Panic: The Story of Modern Financial Insanity by Michael Lewis. W.W. Norton & Company. 2008.
Michael Lewis established his reputation with Liar's Poker as an informed and author worth reading in the financial world. His most recent book is an anthology on recent financial panics. The current era has produced a steady stream of financial panics. Panic starts with the 1987 stock market crash and portfolio insurance, and moves on to the Asia, Russian, Long-Term Capital Management, Mexico, Dotcom, and Subprime financial collapses.
Some of these had impacts and implications not fully understood at the time, which forecast future events. The 1987 portfolio insurance stock market panic “was the beginning of something new—a collapse brought about not by real or perceived economic problems but by the complexity of the financial markets.” This pattern has been a key factor in the current financial crisis, as the complexity, difficulty in valuation, and lack of transparency in derivatives created a global banking freeze-up.
The Long-Term Capital Management collapse came out of the rise of young, computer formula focused financial professionals. It was a “transfer of authority” to this group. The final step was when “Wall Street firms had turned themselves in giant hedge funds.” At Citigroup, the CEO “became the hostage of his cleverest employees.”
As the author notes “everything, in retrospect, seems obvious.” There are lessons to be learned in going over the history of the obvious. Michael Lewis’ book is a fascinating and engrossing way to learn these lessons.
