banksâ
balance sheets because of lot of things the banks didnât want investors
to know about was hidden in these shell companies.
Ms.Â TETT: Absolutely. It was a crazy situation, in retrospect, and for
the most part people ignored these shell companies. They ignored the
off-balance sheet vehicles because they assumed they were ultra-safe and
ultra-boring. And so if you like, it was, you know, a shocking situation
hidden in plain sight. Investors just were not asking hard questions,
and for the most part regulators werenât asking hard questions either.
But the size of this shadow banking system, as itâs sometimes called, is
just breathtaking. I saw a study last week from some bankers and
regulators which suggests that just before the credit bubble burst in
early 2007, the shadow banking system in the United States was as big as
the real banking system. And so itâs as if we had a real banking system,
the High Street banks, the Main Street banks that everyone knows about
were sitting there and people thought, okay, thatâs where our banking
system is, thatâs where the financial flows are occurring, and they just
watched that. But there was this entire shadowy phantom banking system
sitting on the edges, widely ignored, which was just monstrous in scale.
GROSS: Gillian Tett will be back in the second half of the show. Sheâs
the author of the new book âFool's Gold.â She runs global markets
coverage for the Financial Times. Iâm Terry Gross, and this is FRESH
(Soundbite of music)
GROSS: This is FRESH AIR. Iâm Terry Gross, back with Gillian Tett. She
runs global markets coverage for the Financial Times. In March, Tett was
named Journalist of the Year at the British Press Awards.
Her new book, "Fool's Gold," tells the story of the financial boom and
bust by telling the story of a small tribe at JP Morgan that developed
and marketed derivatives and credit default swaps.
Now one of the things that was really crucial in the slice and dice
mortgages and the credit default swaps catching on was that like a lot
of the slice and dice mortgages got AAA ratings from the ratings groups
like Moody's. And we've since learned that they were not nearly as safe
as a AAA rating would lead you to believe. And I'm wondering from the
research you did whether you think that Moody's was especially generous
in their ratings, kind of like playing along, or whether they didnât
comprehend the mathematical formulas or didn't foresee the mortgage
crisis. Like, what explains the AAA rating as far as you can tell?
Ms. GILLIAN TETT (Author, âFoolâs Goldâ): Well basically Moody's, S&P,
and Fitch, and all three are large rating agencies, and those are the
three largest ones, were pretty much much of the muchness and they all
tended to do the same thing. They had these models which implied that
actually AAA made sense. They had these wonderfully complicated
mathematical programs which looked at all these mortgages and said okay,
so what's happened in the past in the subprime world, what's happened to
mortgages, what's the default rate been like? Well, it kind of looks
fine and so it gets a AAA. And the problem was that precisely because
they were operating these very rarified complex mathematical models they
lost sight of what was happening on the ground amongst real-life human
The people who were modeling this stuff almost never went out to a
subprime community themselves. It was all very - it was all numbers on a
screen. So they kind of lost sense of the fact that actually models are
only useful if the past is a good guide to what's going to happen in the
future. They don't work if the world around them is changing so fast
that you can't actually model it. There were always some people in the
rating agencies who realized that, but they didn't have much of an
incentive to speak out because the rating agencies where taking fat fees
from the banks to police the correct ratings. So there really wasn't a
lot of upside for the rating agencies to say no.
GROSS: And the AAA ratings enabled the banks to cut their capital
reserves and that helped lead to the meltdown too. Can you explain the
Ms. TETT: Well in the old days, when a bank made a loan and it kept it
on its books, it had to set aside reserves to make sure that if that
loan went bad the bank was able to meet the loss. So in the old days, if
you made a hundred dollar loan you had certified eight dollars usually.
The (unintelligible) precise amount of money you had certified varied
according to the rating and over time that got more and more
sophisticated. So by the middle of this decade, if something carried a
AAA rating then a bank only had to set aside, say, one, two, three
dollars against a hundred dollar loan. So that was one reason why the
banks began to hold less and less capital relative to the amount of
loans they had made. Or to put it another way, they began to pump out
more and more loans on the same pool of reserves.
But, in addition to that, when the banks began to sell those loans on or
sell the risk of those loans on using derivatives, that enabled them to
cut the amounts of reserve they had even more. So in some cases you had
situations where a bank might've been involved in producing say a
hundred dollars worth of subprime securities, which had all been sliced
and diced and chopped up, but it might actually only end up holding say
fifty cents against the risk that those could turn sour.
GROSS: So we've been talking about some pretty complicated things that
are hard to understand. And I'm going to ask you about something that
baffles me that isnât a financial product...
(Soundbite of laughter)
GROSS: ... or a banking regulation. It's about you. You started covering
the financial world for the Financial Times in 2005. And you
immediately, more or less, started to write cautionary things about what
was going on with the shadow banking world. And this was before most
financial reporters were talking about that. And you weren't even from
the financial world. I mean your background is in cultural anthropology
or social anthropology. So why is it that you, who were not from the
world of finance, started covering finance in 2005 and pretty
immediately got on to this story?
Ms. TETT: Well, when I was an anthropologist I did my field work out in
Soviet Tajikistan. And what you basically do as an anthropologist is to
try and do a grassroots holistic study of how all the pieces work
together, and look not just at the parts of society that people want to
talk about, but also, more importantly, the parts they don't want to
talk about. So I tried to apply that to the financial world and what
immediately struck me in 2004 was that the media on both sides of the
Atlantic was writing obsessively about the equity market and about M&A -
that was glamorous, high status stuff. But they were almost entirely
ignoring this vast debt and derivatives world, this credit world,
because it was kind of boring, low status, a bit dull, etcetera,
So, in fact, in 2004 I wrote a series of memos and spoke to my editor
and said listen, I think there's a story developing out there that we
need to cover. And it became very clear to me that there was an
extraordinary revolution happening in the way that finance operates. And
the only thing that was more extraordinary than the scale of that
revolution was the fact that it was almost completely ignored by
politicians, regulators, ordinary consumers, and to a large degree by
journalists as well. And that really alarmed me because history shows
that whenever you have an area of activity that's occurring in a very
frenzied manner, which is being ignored by everybody else, but basically
is in the hands of a particular elite, a small group of people, there is
tremendous potential for overreached excess for many years to develop.
And that's exactly what happened.
GROSS: I don't know if you've seen this or not, but there's a big story
in the Columbia Journalism Review by Dean Starkman called "Power
Problem: The Business Press Did Everything But Take On The Institutions
That Brought Down The Financial System." And he writes in that article,
the public should be aware, warned, that its interests and those of the
business press may not be in perfect alignment. The business press
exists within the Wall Street and corporate subculture and
understandably must adopt its customs and idioms, the better to
translate them for the rest of us. Still, it relies on those
institutions for its stories.
Do you agree with that perception that the business press's interests
aren't in perfect alignment with the rest of us? That theyâre more about
the Wall Street and corporate culture?
Ms. TETT: I would certainly agree that the business press is in a very
difficult cultural translation position. In order to get a glimpse of
what's happening inside the business world, they have to learn to speak
the language of Wall Street. They have to learn to speak the language of
financial markets and they need to deal with the business community on a
regular basis. And so on one level they need to go native, if you like,
to use some anthropological idioms. But, on the other hand, in order to
then translate what's happening and set it in a wider context for the
rest of society, they have to try to keep a sense of context and
judgment. And one of the problems is itâs very hard to do that, to play
that cultural translation role when they have no time and resources.
And one of the problems in the financial journalism in recent years was
that anybody who actually understood what was happening inside the
credit system tended to be working for the credit because, guess what?
They could get paid by bankers a hell of a lot more money than, say, if
they're inside a newspaper. The bankers had enormous power. They had
huge amounts of money to (unintelligible) public relations efforts. And
so there was a pretty unequal power balance there. The other big problem
though is one of having a silent mentality, which is it suited bankers
very well in recent years to try to regard their activities as a self-
contained little bubble and if a journalist writes something nasty about
banks then often they would bully, threaten, try to browbeat that
And I know that because I was at the receiving end of that a lot back in
2006, early 2007, when I was writing things about the credit markets
that the big banks didn't like. The really pernicious problem though is
that in order to write things that banks may not like or big businesses
may not like, you need time and resources. You have to dig deep.
GROSS: Now you said you were bullied by institutions that you were
investigating. Can you tell us a little bit about how they tried to
Ms. TETT: Well there would be a combination of ways. It would either be
through not talking to you, and I was subject to that on occasion. Or it
would be they'd call you in and harangue you and say why are you writing
such nasty negative pieces about the credit world? I remember I was
called in to see a senior banker in London in early 2007. He said to me,
now why do you keep writing that the world of structured credit is murky
and opaque? It's not murky. Anybody can see the numbers they want if
they look in the Bloomberg machine. So I asked him: Well what happens to
that nice 9.9 percent of humanity that doesn't have a Bloomberg machine?
What are they supposed to do? Donât they have a right to know what's
happening inside the financial system? And there was a 10 second pause.
And it occurred to me that actually heâd probably never even bothered to
think about what that part of the Bloomberg free world...
(Soundbite of laughter)
Ms. TETT: ... actually thought about. I mean it was like, you know,
there was this incredible silent mentality amongst the banking world.
GROSS: Are you finding any - is gratification the right word in knowing
that you were right when everyone was telling you were wrong?
Ms. TETT: No. I'm absolutely shocked by the consequences of the bubble
now having burst because they are actually dramatically worse than I
ever expected. Although I saw two or three years ago that something was
happening that was not sustainable, I never dreamt that the subsequent
crash would be as bad as it has been. And I just desperately hope that
we can learn the lessons collectively of the need to have better
oversight and transparency going forward to make sure that this type of
terrible bubble doesnât occur again. Human greed will never disappear
and the tendencies of bankers to basically go mad and proceed to profit
will never disappear. But the best checks and balances to prevent that
running completely out of control is to have transparency oversight and
non-bankers watching what the bankers are doing.
GROSS: Gillian Tett is the author of "Fool's Gold." She oversees global
markets coverage for the Financial Times.
After we recorded our interview yesterday, the Obama administration sent
a proposal to Congress laying out a plan to regulate derivatives and
credit default swaps. So we invited Tett back today for an update and
weâll hear that after a break. This is FRESH AIR.
(Soundbite of music)
GROSS: The derivatives and credit default swaps that are behind the
financial crisis may soon be regulated. Yesterday, the Obama
administration presented Congress with a plan to regulate these
My guest, Gillian Tett, oversees global markets coverage for the
Financial Times and is the author of the new book "Fool's Gold." What
are the regulations that President Obama is proposing?
Ms. TETT: Well essentially he's trying to do several things. On the one
hand he's trying to make sure that as much trading in that derivatives
as possible is cleared through a centralized platform. What that
basically means, that instead of banks cutting derivative deals in
private where regulators can't see them, they'll be going through a
single centralized system so that they can be better monitored. At the
same time, he's also trying to make sure that all the banks and hedge
funds and insurance companies that trade in derivatives have enough of a
capital cushion to make sure that if there are any loses they can
basically survive those loses without going down. And both of those
points are critical because the derivatives world has been very opaque
in recent years and many institutions have been trading derivatives
without much of a capital cushion.
GROSS: So what could've been avoided if derivatives and credit default
swaps were regulated all along in the way that President Obama is
proposing they be regulated now?
Ms. TETT: Well a number of things could've been avoided. Firstly, you
would have avoided a situation where a group like AIG had massive
derivative contracts on its books for which it had absolutely no
meaningful capital cushion. And the reason why AIG was able to get away
with that was partly because it really kind of fell through the
regulatory cracks in the system. So going forward, what the government
wants to do is make sure that big insurance companies are covered with
the same kind of rules as banks and everyone else.
Secondly, one of the big problems in the last six months during the
financial crisis has been that investors and regulators have no way of
telling who was holding the risk and derivatives contracts and just how
big those risks where. So they basically panicked and lots of investors
said I've got no idea just how risky other institutions are. I'm going
to stop trading with everybody and basically go on strike. So what
people hope in Washington is that by introducing more clarity and more
of a centralized system into whatâs been a freewheeling bilateral world,
youâll actually have more confidence in the system as well, particularly
if a crisis hits.
GROSS: Now you know how youâre describing the shell companies, the SPVs
and the SIVs, where a lot of companies hid their more toxic assets
offshore, off the books, so their investors wouldnât know about them?
Does this regulation that the president is proposing affect those shell
Ms. TETT: Well, this regulation is not directly targeted at the shell
companies specifically. But yes, it is highly likely that itâs going to
be harder for banks and insurance companies and hedge funds to conduct
the type of crazy deals they were doing through shell companies in
recent years quite so easily in the future. Now, thereâs a lot of
details about the plan that weâve still got to see, and to be honest,
you know, lawyers and bankers are pouring over this stuff right now,
trying to thrash out what they actually mean.
But certainly, the principal has been established that you canât just
duck and weave around all the rules and run whatever derivatives you
want on the idea that somehow itâs all part of free market enterprise
and the government should keep out and that deregulation is a good
thing. Thatâs been a dominant mantra for the last nine years, all
through the Greenspan era. And essentially, what Geithner and the other
Washington administration officials are saying is that era of extreme
deregulation, of freewheeling, do what you want in the name of American
capitalism, that era is now over. And they want to try and introduce
most of their controls.
GROSS: There is a finance lobby group, the ISDA, which stands for the
International Swaps and Derivatives Association. And, of course, they
were one of the forces behind the deregulation of derivatives and credit
default swaps. Do you know what they have to say so far about President
Ms. TETT: Well, in public, theyâre trading pretty carefully because they
know which way the political wind is blowing. And so theyâve issued some
fairly careful statements, saying theyâll work with the administration.
In private, theyâre seething because the reality is that if they have
been fighting for 20 years to stop regulation of the credit derivatives
world in a heavy-handed way - or other to stop derivatives and
regulation of the entire derivative world. And they fought off
regulation three times: once in the late 1980s, once in the early 1990s
and then in 2000, Congress passed an act which effectively seem to nail
the door shut on regulation for good. I mean, people in IFTA told me
that effectively, the 2000 act had, quote, ânailed the door shutâ on
regulation of the derivative world.
But now, having won that battle three times and having actually become
pretty complacent in recent years, theyâre discovering that the door is
being blown wide open again and Geithner appears pretty determined to
overturn, not just the specifics of the 2000 Act, but the general
principles as well.
GROSS: Iâd really like to hear what you think about this since youâve
been covering swaps and derivatives so carefully for the last few years.
Theyâve gotten the global economy into so much trouble. Are they worth
saving and regulating, or should we try to get rid of them? Are they
that dangerous that we should try to just abolish them?
Ms. TETT: Well, to be perfectly honest, thatâs an idea Iâve been
wrestling with myself. And the fact is that, in theory, there could be
many, many valuable benefits of derivatives. And there are many valuable
benefits of derivatives because the type of derivatives that are useful
but donât get much press are things like contracts which allow companies
that trade overseas to protect themselves against future swings in
currencies or to protect themselves against future rises in interest
rights. And in theory, the idea of companies being able to protect
themselves against the chance of another creditor going default is a
The problem is that they have been so badly abused and used by â used
for speculation rather than for actual risk mitigation that theyâve
actually increased the risk in the system. They havenât reduced it. So,
at the very least, if derivatives are going to play a useful function
going forward, they have to be made standardized, transparent and easily
monitored - not just by the bankers, but by everyone else, too.
GROSS: Gillian Tett, thank you very much for talking with us.
Ms. TETT: Thank you.
GROSS: Gillian Tett oversees global markets coverage for the Financial
Times and is the author of the new book âFoolâs Gold.â Coming up, our
book critic Maureen Corrigan reviews some mysteries for summer reading
by an author who is not one of famous mystery writers. This is FRESH
*** TRANSCRIPTION COMPANY BOUNDARY ***
A Wise Guy Mystery Writer Makes Good
TERRY GROSS, host:
For her first summer reading review, book critic Maureen Corrigan has
sidestepped the usual suspects in mystery fiction and decided to turn
the searchlight on a writerâs writer whoâs name is not yet posted on the
reading publicâs most wanted list. Hereâs her review.
MAUREEN CORRIGAN: I was all set to do a big mystery round up for this
week. One of those, hey, letâs-get-a-jump-on-summer cavalcades of crime
and suspense novels. But as any student of detective fiction knows, the
minute you think youâve hatched a good plan, the universe throws a
wrench into the works. Every time I started to write my paen to the
predictable excellence of new crime novels by George Pelecanos and
Michael Connelly, a little guy kept muscling into my consciousness,
complaining about how those bestseller boys always steal the spotlight.
This wise guy writerâs name is Reed Farrel Coleman, and he made a good
case for himself. Admittedly, I havenât been able to stop thinking about
his Moe Prager mystery series ever since one of Godâs own divine
messengers on earth - that is, an independent bookseller - recommended
it to me last year. If life were fair, Coleman would be as celebrated as
Pelecanos and Connelly. Then again, if life were fair, a hardboiled poet
like Coleman would have nothing to write about. Reed Farrel Coleman -
with a triple decker, sterling silver handle like that, Coleman should
be the headmaster of Choate, instead of a working stiff who, I kid you
not, holds down a day job as a commercial truck driver, licensed to
drive hazardous materials, like nuclear waste.
A Brooklyn boy who came of age in New York Cityâs noir period of the
1970s, Coleman found his calling when he took a night school class in
detective fiction at Brooklyn College. Pelecanos and Raymond Chandler
also took similar routes to hardboiled greatness. Coleman has written
several different mystery series, has won a slew of major mystery awards
and is admired by his colleagues. Some of those famous tough guys and
gals have even written heartfelt introductions to the Moe Prager novels,
which were originally brought out by major publishing houses, but are
currently being kept in print by small presses: Busted Flush Press and
There are five novels in the Moe Prager series, and together, they do
what only the low-rent genre of serious fiction can do: They compose a
slow-evolving saga, set mostly in and around Coney Island. Moe, our
hero, is that iconic hardboiled character, a too-smart-for-his-own-good
ex-cop turned private eye. He makes a crucial mistake in the first
novel, called âWalking the Perfect Square.â He lies to a woman named
Katy who will become his wife about the true fate of her missing college
Moe lies out of kindness, and thus ignores one of the golden rules of
the noir world: that is, no good deed goes unpunished. That original sin
of Moeâs past haunts the novels and accrues an awful power as they go
on. By the last novel in the series, graced with the Chandler-esque
title, âEmpty Ever After,â youâre basically wishing for the doomed Moe
to be put out of his existential misery. The fact that throughout most
of the series, itâs Moeâs own monstrous father-in-law whoâs torturing
him with a threat of spilling the truth to Katy, is simply Colemanâs own
delicious spin on the dysfunctional family theme thatâs a staple of
classic American detective fiction. Coleman is a pro at executing all
the other standard hard-boiled elements like brooding atmosphere and
loop-de-loop plot-lines. But itâs Moeâs New York Jewish, part Yuppie,
part blue collar, insider-outsider sensibility thatâs the fresh draw
In my favorite novel of the series, âRedemption Street,â Moe travels to
the crumbling Catskills resort area to solve an age-old mystery â
thereâs the past again - at a burned-out hotel. After wisecracking with
a small town local woman who looks blankly back at him, Moe reflects:
Sarcasm isnât a universal language. Thatâs the thing most New Yorkers
forget when they venture beyond the city limits. Most Americans donât
spend 80 percent of their waking hours constructing witty comebacks and
snide remarks. Not everyone acts as if theyâre onstage at the Improv or
trying to outwit Groucho Marx or George Bernard Shaw. Most people say
what needs to be said and shut up.
Heâs right. And in honor of the wisdom of Moeâs sociological insight,
Iâll stop acting like the native New Yorker I am and say what needs to
be said and then shut up. Reed Farrel Coleman is a terrific writer. If
mysteries are your poison of choice, hunt his up. It may take you a
little longer to nab them, but youâll appreciate them all the more for
GROSS: Maureen Corrigan teaches literature at Georgetown University. She
reviewed the Moe Prager novels by Reed Farrel Coleman. You can download
podcasts of our show on our Web site: freshair.npr.org.
Transcripts are created on a rush deadline, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of Fresh Air interviews and reviews are the audio recordings of each segment.