Gillian Tett studied J. P. Morgan and predicted financial meltdown

Gillian Tett is an assistant editor of the Financial Times.

'Fool's Gold': The Banking World's Responsibility (listen to radio interview)
Fresh Air from WHYY
May 14, 2009

Journalist Gillian Tett warned about the problems in the financial industry long before many of her colleagues. In her new book, Fool's Gold, Tett examines the global economic meltdown and the role J.P. Morgan played in creating and marketing risky and complex financial products.

A reporter with Financial Times since 1993, Tett was named British Business Journalist of the Year in 2008, and Journalist of the Year in March by the British Press Awards.

http://www.npr.org/templates/story/story.php?storyId=104130944


Excerpt: 'Fool's Gold'

Fools Gold



Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe
By Gillian Tett
Hardcover, 304 pages
Free Press
List Price: $26.66




On half a mile of immaculate private beach, along Florida's fabled Gold Coast, sits the sugar-pink Boca Raton Hotel..

On one summer's weekend back in June 1994, a quite different clientele descended: several dozen young bankers from the offices of J.P. Morgan in New York, London, and Tokyo. They were there for an off-site meeting, called to discuss how the bank could grow its derivatives business in the next year... "It was in Boca where we started talking seriously about credit derivatives," recalls Peter Hancock, the British-born leader of the group...

They worked for the "swaps" department—a particular corner of the derivatives universe—which was one of the hottest, fastest-growing areas of finance. In the early 1980s, J.P. Morgan, along with several other venerable banks, had jumped into the newfangled derivatives field, and activity in the arcane business had exploded. By 1994, the total notional value of derivatives contracts on J.P. -Morgan's books was estimated to be $1.7 trillion, and derivatives activity was generating half of the -bank's trading revenue. In 1992-one year when J.P. Morgan broke out the number for public consumption-the total was $512 million.

More startling than those numbers was the fact that most members of the banking and wider investing world had absolutely no idea how derivatives were producing such phenomenal sums, let alone what so-called swaps groups actually did. Those who worked in the area tended to revel in its air of mystery.

By the time of the Boca meeting, most of the J.P. Morgan group were still under thirty years old; some had just left college...On Friday afternoon, they greeted each other with wild merriment and headed for the bars. Many had flown down from New York; a few had come from Tokyo; and a large contingent had flown over from London. Within minutes, drinking games got under way...Bill Winters, a jovial American who, at just thirty-one, was the second most senior official of them.

...The derivatives group was one of the most unruly but also most tightly knit teams. "We had real fun-there was a great spirit in the group back then," Winters would later recall with a wistful grin. When he and the rest of that little band looked back on those wild times, many said they were the happiest days of their lives.

[They had a good time ruining lives and melting down economies.]

One reason for that was the man running the team, Peter Hancock. At the age of thirty-five, he was only slightly older than many of the group, but he was their intellectual godfather. A large man, with thinning hair and clumsy, hairy hands, he exuded the genial air of a family doctor or university professor. Unlike many of those who came to dominate the complex finance world, Hancock sported no advanced degree in mathematics or science. Like most of the J.P. Morgan staff, he had joined the bank straight from getting his undergraduate degree... he especially loved developing elaborate theories about how to push money around the world in a more efficient manner...

The J.P. Morgan derivatives team was engaged in the banking equivalent of space travel. Computing power and high-order mathematics were taking finance far from its traditional bounds, and this small group of brilliant minds was charting the outer reaches of cyberfinance. Like scientists cracking the DNA code or splitting the atom, the J.P. Morgan swaps team believed their experiments in what bankers refer to as "innovation" — meaning the invention of bold new ways of generating returns — were solving the most foundational riddles of their discipline...

That stemmed in part from Hancock's intense focus on the science of people management. He was almost as fascinated by how to manage people for optimal performance as by financial flows.

The moment he was appointed head of the derivatives group, Hancock had started experimenting with his staff. One of his first missions was to overhaul how his sales team and the traders interacted. Against all tradition, he decided to give the sales force the authority to quote prices for complex deals, instead of relying on the traders...He then started inventing new systems of remuneration designed to discourage taking excessive risks or hugging brilliant projects too close to the vest. He wanted to encourage collaboration and longer-term thinking, rather than self-interested pursuit of short-term gains...

In later years, Hancock pushed his experimentation to unusual extremes. He hired a social anthropologist to study the corporate dynamics at the bank. He conducted firm-wide polls to ascertain which employees interacted most effectively with those from other departments, and he then used that data as a benchmark for assessing employee compensation, plotting it on complex, color-coded computer models. He was convinced that departments needed to interact closely with each other, so that they could swap ideas and monitor each other's risks. Silos, or fragmented departments, he believed, were lethal. At one stage he half-jokingly floated the idea of tracking employee emails, to measure the level of cross-departmental interaction in a scientific manner. The suggestion was blocked. "The human resources department thought I was barking mad!" he later recalled. "But if you want to create the conditions for innovation, people have to feel free to share ideas. You cannot have that if everyone is always fighting!"

One of Hancock's boldest experiments focused on the core group within the swaps team known as Investor Derivatives Marketing. The bankers attached to this team sat around a long desk under low ceilings on the third floor of the J.P. Morgan headquarters, and the group was somewhat anomalous in its responsibilities. Though some marketing of products to clients was done, the group acted more like an incubator for ideas that had no other obvious departmental home and handled a ragbag of products, including structured finance schemes linked to the insurance world and tax-minimizing products.

A few months before the meeting in Boca Raton, Hancock had approached Bill Demchak, an ambitious young banker with a good reputation around the bank, to run the IDM group. Determined to drive innovation, Hancock told him, "You will have to make at least half your revenues each year from a product which did not exist before!" By Wall Street standards, that was a truly peculiar mandate...

Demchak happily accepted the daunting mandate...

Demchak's razor-sharp mind dissected problems at lightning speed. A particular talent was lateral thought, pulling in ideas from other areas of banking...

Hancock installed another ambitious and driven banker in the London office of the team. Bill Winters, who had taken the breaking of his nose with such good cheer, also came from a relatively modest background by comparison to the Ivy League pedigrees of so many of the banking elite. He had studied at Colgate University in New York State, and joined the bank in the mid-1980s. He was blessed with good looks — female colleagues thought Winters looked a little like the actor George Clooney — but he preferred to stay out of the limelight...

Hancock first noticed Winters in the late 1980s, when he was working in the area of commodities derivatives.

"We sent him down to Mexico and somehow — I still don't know how — he persuaded the government to hedge half of its oil production and interest-rate exposure with us," Hancock recalled...Hancock appointed him to run the European side of the derivatives team with the expectation that the "two Bills," as their colleagues dubbed them, would work well together in tossing innovative ideas back and forth across the Atlantic.

Central to the swaps -team's quest now was to take the newfangled breed of financial products called derivatives into new terrain.

From FOOL'S GOLD by Gillian Tett. Copyright (c) 2009 by Gillian Tett. Reprinted by permission of Free Press, a Division of Simon & Schuster, Inc, NY.