Book Reviews



Capital Indeas Evolving

Author: Peter L. Bernstein

Difficulty

Capital Indeas Evolving
Since 1952, portfolio theory has evolved to form what we called modern portfolio theory. MPT includes various theories like efficient market hypothesis and capital asset pricing model just to name a few.

Capital Indeas Evolving not only describes these ideas, but also shows how they are implemented in day to day business.

The author, Peter L. Bernstein was an American financial historian and economist.

In the first part of Capital Ideas Evolving, Mr. Bernstein presents the history of modern portfolio theory and its latest development. People like Markowitz, Scholes, Modigliani, Merton, Sharpe and others are presented.

The second part relates the success of various institutional investors like:

» Barclays Global Investors with the development of index investing.

» The Yale Endowment Fund with its emphasis on alternative investments.

» Goldman Sachs and the development of quantitative investing.

The last part of the book is dedicated to the current evolution of the Investment industry: The separation of beta and alpha when managing money and the search for portable alpha strategies.

As a critic, the author omits significant contributors to modern portfolio theory, Nassim Taleb’s work on black swans and randomness and Benoit Mandelbrot’s criticisms against Gaussian distribution.

Regarding the difficulty, this book is not such an easy read as it deals with efficient market hypothesis, capital asset pricing model and portable alpha strategies.

That being said, chapters are based on interviews of leading theorists and practitioners. In addition, gossips along the book make it’s reading enjoyable.

Despite some shortcoming, Capital ideas Evolving is a must read for every student in Finance. It will help you to understand how the current investment strategies came about.

Buy Capital Indeas Evolving by Peter L. Bernstein

Aug 22, 2012

How Markets Fail

Author: John Cassidy

Difficulty

How Markets Fail
Many books about the 2008 crisis have been written, How Markets Fail goes beyond regular discussions about the causes of the crisis by underlying the predominance of "Utopian economics".

Mr Cassidy describes the utopian economics as disconnected from what really happening in the real world.

The author, John Cassidy is an economic writer for the New Yorker.

The book is divided in three parts:

» The first part exposes the economic intellectual history.

Starting from Adam Smith with the Wealth of Nation in 1776 to the Chicago School of Economics with Eugene Fama and the efficient Market Hypothesis.

The author notes that very few economic theories focus on economic crisis and that the liberal view is that an economy regulates itself without any government intervention.

Amusingly, even Adam Smith has issued warnings about the excess of an unregulated financial industry.

» In the second part, Cassidy describes how economics have evolved through the reality based economics with the Game theorist like John Nash and the development of behavioural economics with Amos Tversky and Daniel Kahneman. The author rediscovers Minsky's financial instability hypothesis.

» In the last part, the author explains why things went wrong and triggered the 2008 crisis.

Even if it is maybe a bit easy to blame one person, for Cassidy, the main culprit of the current crisis is Greenspan. According to the author, Greenspan has let the interest levels low for a too long time. Some argues that Greenspan has replaced the dotcom bubble by a real estate one. The uncontrolled development of the financial industry is also responsible for the current crisis.

Cassidy doesn’t reject the free market theories, but like Adam Smith and Keynes, he argues in favour of a greater government regulation of the financial industry.

To conclude this book is very interesting not because it covers the 2008 crisis but it does an excellent job at describing the various economic theories and their influences.

Buy How Markets Fail by John Cassidy

Jul 20, 2012

The Return of Depression Economics and the Crisis of 2008

Author: Paul Krugman

Difficulty

The Return of Depression Economics and the Crisis of 2008
A part from explaining the causes of the 2008 crisis and proposing some solutions, the best thing about this book is a chronology of the various currency/financial crises since the great depression. From the Tequila crisis, the Argentina crisis, the Asian financial crisis of 1997 to the Russian and Japan crisis, just to name a few.

Bubbles and the role of the hedge funds in a crisis environment are also discussed.

The return of depression economics has been originally written in 1999. Since then, it has been updated with the dotcom bubble, real estate bubble and the last event, the 2008 crisis. This book is a quick read, around 200 pages.

The author, Paul Krugman is a columnist for The New York Times. He’s the 2008 Economics Nobel Prize’s winner, he is considered a Keynesian and has done a lot of research international finance and trade.

The first part is dedicated to emerging crisis:

There are three things that macroeconomic manager want for their economies:

» Discretion in monetary policy so that they can smooth recessions and control inflation.
» Stable exchange rates so that businesses are not faced with too much uncertainty.
» Free international exchanges.

The problem is that it is very difficult to achieve the three at the same time, especially for emerging countries.

Countries usually follow a restrictive fiscal and monetary policy in order to increase trust from the markets. But, according to the author, this is the wrong answer.

The second part is about the current crisis.For Krugman, the main culprits for the current crisis are the problems faced by the shadow banking system.

According to Paul Krugman, the best way to solve the 2008 crisis is to, first help the economy by easing monetary and fiscal policy. Second, to correct the problem, regulate the shadow banking economy.

Buy The Return of Depression Economics and the Crisis of 2008 by Paul Krugman

June 25, 2012

Freefall

Author: Joseph Stiglitz

Difficulty

freefall
If you want to understand the 2008 crisis, Freefall is an excellent book. The author, Joseph Stiglitz has received the Nobel Prize in Economic sciences and was former chief economist of the World Bank. He’s currently professor at Columbia University.

In Freefall, Stiglitz underlines a subject he is well aware of, the various problems posed by information economics, that’s actually his Prize Nobel’s subject. Various information issues like the principal-agent problem populate the finance industry.

Stiglitz is not against free market but he thinks that some regulations are necessary in order to get a well functioning economy. He argues that an unregulated Finance industry has led to the current crises. The author shows the fact that in 2007; the finance industry was representing around 41% of the US corporate profit.

Freefall is divided in two parts:

Part 1: Description of causes of the crisis

Various factors have contributed to the crisis. Stiglitz notes that the expansion of an uncontrolled financial sector is the principal cause. The development of financial products through securitization, the opacity of the financial system and the amount of leverage employed have conducted to the current situation.

The finance industry was left unregulated because of the predominance of the neoclassical views on the market economy.For example, neoclassical theories ignore bubbles in economy when we all know that bubbles do exist.

Part 2: How the crisis was handled

Stiglitz condemns the way the Bailout has been executed in U.S. For the author, the government didn’t ask for sufficient guarantees before releasing funds.

Joseph Stiglitz is sometime presented as a socialist, but in this book he remains objective on the subject underlining the major causes of the crisis.

Even if the solutions proposed by Stiglitz are not convincing, Freefall is maybe the best book about the current crisis.

Buy Freefall by Joseph Stiglitz

Apr 21, 2012

Too Big to Fail

Author: Andrew Ross Sorkin

Difficulty

Too big to fail
Too big to fail relates the chronology of the 2008 financial crisis, from the failure of Bear Stearns to the TARP execution.

At the end, each top investment bank was sold or converted into a bank holding company.

This book is about the following stories:

» How Bear Stearns was sold to JP Morgan.
» The Bailout of the two mortgage-lending giants, Freddie Mack and Fanny Mae.
» Why the US government left Lehman Brothers going bankrupt.
» How AIG was bailed out.
» The Sale of Merrill Lynch to Bank of America.
» How the major banks were forced to accept the TARP program.

The author, Andrew Ross Sorkin is a reporter and columnist for the New York Times. Sorkin has done a great job at reporting the events, has done a great research, spending countless hours doing interviews and collecting facts.

This book reads like a thriller-documentary, even if it is more than 500 pages, it is quite an easy read.

Because this book introduces many characters and it is difficult sometimes to remember every banker or official names.The author assumes that the reader has some knowledge about CDOs, MBS and other repurchase agreements.

Even if it is true that the author spend a minimum of time explaining the causes of this financial meltdown, this book is one the best book about this crisis started in 2008.

Too big to fail has its place among other great books like Barbarians at the gate, LTCM, The smartest guy in the room, just to name a few.

Buy Too Big to Fail by Andrew Ross Sorkin

Mar 17, 2012

The Big Short

Author: Michael Lewis

Difficulty

The big short
Michael Lewis is a financial journalist; he is also the successful author of Money ball where he focused on analyzing the Oakland Athletics baseball team and Liar’s poker where he described his experiences at Salomon Brothers.

Before the housing collapse of 2007-2008, you didn’t have to be a genius to realize that the housing prices in US were overvalued.Michael Lewis has documented how few industry players saw that market crash was coming and have made profit from it.

The big short is a quick read with 264 pages long, so it can be read within a day. This book reads like a novel in which the author spends time describing the various characters involved.

You don’t need to have a strong financial knowledge to understand this book as Michael Lewis is quite good at describing complicated financial product like credit default swaps

In this book, you will understand how Goldman Sachs made huge profits thanks to AIG guaranteeing subprime mortgages industry by issuing credit default swaps.

If you want to know more about how the current crisis has started, the big short is a worthwhile read but it isn’t complete. To get a bigger picture of the current situation, you will have to read other books like "Too Big too Fail".

Buy The Big Short by Michael Lewis

Mar 04, 2012

No One Would Listen

Author: Harry Markopolos

Difficulty

No one would listen
This book relates the true story of Harry Markopolos. Mr Markopolos is the man who tried to ring the alarm well before the Madoff’s ponzi scheme collapse. Even if you are not familiar with finance but you want to know more about why Bernard Madoff was able to develop such a huge Ponzi scheme, you should definitely read this book.

Along the way, you will see how Harry M. with some friends tried to warn the government since 2000 (Madoff’s activities were stopped in 2008), you will be astonished by the number of time, the author tried to warn the SEC and the government about Madoff’s activities.

Bernard Madoff ran a Ponzi scheme (officially a hedge fund) for more than 20 years. After the Ponzi collapsed, nearly $65 billion were missing from client accounts. Madoff was simply using money from new investors to payback older investors.

Harry M. discovered the Ponzi scheme by accident. He was an option trader and his superior asked him to replicate the Bernard Madoff’s strategy. As the strategy was impossible to match (with such constant earning and low volatility), he started suspecting Mr Madoff.

This book is more about the author trying to uncover the true and dealing the SEC; don’t expect too many details about Madoff’s activities in this book.

Even if Madoff’s hedge fund was based on complex option trading strategies, the author doesn’t go into technical details.This book is an easy read and is accessible to a broad audience.

Madoff was sentenced to 150 years in prison, the maximum allowed.

Buy No one would listen

Jan 13, 2012

Confidence Game

Author: Christine S. Richard

Difficulty

confidence game
If you are interested in how the financial crisis of the past few years has begun, you should read this book. This is the story of how hedge fund manager Bill Ackman started to short MBIA, one of the largest municipal bond insurers. Like H. Markopoulos with B. Madoff, it will takes a lot of time and effort to show the world he was right.

Everything started back in 2002, when Ackman started to believe that structured finance could be easily gamed. He started shorting MBIA by buying CDS (credit default swap). During several years Bill Ackman with confronted with the scepticism of Wall Street.

In 2003, the SEC and New York Attorney General's office head by Eliot Spitzer investigated Ackman. Ackman was cleared of any wrong doings by the SEC and New York Attorney General's office. In 2008, Ackman sold his positions in MBIA, pocketing more than 1.1 billions

Everything ended with a gigantic bailout in order to protect debt holders. You will see how MBS, bonds guarantees, CDOs, squared CDOs to name a few, have participated in the current crisis. How MBIA has tried to protect it’s triple A rating at any cost. Without it’s AAA, the business model was broke.

Bill Ackman gave all the emails regarding MBIA case to the author of this book, the Bloomberg journalist Christine S. Richard. She was able to produce a well-written book on a complicated matter.

Buy Confidence Game

Jul 20, 2011


When Genius Failed, The rise and the fall of Long-term Capital Management.

Author: Roger Lowenstein

Difficulty

long-term capital management
Long-Term Capital Management (LTCM) was a hedge fund founded in 1993. At this time, the US government wasn't aware what was a hedge fund until it was about to blow up the financial markets. John Meriwether set up the fund, formally head of the bond arbitrage group at Solomon Brothers. The future Nobel laureates Robert Merton and Myron Scholes were among the board of directors of LTCM.

The strategy was taking advantage of bonds spread using very high leverage. LTCM was trying to find out some small mispricing of one security versus another. At the peak of the fund, $100 billion were borrowed against only $4 billion in equity; the exposure of the opened position through options was $1 trillion.

During a period the fund was very successful until they started other strategies without any advantage (ie merger arbitrage). In 1998, the Russian government devalued its currency and was in default on its borrowing. With this event, the LTCM fund blowed up. The US government was forced with other banks to rescue the company in order to avoid the entire collapse of the financial system.

This book is non-technical, so you won’t learn the bolt and nut of a option pricing model or a spread analysis. By the way, it is worth reading to understand one the biggest fund blow up in history. The author Roger Lowenstein does a good job at describing the greed and fear of the characters.

Buy When Genius Failed: The Rise and Fall of Long-Term Capital Management

Jun 01, 2011


Den of Thieves

Author: James B. Stewart

Difficulty

den of thieves
If you are interested in investment banking and more generally in finance, if you want to know what's happened during the 80's, this book is a must read. This book takes you into the lives of big players of Wall Street at this time. You will see how people can become greedy through character like Michael Milken, Ivan Boesky, Dennis Levine, Marty Siegel, Richard Freeman and others..

James Stewart tells you the story of one of major wall street investment banking firm of his era, Drexel Burnham Lambert . The company was involved in hostile takeovers using leverage buyout (basically it's when an investor acquires a significant portion of company's equity using a high percentage of debt by issuing for example high yield bonds).

After several years of success, various Drexel executives were convicted for insider trading (plus other felonies) leading to the collapse of the company.

My only regret is that book won’t provide much information about Milken himself. That being said, after nearly two decades, this book is still worth reading.

Buy Den of Thieves

Jun 15, 2011


Barbarians at the Gate.

Author: Bryan Burrough and John Helyar

Difficulty

barbarians at the gate
If you want to understand the history of Wall Street, along with Den of thieves, you should read Barbarian at the gate. This story will take you in the middle of the battle for the control NJR Nabisco. It was the largest leveraged buyout of the 80’s; with deal approaching the $31.1 billion.

A leveraged Buy out is a highly leveraged transaction where a group of investors acquires a controlling interest in a company. Barbarians at the gate gives you insight on how LBO works.

This book reads like a novel, it is extremely well written. The authors have well researched the subject and give many personal details of the characters involved. The two major companies involved in this transaction are Kohlberg Kravis Roberts & Co and Shearson Lehman Group but a lot of well known companies were also involved in this transaction, Morgan Stanley, Goldman Sachs, First Boston, Salomon Brother to name a few.

This book also describes the personal history of Ross Johnson through Standard brands and Nabisco before the merger with RSR. The only regret about this book is that it no gives enough details regarding the various transactions.

Buy Barbarians at the Gate: The Fall of RJR Nabisco

May 29, 2011