Gillian Tett tells how JP Morgan made credit derivatives big, then backed off before they blew up

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The FT hosted a breakfast this morning where Gillian Tett promoted her new book about derivatives and the financial crisis, Fool’s Gold. There was a great moment during the Q&A when NYT columnist Joe Nocera started off, “There’s this character in your book, Mark Brickell …”

“He’s sitting behind you,” Tett interrupted. At which point Joe and the rest of us turned around to look at the nattily attired man sitting on the windowsill.

Brickell is really the closest thing to a villain in Tett’s book—a former J.P. Morgan derivatives guy who in the 1990s became the point man in the banking industry’s effort to keep Congress from subjecting over-the-counter derivatives to regulation. Yet he showed up at Tett’s book event, which tells you something about her style. She’s a reporter (and a social anthropologist with expertise in Tajik wedding rituals) on a hunt not for villains but for explanations.

To me this is the great strength of her book, which tells the story of the team at J.P. Morgan that popularized credit derivatives in the 1990s (they didn’t invent them; some people at Bankers Trust did that) and then pulled back during the great credit-derivatives-enabled housing insanity of the 2000s. I read it cover-to-cover on a flight out to L.A. a couple weeks ago, and while the J.P. Morgan focus keeps it from being anything like a definitive account of the credit crisis, this peculiar perspective delivers all sorts of insights that a more conventional account might not. Mainly it shows how hard it is to resist the demands and temptations of a financial market gone mad—JP Morgan Chase succeeded in doing so, Tett argues, only because of the lucky marriage of a time-honored-if-beleaguered culture of responsibility, risk-assessment, and long-term thinking inherited from the old J.P. Morgan with the similarly risk-aware approach of new CEO Jamie Dimon. But that turned out to be a rare combo: Citi, Merrill and UBS sure didn’t have it.

The book also comes closer than anything I’ve read to nailing down the connection between the rise of credit default swaps and all the craziness in housing finance. It doesn’t entirely nail it—when Tett gave Brickell a few minutes to speak this morning, he confidently denied that there was any connection at all. But Tett’s account of the enabling role that CDSes played certainly makes me suspect that there was something there.

Finally, there’s this point in my book (now less than a month from publication) where I’m discussing Robert Merton, Steve Ross and their 1970s options-pricing theories and I write:

The rise of these derivatives, as Ross called them, became one of the great financial stories of the next quarter century. Chronicling it adequately would require a book of its own.

Again, Tett’s book doesn’t entirely do that—it’s not what she set out to do. But reading it I kept getting the sense that it was filling in big holes in my narrative (which I’d left because I didn’t want to spend two more years expanding my book to 700 pages). So it’s nice to see that on my book’s Amazon page there’s a recommendation to buy the two books together—for a mere $34.07.

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