Book Review: Liz Weston, The 10 Commandments of Money

This article was first published at Blogcritics

The 10 Commandments of Money: Survive and Thrive in the New Economy, now available in paperback, is online financial guru Liz Weston's guide to building economic security in today's post real estate bubble environment.  It acknowledges that we live in a new world where what had been standard financial advice in the past is no longer valid and gives commonsense advice about the strategies and actions that offer the best opportunity for the good life.  Her advice seems practical, although it isn't necessarily simple.  More often than not it involves either a lot of homework for the individual or the help of a professional.  Still, there are steps an ordinary person can take and if one is willing to put in the time and the effort, Weston's "10 Commandments" would appear to offer readers a good shot at building and preserving the kind of nest egg that is part and parcel of the American dream.

After a short introduction in which she points out the failures of the past, the book is divided into ten chapters, each explaining in some detail the best way to handle finances as we move forward.  Her advice isn't necessarily original, rather it is often a compendium of strategies she has collected and sometimes modified from a variety of sources.  So for example, in the first chapter where she discusses creating a budget that will work in the "real world," she uses as her base the work of Harvard University's Elizabeth Warren.  Later when she talks about buying and selling real estate she refers to the work of Ilyce Glink.  She is always careful to acknowledge the sources of her ideas both in individual chapters and in an appendix which points to them and others for further study.

Among the topics she discusses are budgeting, credit, retirement, insurance and education.  She introduces each chapter with a statement about what had conventional wisdom, a statement about how that wisdom had changed during the bubble economy, and what the new rules should be.  On debt, for example, the old rule: "All debt is bad.  Pay it off as fast as possible."  During the bubble: there is no need to worry about paying off debt; there are better things you can do with your money.  The new commandment: pay off bad debt, use good debt.  Her basic thesis is that when debt is inescapable, as it seems to be for most of us, it is important to recognize that not all debt is equal.  Some debts are more expensive than others.  Some debts come with more dire consequences for failure to make payments.  Common sense then dictates which debts to pay off as quickly as possible and which to keep in abeyance.

This is the kind of practical wisdom she dispenses throughout the book.  She points out the importance of early retirement saving by illustrating how contributions appreciate over the years.  She explains the importance of higher education, but points out that it is not necessary to buy more education than you need to meet your goals.  She guides readers through the morass of student loans, bankruptcy laws, mortgage options, insurance and even cell phone plans.  Although at times she seems to be repeating herself, since there is a good deal of overlap in some of the chapters, her writing is always clear and easy to understand. 

Each chapter ends with a list of actions readers can take to implement their goals, although some  of her advice seems easier to follow than others.  "Exhaust federal student loans before seeking private education loans," she advises at the end of the chapter of education.  She has already explained the advantages of federal loans in the meat of the chapter, so it is absolutely clear why she makes this recommendation.  On the other hand after explaining about the necessity for communication in her chapter about marriage, she points out that when conflicts arise, it is the problem that needs to be attacked, not the marriage partner.  Good advice, although sometimes human nature gets in the way.  

Of course, in the end, there are no rules that will work for everyone.  Generalizations are dangerous.  Individuals must evaluate each and every one of these commandments and apply them with care to their own particular situation.  Besides as this book, itself, demonstrates, yesterday's truisms may turn out to be today's fallacies.

Book Review: All the Devils Are Here, by Bethany McLean and Joe Nocera

This article was first published at Blogcritics

A better title for Bethany McLean and Joe Nocera's comprehensive history of the recent financial crisis All the Devils Are Here would be All Here Are Devils. If there is one undeniable truth their book seems to document, it is that there is no one involved in the debacle, be they Wall St. moguls, Washington polls, government regulators, rating agencies, unscrupulous lenders or unqualified borrowers, who is free from blame. There were those who were outright crooks. There were those who failed to do due diligence. There were those who were simply greedy. There were those that were too dumb to see what was going on. What McLean and Nocera Have written is an indictment of all the devils involved, and everyone involved smells of the sulfurous pit.

Certainly books on the financial crisis in the past few years have not been lacking. More often than not they have been books devoted to one particular aspect or company. Michael Lewis tells the story of the men that managed to read the tea leaves and make a fortune from the crisis. William Cohan describes the collapse of Bear Stearns. Gillian Tett describes the creation of credit default swaps. All the Devils Are Here looks at the whole picture and tries to provide a coherent explanation of what happened, how it happened and most importantly why it happened. If there is only time to read one book on the subject, this should probably be it.

It goes back to the beginnings—to the creation of mortgage backed securities thirty odd years ago. "In the simplest of terms, it allowed Wall Street to scoop up loans made to people who were buying homes, bundle them together by the thousands, and then resell the bundle, in bits and pieces, to investors." In the past, if a bank had made a loan to a home buyer, that bank would hold and service the mortgage. Repayment of the loan would be to the bank. With securitization, the bank or whichever company made the loan would no longer have any interest in the repayment. That would be the concern of the buyer of the new securities. Suddenly it wasn't so important to worry about the credit worthiness of the home buyer; repayment wasn't your problem. On the other hand there were hefty fees to be made from making loans, the more loans, the more fees.

Of course, it gets more complicated with innovations on the basic theme and innovations on the innovations, but the underlying principle is the same. Loans could be made without any consideration for whether they could be paid back. As long as the real estate market was hot and prices on housing kept rising, home owners could refinance loans to meet their obligations. But, and there is always a but, prices don't always rise. Bubbles burst.

McLean and Nocera's explanations of the different financial instruments and the way they were used are as clear and concise as any I've read. This is not to say that I didn't have to read some of them two or three times to try to make sense of them. As with any profession, financiers and those who write about them have their own jargon, and it is difficult for them to avoid that jargon. Terms are defined, but it is easy for the casual reader to forget the definition. The alphabet soup of initials is confusing (even given the authors' acronym key at the beginning of the book which lists twenty nine different acronyms). Moreover, it isn't always easy to distinguish who owes who what when a short seller borrows securities and prices change. If the authors are correct, and I would suspect they are, even these people who were dealing with them on a daily basis didn't really understand them.

The book details the problems with the pseudo-governmental enterprises Fanny Mae and Freddy Mac. It deals with the subprime mortgages spun out by predatory lenders like Countrywide and Ameriquest. It describes the machinations of financial giants like Goldman Sachs and Merrill Lynch. It documents the role of AIG. The failures of ratings agencies like Moody's are documented as are those of governmental regulators. If the authors don't go into quite the detail on any one of the problems that the book length treatments of the problems do, they make up in breadth what they may lack in depth. Besides, there is more than enough depth here for any but the most professional of academics.

It is interesting that there is really no one in this book that comes out of this mess with anything approaching honor. Some seem less culpable than others; some seem smarter at least when it came to seeing their own self interest. Individual characters emerge as vain, obstinate, jealous, power hungry and self centered. These are men and women who are used to having their own way. They measure success by the size of their bonuses. The cast of characters is large, and sometimes for the uninitiated it is easy to forget which name goes with which company. Who works for AIG? Who is the CEO of Lehman Brothers? Roland Arnall is the head of what company? Again, there is a list of players at the beginning of the book, but like end notes, too often it is too much trouble to turn back to it.

With the country still suffering from the effects of this financial meltdown, while the movers and shakers responsible seem to have come out of it unscathed, the indictment in All the Devils Are Here ought to be required reading for us all. You know what they say about history and repetition.

Book Review: Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable, by Mark Gilbert

All too often books on economics justify Carlyle's pejorative characterization of the subject as the dismal science. They indulge in dry statistics and arcane formulas. They talk down to their readers often asserting that much of the subjects they are discussing are so complicated that only the experts are able to understand them, indeed one has to wonder if even these so-called experts actually do understand them. They prefer the jargon of the insider to a language more accessible to a larger audience. It is almost as if these writers are purposely obfuscating, as if they are not interested in being understood by the general reader.

Bloomberg News London bureau chief Mark Gilbert's Complicit, a study of the what went wrong with the world credit markets and led to the recession in which we find ourselves currently embroiled, tries to avoid these pitfalls. While there are times he cannot quite manage to escape the snares entirely, and there is after all some excuse for the precision of professional jargon, his prose is usually aimed at the general reader and it usually hits its mark. He is willing to explain the arcane. He is unwilling to rely on the too complicated cop out.

There may be a lot of references to M-LEC's, SIV's and CDO's. There may be discussions of hedge funds and risks and rewards of borrowing short and lending long. There may be fingers pointing at the esoteric machinations of institutions like the central banks and the securities raters. There may be the reliance on some of the economic clichés that have become part of the vocabulary of nearly everyone paying any attention to today's news coverage: moral hazard, liquidity crunches, and market bubbles. This is to be expected. These are after all the flesh and bones of the problem under discussion, and Gilbert does his level best to make all these things intelligible to the layman, without gross oversimplification.

The essential take away from his book would seem to be that there were many to be blamed for taking part in and allowing the risky speculation that became the norm for financial institutions world wide who were supposedly conservative custodians of their client's funds and their stockholder's best interests. This risky gambling with other people's money was not only tolerated, it was encouraged and rewarded. Paper profits earned huge bonuses and Cadillac perks for speculation. Conservative investing earned stones and ashes.

So long as market conditions remained propitious—easy credit, optimistic outlook, minimal regulation—the bubble grew and grew, larger and larger. The assumption was that what had risen would continue to rise. Until, an ill wind blew down what was a house of cards. Supposedly rock solid financial institutions found themselves embroiled in obligations they could not meet with funds on reserve, and unable any longer to find available credit. Trust in financial institutions gave way to panic. One company is allowed to go bankrupt. Mergers are arranged for others. Tax payers all over the world are saddled with the toxic assets of corporate behemoths deemed too big to fail. The results are catastrophic, and they have yet to be fully realized.

While there is little that is new in Gilbert's book, it does have the merit of pulling together all of the divergent strands and tying them together cogently. And he does it with style. His prose is colorful, figurative and allusive. "The alphabet soup cooked up by the derivatives chefs—boil some CDOs, toss in a dash of ABS and a soupcon of CDS, season with CPDOs, and serve with a garnish of overly optimistic ratings—was sufficiently toxic to poison the entire financial system." A little further on, "Music producers joke that the most successful heavy metal records are those in which every instrument is louder than every other instrument. A global capital market in which everything was becoming more expensive than everything else was a market that was cruising for a bruising." Here is his take on the difficulty of making judgments about employees: "Until a trader goes 'ker-ching' or 'ka-boom,' the bank has no clue whether it has hired a star or a turkey." This kind of lively prose style contrasts nicely with the inevitable academic jargon.

The book ends with some suggestions for avoiding repetition of these kinds of crises. Most seem fairly conventional: better regulation, but not to the point of stultifying business; stop speculators from profiting from temporary gains; make sure that when speculative investment goes bad, speculators take their share of the hurt. He even suggests at the very end of the book that perhaps one cause of the crisis may have been the macho character of a financial world dominated by testosterone. It may well be time, he goes on, to see if an injection of a greater female presence in high finance might not have an ameliorative effect. If this is the kind of mess men can get us into, how much worse could the ladies do?