Fool’s Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe 
By Gillian Tett 
Little Brown £18.99, 326 pages 
FT Bookshop price: £15.19

There must have been mixed emotions in the marbled parlours of JP Morgan when they learned that Gillian Tett, the FT’s capital markets editor, was writing a book concentrating on the role that their innovative credit derivative team of the 1990s played in the genesis of the financial crisis.

It is not always an unalloyed pleasure to have Tett on your case. She had her claws into the Old Lady – for reasons I have happily forgotten since – when I was at the Bank of England in the mid-1990s. Our lugubrious press officer, a man with a good sense of history, would report gloomily on each phase of what he described as “the Tett offensive”, as the Bank’s positions came under fire from unpredictable directions.

There are some echoes of those old battles in Fool’s Gold. While the Bank’s deputy governor, Paul Tucker, is quoted admiringly, governor Mervyn King is variously described as “stubbornly dogmatic” and “cerebral, owlish”. Of course there’s no defence against “cerebral”. In Britain, the rudest thing you can say about anyone is that they are clever and read books. But I am rather fond of owls, as it happens, and stubbornness, it seems to me, is not always a vice in a central banker.

In fact, the folks at JP need not worry unduly. Contrary to what the book’s racy subtitle would have you expect, Tett is rather kind to her cast of central characters. The thesis of Fool’s Gold is that a small group of clever quants at JPMorgan invented credit derivatives, all those dangerous acronymic creatures – CDOs, CLOs and the like – that we have come to know as the crisis has evolved. But it was other, greater fools, in other banks, who misunderstood and misused them.

Credit derivatives’ inventors seem to have done all their creative work at a series of off-site meetings in Florida resorts (close those places down at once), episodes punctuated with jolly japes as fun-loving managing directors were thrown in the pool by drunken rocket scientists. Tett would clearly love to have been a fly on the wall at these events which fill most of us with fear and loathing – indeed, at times, her writing implies that she was there. Perhaps the FT does not provide enough corporate bonding fun for its reporters.

She introduces us to the individuals who made it all happen: Bill Winters, Peter Hancock and Bill Demchak in the US, Blythe Masters and Tim Frost in London. Winters and Masters are still with the bank; the others have moved on. Masters is still the high priestess of securitisation as chair of New York’s Securities Industry and Financial Markets Association, though when she speaks in public these days, notes Tett, “in deference to the dark mood of the times, she wears a sombre, chocolate-brown suit, instead of her usual jewel-toned hues”. Such subtle semiotics are not available to men – it’s not fair. Frost emerges as a kind of Macavity the mystery cat: now a firework inventor, now a trader, then creatively salvaging a structured investment vehicle (SIV), and today an advisor on restructuring to the Bank of England.

The innovations that emerged from the fertile minds of this talented team were supposed to make the world safer. They allowed risks to be sliced and diced and spread around the globe, held by those best able to bear them. This narrative, assiduously promoted by the banks, was generally accepted by the financial authorities at the time. In its 2006 annual report, the International Monetary Fund (IMF) noted that: “The dispersion of credit risk by banks to a broader and more diverse set of investors ... has helped to make the banking and overall financial system more resilient ... improved resilience may be seen in fewer bank failures.”

But in the wrong hands these fireworks proved to be, well, explosive. Tranched and squared, insured by monolines, triple-A rated by Standard & Poor’s and Moody’s, tucked away in SIVs, they looked as safe as houses. As indeed they were, except that the houses concerned were falling sharply in value, and their over-geared occupants were non-status borrowers. Many of the investors, including titans such as Merrill, Citi and UBS, had not understood the risks, and lost their shirts (and red braces too). The rest is familiar history to readers of Tett’s FT columns.

JP Morgan, the original begetter on the Tett reading, sailed through the turmoil relatively unscathed, under Captain Dimon. They had not loaded up their balance sheet with super-senior tranches, as did most of their competitors, and were largely SIVless. If Bill Winters’ hindsight testimony is to be believed, “I could never work out why anyone thought SIVs were a good idea.”

What blame should the manufacturers shoulder if their fireworks fall into the wrong hands? Tett rather leaves the question hanging. She also leaves open the issue of whether it would be possible to create a regulatory environment which allows proper use of such complex creations while guarding against the worst risks of mis-selling and misapplication. There is no market today for the racier instruments, but securitisation will surely return in some form, so regulators and central banks will need an answer before too long.

The best journalism, they say, is the first draft of history. There is no doubt that Tett’s reporting of the securitisation market is in that category. Her background in anthropology has given her insight into the human dimension (OK, they are bankers, but prick them and they bleed) of the crisis, to add depth to her understanding of the statistical quirks of the Gaussian cupolas, the model for pricing credit derivatives. This close reading of what happened in a corner of the financial world will be of great value to those who seek a more comprehensive assessment of the crash in due course. It is well written, as we have come to expect. The broader judgments later in the narrative – on the role of central banks and regulators – are more provisional, I think. As with the tortoise and the hare, the owl might just catch up with the mystery cat one day.

Howard Davies is director of the London School of Economics