Fiasco: The Inside Story of a Wall Street Trader
by Frank Partnoy
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Book Summary Information
Author: Frank PartnoyEdition: Paperback
Audio: English (Unknown); English (Original Language); English (Published)
Published: 1999-02-01
ISBN: 0140278796
Number of pages: 288
Publisher: Penguin (Non-Classics)
Book Reviews of Fiasco: The Inside Story of a Wall Street Trader
Book Review: Review of F.I.A.S.C.O.
Summary: 4 Stars
For an easy and mostly understandable explanation on why we're in the financial problems we're in--you won't do much better than F.I.A.S.C.O. Written by Frank Partnoy, once a emerging-markets derivative seller for Morgan Stanley, the book walks through in plain English the principles and approaches that have shaped the investment banking industry over the last 15 years--with these remarkable observations: legalized corruption, personal greed, and lifestyles of profane excess.
What are derivatives? Partnoy explains, "A derivative is a financial instrument whose values is linked to, or derived from, some other security, such as a stock or bond." Derivatives come in one of two forms: options or forwards. "An option is the right to buy or sell something in the future... A `forward'--is the obligation to buy or sell something in the future." When you buy or sell something, you are either capitalizing on current or forfeiting future appreciation in value. Derivatives have at their heart the selling of borrowed goods--something you don't own, and will have to pay back.
This only begins to tell the story, because you have to add in to this mix the use of bonds. Bonds are really nothing more than an IOU with interest. Your city or a local company or the Federal Government issues bonds (debt). You (or somebody else) give them money with the guarantee that over a preset period of time the principle loan amount will be repaid plus interest. The extent to which a city or a government is likely to be able to pay back the bond is reflected in the rating it receives. Hence, rating agencies play the part in assuring you and me (and Japanese buyers) that they'll get their money back.
If all of this starts to sound confusing--it's no wonder. Partony regularly describes coworkers in the structured derivative division as "rocket scientist." He gives, as example, the saga of the PLUS 1 from 1993--a structured deal that allowed a Mexican bank to borrow billions more than it could repay. Partony writes, "Banamex asked several U.S. investment banks whether it could remove some undervalued and illiquid inflation-linked bonds from its balance sheet without actually selling them... Banamex wanted to exchange the bonds for cash so that it could invest in something else, but it didn't want to sell the bonds because it would have to book a loss from the sale."
And so man's greatest art--the art of deceiption--takes over. Partony, by his own admission, as an employee of Morgan Stanley, helped Banamex take their very risky peso-linked bonds (debt), partner them will very stable US Treasury Bonds (debt), and put them in a trust in the Bermudas which then turned around and sold it all to unsuspecting Americans--with the trusted stamp of AAA rating. Partony writes, concerning this financial trickery, "Morgan Stanley was taking precisely the same steps drug deals too to evade U.S. regulators."
Where there isn't outright trickery and deception, there was flagrant gambling. In describing one trade, called a Three-Year Currency Protected Sterling Inverse Floater--Partony writes, "Because this note was an `inverse floating rate' note, the payments on the note moved in the opposite direction as the interest rate reference in a formula..." He goes on to say that this note "wasn't merely any old LIBOR rate. In this case the referenced rate was called the Two-year Constant Maturity Sterling Swap Rate. The two-year swap rate is the fixed interest rate offered on an interest rate swap if you agreed to pay a floating rate of LIBOR flat." Confusing? Partony sums it up: "Basically, by buying this note, you were betting that British interest rates would decline. Except, as with other notes, instead of placing this bed directly, you would be betting indirectly in the most unbelievably convoluted, complex manner possible."
As with all gambling--the house has the advantage. Here is no exception--for whenever Morgan Stanley, or another investment bank, had monies tied up in one side of the complexly structured financial instrument, they would hedge against losses by buying (or, conversely, selling) the opposite. It's like you going to Harrah's--betting the house that gold will go up by $5 in the next week--and pay to lock in the current rate. What you don't realize is that Harrah's owns or controls 90% of the gold above the ground. They can afford to dump tons of it just for the sake of driving the price down, to keep from having to sell it to you at the increased rate, thereby earning the profit from your fees paid.
Another insightful passages: "The term `hedge fund' clearly was a misnomer because hedge funds typically didn't hedge. Instead, hedge funds were overseen by risk-seeking, off-shore investment managers who placed some of the biggest best in the bond market."
While F.I.A.S.C.O unveils the government-approved (and regulated--via Moody's and S&P) gambling of the investment banking industry--it does so in a narrative, and occasionally vulgar and risqué manner. When Partony's coworkers aren't "ripping someone's face off"--a term used to describe legalized thievery, they are really gambling (at casinos), or engaged in alcohol induced sexual activities. Though these passes are rarer, the profanity of language throughout is raw and intense. And why not? When you have made it your goal to make as much money as possible through financial trickery--there is no god but your desires and impulses.
In a word--the problem that faces us as a nation--is "borrowed." Investment banks have been allowed to gamble with borrowed money. That money first came from mutual funds, hedge funds, corporations, and communities. And yet, once begun, the gambling impulse is so all-consuming that the successful bets will never offset those that failed. And when the bets of this money went south, all that remained was to borrow more money--from Uncle Sam.
Eventually, the art of deception utterly corrupts, or begins to appear corruptible. Where Bernard Madoff was corrupted utterly--and would continue the farce as long as the environmental conditions would allow, with absolutely no intention of ever changing his practices--the dehumanizing fatigue wore Partnoy out.
After a season in Japan, he returned to the States. He writes, "When I retuned to the U.S., I was completely disillusioned. Three years earlier...I knew nothing about derivatives or structured notes or RAVs or ripping people's faces off. Some of my friends even thought I was a nice guy.... I now believed everything was a fraud, and I had a well-founded basis for my beliefs. Derivatives were a fraud, investment banking was a fraud, the Mexican and Japanese financial systems were frauds... The value system I had acquired in recent years included shooting at clients and blowing people up, all in the name of money."
Where is human morality? Where is compassion? Care for the weak? Concern for the frail? A belief that to hold the trust of others is the greatest investment of all? Partnoy writes, "For most people in the financial services industry, their job is morally ambiguous. That's the only way to survive. I believed mine was, too. Moral ambiguity is fine, especially when your salary is increasing. However, when I began to think, unambiguously, that what I was doing with my life was fundamentally wrong, I simply couldn't do it anymore. I had no choice but to stop."
In the end--the emptiness of deception reveals its ugly head. In the end, Dorian Gray hated the image in the picture. And if there is a moral from all of this, it is the old proverb which--if practiced--would have kept us from this debacle in the first place: the borrower is slave to the lender. Foolish in his own pursuits, Shakespeare's Polonius at least got this right, "Neither a borrower nor a lender be; for loan oft loses both itself and friend..." How much more a society, which--when all its lenders be lost--will have nowhere to turn?
Summary of Fiasco: The Inside Story of a Wall Street Trader
FIASCO is the shocking story of one man's education in the jungles of Wall Street. As a young derivatives salesman at Morgan Stanley, Frank Partnoy learned to buy and sell billions of dollars worth of securities that were so complex many traders themselves didn't understand them. In his behind-the-scenes look at the trading floor and the offices of one of the world's top investment firms, Partnoy recounts the macho attitudes and fiercely competitive ploys of his office mates. And he takes us to the annual drunken skeet-shooting competition, FIASCO, where he and his colleagues sharpen the killer instincts they are encouraged to use against their competitiors, their clients, and each other.
FIASCO is the first book to take on the derivatves trading industry?the most highly charged and risky sector of the stock market. More importantly, it is a blistering indictment of the largely unregulated market in derivatives and serves as a warning to unwary investors about real fiascos, which have cost billions of dollars.
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