Panic

Michael Lewis, “Panic” (The Story of Modern Financial Insanity), W.W. Norton & Co, 2009, 378 Pages

When I finished reading “Panic” I wondered just how many financial-subject books I have read and summarized since beginning this blogsite. Answer: this is my 44th book such book which began with “The Black Swan” on 4/5/08. Just about all of these previous books concerned the aftermath of a financial debacle. Michael Lewis, in Panic, provides a different perspective. He compiles articles written by others as well as himself that were written before and during the calamities, as well as articles written in hindsight. These articles cover the crash of '87, the Russian default (and the subsequent collapse of Long-Term Capital Management), the Asian currency crisis of 1999, the Internet bubble, and the current sub-prime mortgage disaster

The only real message I got from this book is a documented warning to not count on most financial “talking heads” to predict anything. For instance: Jim Cramer just before the Bear Stearns collapse had it rated as a buy, and so on. This book is another I only recommend for the truly OCD financial types. It is no great feat to gather up articles written by others and put them into a book.

My notes:
Pg. 4: The 1987 crash marked the beginning where a collapse could be brought about not by real or even perceived economic problems but by the new complexity of financial markets. A new strategy known as portfolio insurance evolved from the most influential idea on Wall Street, an options-pricing model called Black-Scholes. The model is based on the assumption that a trader can suck all the risk out of the market by taking a short position and increasing that position as the market falls, thus protecting against losses, no matter how steep. The glitch was discovered only after the fact: When a market is crashing and no one is willing to buy, it is impossible to sell short. If too many investors are trying to unload stocks as a market falls, they create the very disaster they are seeking to avoid. That’s what happened on October 19, 1987. Oddly, this failure of financial theory did not lead Wall Street to question Black-Scholes in general. The math was too advanced, the theorists too smart; the debate, for anyone without a degree in mathematics, was bound to end badly.

Pg. 12: The crash of 1987 marks the beginning of the Age of Financial Unreason, when panic became just another, quotidian aspect of financial life.

Pg. 118: The Russian drama began at the end of 1991, when the Soviet Union ended. Russia and 14 other new countries emerged from the ruins of the Soviet Union. Every one of those 15 new states faced a profound historical, economic, financial, social and political challenge. By 1994 Viktor Chernomyrdin presided over one of the most corrupt privatization practices that one could imagine. Under Chernomyrdin almost half of the world’s natural gas deposits was privatized, meaning, given away to cronies and friends of the Yeltsin government.

Pg. 257: A boom without crooks is like a dog without fleas. It doesn’t happen. Is it possible that scandal is somehow an essential ingredient in capitalism?