The University of Illinois has a very nice tradition of selecting a book for the library in honor of recently tenured professors.  I have to say that I missed the first deadline because I was paralyzed at having to pick just one book!  Anyway, I have chosen my book now and a book plate will be placed in this book with my name on it.  I am very appreciative of this honor.

So, what book did I choose?  My kids guessed (wrongly) that I chose either "Guess How Much I Love You" or "Love You Forever."  (The letter I received said I could choose "anything from a children's book to a treatise.")  However, although I do fuss over these books at bedtime, I don't generally read them in my spare time.  (If I had chosen a children's book, it would have been "I Love You the Purplest."

Instead, I chose Clarence Darrow For the Defense by Irving Stone.  I was required to read it in American History, 11th grade, and I think I adopted the principles embodied in the stories there as my polestars.  Like Atticus Finch, but rumpled and real.

What would you have picked?

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Here is the front page of the leading Canadian daily last weekend. The graphic is very impressive, and the headline, An Economic Crisis Descends into Farce, is more charitable than some other foreign headlines, notably in Asia. The same issue has Eric Helleiner’s Depression book recommendations.

Apropos reading lists, Adam Levitin recommends Maury Klein’s Rainbow’s End.

I tend to the dishy comparative. Here are my top three choices of the week. 

• Paul Blustein’s The Chastening is the best telling of the last time U.S. Treasury personnel graced glossy covers. Chapter 3, which tells of the Thai central bank’s battle with the derivatives markets, is especially racy. Chapter 10 sheds light on crisis policy coordination, and Chapter 11 on LTCM puts the story well-told by Roger Lowenstein in global perspective. I have been assigning The Chastening to my International Finance class for the past few years; I think I will do it again this year despite the new cataclysm. The book’s advantage as a teaching tool is that it covers so many different aspects of the financial industry – banks, securities and currency markets, derivatives, hedge funds, etc. And it makes for great fixins to one tough textbook.
• Gillian Tett’s Saving the Sun is about the demise of Long-Term Credit Bank, but it is really a window on Japan’s crisis of the 1990s. Like Blustein, Tett is a money journalist, which makes for lucid, savvy prose. She is also an anthropologist (biiig plus in my book). Lots of scary déjà vu moments for the current adventure – though Adam Posen’s warning against overwrought Japan comparisons should relieve you some.
• Finally, it may be a sin to put a classic by one of the greatest economic historians ever in the same string as dishy journalism, but I hope Charles P. Kindleberger’s spirit takes it as a compliment. I find his writing in Manias, Panics, and Crashes:  A History of Financial Crises so utterly zany that I cannot resist. I will be sure to reprise this recommendation in a serious academic reading list as I atone next week.

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That is from Chapter 1 ("A Disquieting Suggestion") of Alasdair MacIntyre's After Virtue, which is this semester's book in the Faith and Intellect Seminar for faculty here at BYU. The hypothesis to which MacIntyre refers is this: "We possess ... simulcra of morality, we continue to use many of the key expressions. But we have -- very largely, if not entirely -- lost our comprehension, both theoretical and practical, of morality."

The book is over a quarter century old, but I expect this to be a lively seminar. This is my third book in three semesters at BYU, and I am surprised that more people don't take the opportunity to attend. We usually get about 15-20 people, and a number of them are not faculty. I guess we are all busy, and I know that many people are not interested in reading books selected by others, given that their own reading lists are bulging at the seams. Still, this is a nice opportunity to benefit from the insights of others around campus while having a romp through the history of moral philosophy.

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Our friends at orgtheory are hosting a Book Forum on Steve Teles' Rise of the Conservative Legal Movement. I haven't read the book, but it seems to focus on just what you might expect: law and economics, the Federalist Society, and conservative public interest firms (e.g., Institute for Justice). Teles traces the movement to the late 1970s, and it certainly was in full swing by the time I attended law school at Chicago in the late 1980s.

My first direct contact with CLM was in 1985, when I visited Clint Bullock at the Institute for Justice in Washington DC. I was an undergraduate in the DC Circuit Executive's office, and I was incredibly impressed with his work. And I thought the humble offices were cool.

The secretaries at my internship were encouraging me to go to Chicago for law school, rather than any number of other top law schools. Chicago had the right values, they said. Well, I didn't just take their word for it -- and it certainly made a difference that Chicago happened to be close to Wisconsin -- but that's where I ended up two years later. Once at Chicago, I was initially drawn to the Federalist Society because they had the best speakers and food (most money) ... and because I have always had a libertarian leaning.

I ultimately became an officer in the law school chapter of the Federalist Society, then founded a lawyer's division in Delaware. I have been the adviser to student chapters at Lewis & Clark and Wisconsin, but they don't need me here at BYU. Anyway, I don't spend much time with the Federalist Society anymore, but Teles' book sounds like a nice trip down memory lane.

In addition to a stroll down memory lane for me, the book seems to have some very interesting stories to tell law professors. This is from Teles' first post at orgtheory:

L&E was successful in law schools in part because of the pre-existing weakness of the fields it was attacking. Doug Baird, who went on to become Dean of the Chicago Law School, told me that in the 1970s, "it was clear that…doing great work was easy…I used to say that this was just like knocking over Coke bottles with a baseball bat…I remember writing articles where the time between getting the idea and getting it accepted from a major law review was four days." (p.100) That suggests that to account for the success of L&E, we need an approach that looks both at the pre-existing regime in the law schools (especially in private law), and not just on what the agents trying to bring it down were doing. That is, there was an opportunity that, in the 1970s, meet a set of mobilized agents. I think that you can’t explain what happened with the explosion of law and economics without dealing with the structural vulnerability in the legal academy that agents were able to exploit (along with the fact that the immune system of the legal academy was much lower in areas like bankruptcy that had lost much of the ideological interest that they once had).

Doug Baird's comment will seem shocking to those outside of the legal academy. It brings to mind a conversation I once had with a colleague that getting something published in a law review was no great accomplishment: "I could start a brand new article right now and have something publishable -- somewhere, maybe even somewhere respectable -- by the end of the weekend." That's merely a function of having way more outlets for publication than we have good product to fill those outlets. Still, I think there is no question we have come a long distance in the past 30 years.

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My first Aleksandr Solzhenitsyn novel was A Day in the Life of Ivan Denisovich, but I soon assembled a collection of his books, though I can't claim to have read them all. The Gulag Archipelago was life altering for this kid from rural Wisconsin, even though by the time I read it, Solzhenitsyn was saying nasty things about my country from the safety of Vermont. As noted in the NYT, "Many in the West didn’t know what to make of the man," but it's hard to think of a writer with a more profound influence on the world than Solzhenitsyn.

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This is Joe Nocera's list “in no particular order”:

    “Barbarians at the Gate: The Fall of RJR Nabisco,” by Bryan Burrough and John Helyar
    “Liar’s Poker,” by Michael Lewis
    “The Devil’s Candy,” by Julie Salamon
    “The Box,” by Marc Levinson
    “Indecent Exposure,” by David McClintick
    “The Go-Go Years,” by John Brooks
    “The Kingdom and the Power,” by Gay Talese
    “Titan,” by Ron Chernow
    “Do You Sincerely Want To Be Rich,” by Godfrey Hodgson, Bruce Page and Charles Raw
    “Disney Wars,” by James Stewart
    “The Informant,” by Kurt Eichenwald
    “Father, Son and Co.: My Life at IBM and Beyond”, by Thomas J. Watson and Peter Petre
    “When Genius Failed,” by Roger Lowenstein
    “Greed and Glory on Wall Street,” by Ken Auletta
    “The Smartest Guys in the Room,” by Peter Elkind and Bethany McLean

Nocera concedes his conflict of interest on the last book (“O.K., O.K., they are former colleagues of mine, and I was deeply involved in editing this book — but I have to say, I think it turned out pretty well!”), after he disses Eichenwald's Enron book in endorsing The Informant (“Forget his Enron book, “Conspiracy of Fools.” This book, about the strange saga of Mark Whitacre and Archer Daniels Midland, is his masterpiece”). I liked both of Eichenwald's books.

I have read about half of the books on Nocera's list, and a couple of others are on my bookshelf. I might have included Startup: A Silicon Valley Adventure by Jerry Kaplan and Andrew Carnegie by David Nasaw. Or a real dark horse, Siberia Bound: Chasing the American Dream on Russia's Wild Frontier by Alexander Blakely. But all in all, Nocera's is a nice list.

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This book refuses to come out in paperback, so I plunked down hardcover cash for it and read it on a plane to a foreign land. It’s quite good, and you can basically get the point via the first 50 pages – here’s a couple of blogospheric reactions. But as a business bestseller, which it is, it takes the cake for being non-businessy. Taleb has the prose style of Nietszche, with wit, aphorisms, plenty of polemics, and one page long subsections. When is the last time you read a Who Moved My Cheese with a chapter titled “Living in the Antechamber of Hope”? And a series of subtitles (that do not conform to the actual subtitles he ends up using in the text, btw) such as “How to avoid watercoolers – Select your brother in law – Yevgenia’s favorite book – What deserts can and cannot deliver – On the avoidance of hope – El desierto de los tartaros – The virtues of slow motion.” 

Golly. Taleb attacks business school professors at every turn for using statistical models unattuned to the importance of the highly unexpected, which for him explains everything. But he’s a Wharton graduate, so we nonetheless take full credit, etc.

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In the Ring: The Trials of a Washington Lawyer is the fascinating memoir of well-known Washington, D.C. attorney Robert S. Bennett. Although it was published a few months ago (and was extensively reviewed, including here, here, and here), I only recently had time to read it. In the interest of full disclosure, I had the tremendous good fortune to work for Bob at Skadden, Arps, Slate, Meagher & Flom. I admire him a lot. Consequently, I had been looking forward to reading some of his legal war stories.

I was not disappointed. The book serves up chapter after chapter detailing interesting cases Bob has handled. Some of the cases are well-known: acting as Special Counsel to the Senate Ethics Committee during the Keating Five investigation; representing Caspar Weinberger in an investigation regarding Iran/Contra; representing President Bill Clinton in the Paula Jones case; and representing New York Times reporter Judy Miller in legal proceeding regarding her sources for a story revealing a CIA agent’s identity. Other cases are less well-known, but equally intriguing. Bob is a careful and entertaining storyteller. He provides interesting behind-the-scenes anecdotes without disclosing confidential client information (and without getting bogged down in the more mundane legal issues that are present in even the most interesting legal cases). Those who enjoy stories of law will appreciate this book.

But the book also has something for those who enjoy the ideas of law. For me, the most thought-provoking chapter was entitled “Ring Around the White Collar.” Among other things, this chapter highlights the precarious position of companies accused of corporate wrong-doing. “Even if a company believes it is innocent, it cannot, absent unique circumstance, afford to fight the charges to the bitter end … because the company will be destroyed in the process.” Remember Arthur Andersen. Bob notes that “[w]hile prosecutors claim that they do not pressure companies to do what the government wants, every defense lawyer knows that in the real world companies are under tremendous pressure to do what the government wants so that they will not be charged.” Yet Bob concedes that “Sarbanes-Oxley has been a positive force for good. There is more corporate accountability than in the past and it has forced executives and directors of companies to focus more on their obligations to the public.” The book is not a law review article. It leaves the task of determining how to fairly prevent and punish white-collar crime largely to the reader. I cannot say that I have all the answers, but I feel comfortable saying that attorneys like Bob Bennett play a critical role.

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Vachon’s novel is an absurdist roman a clef about an incompetent junior analyst at a stand-in for JPMorgan’s M&A group. Though there’s a bit too much anomie, and you can skip the parts having to do with anything other than investment banking, Vachon is great with over-the-top characters, including Makkesh Makker, the kindly, overworked banker who has to supervise the protagonist's early work in energy (“These oil fields have no oil! They are not oil fields! Just fields! … And everything you do is wrong, anyway! So for now, we have no more work to do!”), and Roger Thorne, the incompetent WASP who succeeds at everything he does (“Thorne’s hobbies, I soon learned, including sunbathing, squash, and the acquisition of luxury goods”). I liked the book, especially the part where our hero realized he undervalued a deal by $600 million dollars by converting Canadian dollars into American dollars twice, breaking "new ground as a financial pioneer, the first and only man to ever successfully convert the U.S. dollar into itself. This I did at the rate of 1.58 U.S. dollars to the U.S. dollar.”

I'll read Vachon's next book.

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Forget backdating scandals and accounting scandals, a new fraud revelation is shaking the travel guide industry!  Thomas Kohnstamm, a travel writer for among other publishers, Lonely Planet, is making news by blowing the whistle on the crafting of guidebooks.  In particular, Kohnstamm claims that the payment schemes for travel writers (who contribute to guidebooks for a fee, but share no royalties and are not reimbursed for expenses) creates incentives for writers to cheat:  accept free meals and lodging, cut and paste information on tourist sights from other sources, and include information for places not personally visited.  As an outrageous example, Kohnstamm admits to not visiting Colombia while contributing to Lonely Planet's guidebook to that country.  Kohnstamm recounts the results of these agency problems in his new book Do Travel Writers Go to Hell?  A Swashbuckling Tale of High Adventures, Questionable Ethics & Professional Hedonism.

What is interesting is Kohnstamm's unapologetic non-whistleblower stance.  Kohnstamm obviously thinks guidebook publishers should pay more if they want to get more, but he also thinks that buyers of guidebooks should take them with a grain of salt.  I was listening to an interview with him on Sirius NPR, and he stressed that no guidebook is the insurer of the reader's vacation.  So, if a reader stays at a resort based on its review in the book, which turns out to be recycled for years gone by, and the resort turns out to be a dump -- that's the readers fault for being so gullible.  Interesting.

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Coming out just in time for Berkshire Hathaway's annual meeting: the second edition of The Essays of Warren Buffett, by, well, Warren Buffett, and edited by Conglomerate guest Lawrence Cunningham.  The first edition may belong in the canon of business literature.  (Not entirely related news about it here, and some reviews of the first edition here.)  The second edition contains Buffett's views on CEO pay, how General Re handled complex derivative instruments (and remember, Buffett only buys companies with businesses he can understand), and Berkshire Hathaway succession, which I've been wondering about.  You know what to do.

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The Opposite of Love is a standard “woe betide the wealthy young lawyer” tale, a subject on which I’m something of an expert. Emily Haxby doesn't like her job, doesn't get along with her father, is watching her grandfather deteriorate, and decides, somewhat inexplicably, to end a happy relationship with her boyfriend just as he is about to propose. Nothing that you can’t cure once you start seeing a therapist, apparently. The tricky part in these sorts of books lies in ginning up sympathy for the well-heeled but still kinda sad, and the author pretty much manages it with a dry, outside-the-head-but-in-the-first-person perspective on her protagonist’s inner agonies.

But better than the dry perspective is the lawyer stuff. Emily works at a fancy New York firm, has to deal with a handsy partner who brings in too many clients to fire, and does a nice deposition of a backwoodsy type who is suing a bad guy corporate polluter. Emily interrogates her country deponent about prior health problems, poor diet, other potential polluters nearby, and the like, to the delight of her nasty partner, the consternation of plaintiff’s counsel, and the confusion of her quarry. I delighted too – moral ambiguity! The big guy isn’t always the bad guy! Or, at least, I delighted until the effective but lascivious and mean partner got fired, some other much more politically correct partner, who wears pink high tops to work so you know she’s cool, forced the bad guy polluter to surrender for big bucks, and Emily took a job with a public-interest organization where she could really start sticking it to the man.

Here’s some background on the admirably young, and now book-deal wealthy author of the novel, Julie Buxbaum.

Sort of recommended.

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In Punching In, Alex Frankel took a bunch of different front-line jobs with massive American companies (for instance, at The Gap, which hires 135,000 people, and Starbucks, which hires 130,000) and reported back on what the experience is like.  He rode trucks for UPS, tried unsuccessfully for gigs at Whole Foods and The Container Store, picked up customers for Enterprise Rent-a-Car, you get the idea.  The book tries to sort out what corporate culture is, and whether it matters, though you're not going to write a book about corporate culture if you don't think it matters.  The verdict on UPS is quite positive, with esprit, elan, and high tech everywhere.  Enterprise sorta comes across as a Ponzi scheme selling corporate advancement, as well as cars and insurance.  The Gap is a hell of constantly unfolded clothes.  Starbucks is team-oriented and seriously busy.  Apple is a cult that Frankel likes.

With these kinds of memoirs, with the names changed, the locations obscured, and so on, the question is often: how much of this is fiction?  Frankel's book didn't seem very fictional, but it also wasn't quite enough fun.  His totally plausible experiences lacked interesting story arcs.  It is impressive that he actually worked all these front line jobs, but he seemed peeved and/or journalistically neutral about the experiences, not lapidary and engaged.  Fans of this sort of literature might enjoy Ben Cheever's Selling Ben Cheever even more.

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Then We Came to the End, by Joshua Ferris, is getting about as many accolades as that Wondrous Life of Oscar Wao book.  And people haven't been waiting for Ferris's novel for ten years.

I bring it up here at the Glom because it is probably the best - though that's not saying much because it's circa the only - novel about office life I've ever read.  Ferris's jazziest tactic to to write about the decline and fall of a Chicago ad agency in the first person plural.  Which, amazingly, wasn't intrusive, and at any rate underscored the way that agency's workers worked together, annoyed each other, and worried collectively as the layoffs started coming.  It begins: "We were fractious and overpaid.  Our mornings lacked promise. .... We loved free bagels....Our benefits were astonishing in comprehensiveness and quality of care.  Sometimes we questioned whether they were worth it."

I know, I know, you're thinking "MFA trick."  But if it worked, it worked because the first person plural served a purpose and bookended the stories that the employees of the agency told each other to get themselves through the day.  And they told lots of stories, as they had precious little work to do.  Some of the stories were weird, some implausible, but all were vigorously told, and what I liked best about the book was a terrific scene where two of the employees at the firm talk about the costs of being part of a group, about the reasons not to join, to hold back.  Plus there's a great last scene and a touching final line.  We should all think hard about reading the Ferris.

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Andrew Carnegie was poor when he came to America at age 12, but by age 30 he was one of the richest people in the world.  And steel was but a glimmer in the corner of his eye.  I've been listening to David Nasaw's celebrated biography of the industrialist.  How'd Carnegie get so rich so fast?  If anything, the answer appears to lie in his acting in ways that no modern corporate lawyer could possibly condone.  Carnegie was the named partner in Pennsylvania Railroad supply contracts that enriched his silent partners - the two people who ran that railroad - and himself.  He got involved in bond sales early, traveling to Europe to sell American railroad bonds that frequently failed to perform.  And inevitably, he got sued all the time.  A cost of doing business, apparently, and by age 35, Carnegie controlled at least six corporations, all of which he would abandon within five years to concentrate on steel.  But before that, the model was recognizable - go public but closely held, sell bonds, and sell necessaries to corporations.  However, in Nasaw's account, the model was realized by befriending and working for talented executives who ran their companies well but skimmed off plenty of the upside from contracts with shell supply companies.  Carnegie also tended to get to the office early and call it a day circa noon - like some other famous market makers.

So I'm enjoying the biography.  But boy is it a test of the audio format.  33 hours, and in my view, the limited upside of doorstop books is the chance to skip around.  You can't do that with the Nasaw on CD.   I may never finish it.  But I don't regret the chance to get halfway through.

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Of late, I've been focusing my reading on James Beard recipes for turkey, stuffing and creamed spinach.  But during the downtime, I've consumed Options, by Fake Steve Jobs, and When Genius Failed, the Fall of Long Term Capital Management, by Roger Lowenstein.  Perhaps you will want to do something similar during your own holiday portions of the upcoming break.

I'll save my comments on Options for the Prawfsblawg book club - but I will say that it's different than the blog, a plot-driven, character-developing story with metaphors, dream sequences, and an arc.  It's a fun read.  When Genius Failed is the possibly not so outdated story about what went wrong with LTCM.  It's engrossing, and it even is illuminating, given that it's really difficult to understand the model-drived strategies that caused the fund to collapse in the late 90s, embarrassing two of the Nobel-Prize winning economists who came on board early, and John Merriwether and the other quants who left Salomon to start the thing.  But what stood out to me was how un-pirate-like LTCM was.  They passed on tons of trades - too risky.  They had regularly scheduled risk analysis meetings, the principals came, and they  appeared to care about what went on.  Nothing new to hedge fund veterans, I guess, but I didn't know about the primary importance of the risk analysis confab.  Lowenstein clearly found the LTCM principals to be incredibly boring, golf-obssessed drones, rather than stone geniuses.  And when things started to go south for LCTM because the models were wrong, they kept going south because other Wall Streeters piled on against their positions, which had little to do with mathematical modeling at all.  Lessons learned?  Most of the people who ran the biggest hedge fund collapse of all time were back with new funds a couple of years later.

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Thank you, readers, for tolerating our look at current derivatives through the lens of Frank Partnoy's earlier work.  And thanks of course go to the participants in the club.  We now declare a return to your regularly scheduled Conglomerate programming.  We'll be doing another book in a few weeks, Larry Mitchell's The Speculation Economy.  Join us for that, and consider at your leisure what FIASCO and your book clubbers have to say about the latest news, a $1.2 billion mortgage related write-down by Bear Stearns and a $2.67 billion write-down by Barclay's for similar reasons.

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Frank Partnoy

Many thanks to Matt and Chuck for such thoughtful comments, and again to David. I'll just make two remarks, briefly.

First, I agree completely with Matt that it is important for all of us, and law academics in particular, to remember that there is a real world out there. I have a degree in math, and I'm still struck how much more connected even math theory is than much legal scholarship.

The tide seems to be shifting slightly in Matt's direction. But many corporate law scholars, whether by choice or not, are playing in an awfully small sand box. I plead guilty to some of that, too. Perhaps we like the desert because it is clean.

Second, Chuck is dead on about "derivatives," and I've tried to make it clear that my primary criticisms are really focused on financial innovation not "derivatives," and particularly not exchange-traded derivatives. And, sure, financial innovation has benefits; I just want people to focus on the costs and risks as well.

I'll have a new book out next year, something closer to F.I.A.S.C.O. (I preferred the dots, too, but the publisher took them away) than my academic work, which is to say someone might enjoy reading it. Or at least I hope so.

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Charles Whitehead

FIASCO is a great read. Like Matt, I put it in the genre of a Liar’s Poker (something with which I am familiar as Salomon’s former general counsel in Japan – but many years after Liar’s Poker came out and a few years after Frank left Tokyo). I first came across FIASCO in downtown Tokyo shortly after I arrived there and used it as a guide to audit local sales practices (the rumor, somewhat apocryphally, was that so did Japan’s regulators a few years later when they audited Morgan Stanley in Tokyo).

My perspective, however, differs from the overall picture that FIASCO paints. In today’s alphabet world of SPDRs, CDOs, ABSs, and so on, it may be difficult to remember that the derivatives and structured finance business of the 1990s – the period about which Frank was writing – was still relatively new. For example, the first non-CBOT equity derivatives were not publicly listed until January 1990, and that required a series of SEC-approved rule changes. PERLs (principal exchange rate linked notes), which are highlighted in FIASCO, were relatively new and the “cutting edge” in structured derivatives. Today, there is an active and deep retail market in exchange-traded puts and calls; and PERLs have become fairly standardized. In the FIASCO environment, however, it’s not a surprise that there would be informational asymmetries, regulatory arbitrage and simple, garden variety fraud. Practitioners at the time will recall some of the abuses described in FIASCO (and numerous others that aren’t).

However, I think there is another side of the story that is worth noting. Let me use one example from FIASCO to illustrate my point. FIASCO notes that U.S. governmental agencies were large issuers of structured notes, and attributes that to traders in insurance companies, pension funds, and others who were looking to hide what were, in effect, derivatives transactions within investment grade securities – a kind of regulatory arbitrage. No doubt, there were instances of this occurring – I came across this myself, and I recall a few cases where public pension funds repudiated trades on the basis that they were not authorized to enter into them in the first place. But, in light of those concerns, many firms also instituted pre-screening requirements, including (in some cases) a legal opinion on the purchaser’s authority to buy the relevant securities. So why, then, use U.S. govern­mental agencies as issuers?

Many purchasers had clear caps on the amount of illiquid securities they could purchase. Rule 144A had only recently been introduced (in 1990) and, in many instances, did not satisfy the purchaser’s liquidity requirement. Although Regulation D was already 10 years old, there were concerns about integrating/aggregating derivative instruments – if an issuer sells notes that are linked to the Nikkei index on Monday, where the index price is struck at 10,000, and then issues a second series of Notes on Tuesday, where the index price is struck at 10,100 (due to an overnight change in the Japanese stock markets), are they considered part of the same offering? And at what point might the combined series of issuances (and the efforts to sell them) be considered a general solicitation? A registered offering, on the other hand, raised its own set of concerns – the normal concerns over delays associated with SEC review, but also competitive concerns since publicly available SEC filings would tip your new products to your competitors. Universal shelf registration was only introduced in 1993, and I’m aware of at least one instance in the mid-1990s where the SEC staff had comments on the disclosure in a prospectus supplement after a takedown had occurred (what a nightmare!). So where to turn? U.S. governmental agencies solved a lot of problems – their securities are exempt from the 1933 Act registration requirements (avoiding the Regulation D and after-the-fact SEC comment concerns), they meet most purchasers’ liquidity requirements, and as an added bonus (during the pre-Gustafson years), they were part of a small class of issuers that were understood not to take on § 12(a)(2) disclosure liability. Plus they had investment grade ratings and were relatively sophisticated about new financial instruments.

To be clear, I appreciate the main thrust of FIASCO – that abuses are likely (perhaps inevitable) in new markets, with new instruments, and within Wall Street’s “eat what you kill” environment. But the same can be said of other instruments – take, for example, the distressed debt markets where the buy-sell spreads can make derivatives trading look benign. And there is another side of the story, where deliberation, thoughtful structuring, and practical concerns drove some of the developments described in FIASCO. The book, however, serves as a healthy and worthwhile warning about the risks of an evolving financial marketplace, perhaps underscored by the recent sub-prime problems and, according to some recent reports, the related liquidity puts (see the Fortune article on Citigroup’s exposure at http://money.cnn.com/2007/11/09/news/newsmakers/ merrill_rubin.fortune/index.htm?postversion=2007111119).

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Matt Bodie

I wanted to start my comments with a brief note on the title of FIASCO – or, should I say, F.I.A.S.C.O. The title is taken from the acronym used for the skeet-shooting tournament that Frank so vividly describes. The original title of the book was “F.I.A.S.C.O.: Blood in the Water on Wall Street.” In a subsequent paperback edition, however, the title was changed to “FIASCO: The Inside Story of a Wall Street Trader.” I’m assuming the publisher thought the change would make the book look more like Michael Lewis’s best-selling book, “Liar’s Poker.” And references to “Liar’s Poker” can be found on the back of the paperback edition, including a blurb from Lewis himself. But the two are really quite different books.

“Liar’s Poker” has a sardonic and detached approach to the events it chronicles; it is the work of an outsider, a Nick Carraway who happens to find himself in extraordinary circumstances. “FIASCO,” on the other hand, is an insider’s indictment; the narrator wants desperately to be part of this crowd, until finally getting too disgusted with all he has seen. The beginnings of the two books are instructive. In “Liar’s Poker,” Lewis falls into his job at Salomon Brothers after a dinner at St. James’s Palace with the Queen Mother. In contrast, “FIASCO” opens with “I sat by the phone and willed it to ring.” Partnoy is waiting for a call from a headhunter with a possible position at Morgan Stanley – a job he “coveted.”

This difference in tone continues throughout the books. “Liar’s Poker” focuses on the absurdity of the bond market and the events that unfold around it. Lewis is not necessarily condemning what goes on, and he is not really that worried about the “victims” of Salomon traders like the Human Piranha. Instead, Lewis is mainly struck by the absurdity of his ability to make an extraordinary amount of money selling bonds. As he writes in the preface about bond sales in the 1980s:

Never before have so many unskilled workers made so much money in so little time as we did this decade in New York and London. There has never before been such a fantastic exception to the rule of the marketplace that one takes out no more than one puts in. . . . What happened was a rare and amazing glitch in the fairly predictable history of getting and spending.

Of course, Lewis’s book is the tale of the dramatic events that rocked Salomon Brothers. But the banality and greed of the firm’s leaders bring the firm to its knees; those who cause the problems are the ones who suffer. In the end, it becomes a farce.

“FIASCO,” on the other hand, is the story of an insider exposing the corruption he finds in an otherwise successful organization. And Partnoy pulls no punches. One might expect a future professor to be circumspect in his criticisms, to have more of a healthy respect for the market. But as Partnoy notes early on, his story is about “how Wall Street has made, and continues to make, huge amounts of money on derivatives by trickery and deceit.” (p. 30) The theme of “FIASCO” is that Wall Street generally, and derivative trading particularly, is a rigged game. And the losers are people whose money is being invested on their behalf – folks whose savings sit in pension funds, mutual funds, even banks. “FIASCO” is not a bemused stroll through some crazy situations; it is an indictment and a warning.

The warning still applies today. I found it telling that in the 1998 postscript, Frank notes that “I have expected the stock market to crash every year since 1995.” (p. 253) Critics will find it funny that he thus missed perhaps the biggest stock market boom in our history. Supporters will note that that boom was subsequently shown to be “irrational exuberance.” Or perhaps fraudulently-induced exuberance. Derivatives have played a critical role in many of the biggest financial crises of the past decade, such as the Long-Term Capital Management meltdown, the Enron scandal, and the many recent hits delivered by the subprime market. But it seems to me that derivatives still seem mostly innocuous to the public. Even Victor Niederhoffer has returned, as this New Yorker article demonstrates. (I’d be interested in hearing what Frank thinks of that piece, given his extended discussion of Niederhoffer in the 1998 postscript.)

I found it interesting that Jonathan Macey’s primary criticisms in his book review were that the narrator in “FIASCO” misunderstood what was going on around him. Macey takes several of FIASCO’s anecdotes and “reinterprets” them according to neoclassical economic theory. I have too little space to parse through all of these. But which seems more likely to be true: an insider’s account of what he saw as an experienced, sought-after bond trader, or a professor’s reinterpretation of those events according to the hypothetical world of economic theory? Perhaps, like one of those planets on a Star Trek episode, there exists a world of rational actors who have perfect information, follow the rules, and never try to take advantage of each other. For this world, however, I’d like to have books like “FIASCO” that tell me what really happened.

In closing, I think this sense of the real world of derivatives trading is FIASCO’s primary contribution. Frank’s other work more deeply examines the policy issues that FIASCO raises. But a law review article cannot convey what it is like to be a derivatives salesman. For those who like their economics neat, clean, and rational, the notion of capitalism’s elite talking about “ripping someone’s face off” may seem unsettling. But frankly, that world seems much more plausible to me.

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Frank Partnoy

OK, I have to admit that FIASCO looks quaint by comparison to the recent subprime and CDO meltdown. The derivatives market was only $55 trillion back then, CDOs didn't exist (they were called CBOs or CLOs and were limited to high yield bond and loan collateral), and even the troubles in mortgages during 1994 were at least comprehensible. It wasn't hard to figure out how Orange County or Procter & Gamble took a bath on structured notes and swaps – interest rates went up. The rest was just algebra.

Although the markets are far more complex today, the two primary ways people make money from derivatives haven't changed from the descriptions in FIASCO (or the ones in Infectious Greed, another book I wrote, which did not have any pickles covered with hand lotion or drunken skeet shooting, and therefore did not sell as many copies).

The big money in derivatives doesn't come from speculation, which generally just moves P&L among sophisticated pockets – today it's from Morgan Stanley to Goldman Sachs, or from a Bear Stearns hedge fund to Paulson. Instead, the two persistent money-makers are regulatory arbitrage and informational asymmetry.

First, institutions use derivatives to take advantage of legal rules.

Investors use CDOs in particular to minimize capital requirements or boost yields given regulatory restrictions. The credit rating agencies play the same role as ten years ago, selling, not accurate information, but regulatory licenses that unlock financial doors for regulated investors. The margins on rule-driven structured derivatives are much higher than those on virtually any other kind of financial instruments.

The other is informational asymmetry. Before I started as an academic, I knew this concept as "ripping their faces off." People who read FIASCO seemed to like that term, and I actually think it's more accurate than informational asymmetry, but when in Rome …. The point is that sellers can charge nice fees by selling complex derivatives to buyers who don't understand them. People are understandably split about whose fault this is – the buyer or the seller – but that doesn't change the point about large profits.

In FIASCO, the unsophisticated purchasers, the widows and orphans, were pension and mutual funds. Today, it's more difficult to tell who is unsophisticated. Now that the smartest employees are jumping to hedge funds, it seems to include the banks. On Merrill Lynch's October 24, 2007, earnings call, an analyst asked a simple question, "As of the end of June you noted that your ABS CDO related exposure was around $32 billion, 15 as of the end of September. You marked down around 6. Where did the other 11 go?" That's a good one.

My advice is to think of FIASCO as a period piece from another era.

If you want a glimpse into today's Alice in Wonderland financial world, do this: First, read Merrill's most recent 10-K, http://www.sec.gov/Archives/edgar/data/65100/000095012307002747/y29387e10vk.htm.

Then, try to answer the question "where did the other 11 go"?

Finally, answer a more basic one: why is there anything left?

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Frank Partnoy

First, many thanks to David for exhuming FIASCO. I'm flattered and am reminiscing now about all the criticism – and there was a lot. Just spell my name right, please; no "Portnoy's complaint" jokes. And I'm fully expecting Jon Macey to write in with a guest post retracting his review and praising my subsequent work.

Just a word on the Morgan Stanley quote, which surely was the main reason the book sold any copies. I expected the bank's PR folks to assume a book discussing bond mathematics and option pricing in the first chapter would be lost in a remainder pile in a month. But their press release hit all the papers and immediately put the book on the bestseller list. So, if I haven't said it before, "thank you, Morgan Stanley."

As for David's point about first job disillusionment, as painful as it is for me, I'll just mention the first line of the preface to FIASCO, which states that my group of 70 people generated fees of $1 billion in two years. Derivatives groups and law firms are different worlds, and most of my (young) former colleagues retired long ago. Show me a law firm making that kind of money and I'll show you some happy associates.

I'll send a separate post responding to some of David's questions, but I wanted to say now, to anyone out there who has read and/or purchased FIASCO, I'm truly grateful.

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Because we certainly don’t want this Conglomerate mini-book group to be some kum-bi-yah group hug, or anything….

…I wondered how much of Frank’s disillusion was derivatives industry specific, and how much was based on the fact that work, especially work in your first job after law school (excepting clerking) isn’t exactly easy – or, often, fun. I’ve written about associate-lit, I’ve read plenty of assistant-lit … and I wondered if the predictable downsides of that first job colored Frank’s views. Derivatives do, after all, mean that you can hedge against risks in currency or commodity price fluctuations. Surely selling that – or buying it – doesn’t have to be involve quasi-fraud.  But the tenor of the book is that derivatives almost always equal skulduggery.  I would have loved to hear more about the why they link between the okay thing (derivatives) and the bad thing (financial shenanigans) was so strong, because I otherwise, as you can see above, felt free to supply my own surmise.

But don't take my word for it.  Consider the boilerplate from Morgan Stanley, Frank’s former employer.  Pre-publication of FIASCO, they protested to the Times that ''[t]he book is clearly a combination of inaccuracies and sensationalism. … Our business is based on consistent and professional service to our clients and customers. We do not engage in conduct that would violate the trust that they place in us. We stand on our record.''

And finally, Jonathan Macey wrote in his review of FIASCO in the University of Chicago Law Review that

Partnoy does not convey any sense of the multitude of socially beneficial purposes that derivatives can provide to purchasers, and he fails to understand the strong incentives that motivate rational, survival-oriented firms like Morgan Stanley to discourage the opportunistic behavior that might give rise to the conduct F.I.A.S.C.O. maintains is endemic in the derivatives industry. … There is … one important reason to read F.I.A.S.C.O.: it provides a window into the world of ill-informed, misleading analysis-by-way-of-anecdote that provides the predicate for much regulation. If someone wanted to regulate the derivatives market, F.I.A.S.C.O. provides the pretense of a justification.

Frank and the other book-clubbers needn't respond to any of these critiques, of course, but may if they like.

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After graduating from Yale Law School, Frank Partnoy took two jobs as a derivatives trader, first with First Boston, and then with Morgan Stanley. FIASCO, published ten years ago, documents his experiences. It’s a story of disillusionment about a business that Frank comes to believe is rotten both in what it permits clients to do, and in how it permits banks to serve clients. On the client side, derivatives look like little more than either poorly understood gambling, or, at best, accounting legerdemain. But for banks, the incentives are more clear: the traders are urged  to “go kill someone” because there’s “blood in the water,” and to “rip their faces off.” The “their” and the “blood” are/belong to the clients, and as for the traders, they come across as none too smart, terribly petulant, and no fun to be around.

But FIASCO offers the readers more than simply this bleak bottom line. It begins with a cogent overview of how the derivatives business works, explains the roles traders played in that business, and goes step by step through the creation and sale of some of the derivatives that Frank dealt with during his time at Morgan Stanley. The book culminates in a trip to Japan, where collapsing Japanese financial institutions eagerly seize on Morgan Stanley’s exotic new products to move liabilities off their balance sheets just before the quarterly reports are due. In the end, Morgan Stanley gets rich, the Japanese banks get dishonest, and everybody else, it seems, loses. Frank concludes the book when he returns from Japan, quits his job, and moves happily ever after to the world of corporate legal practice in DC and, eventually, legal scholarship in San Diego.

Ten years, later, derivatives are going south on the banks again, and it’s worth thinking about what FIASCO has to say about it. Back then, the derivatives business seemed to be all about currency hedging (to the extent it wasn’t about moving liabilities off books); now, it’s mortgages. Back then, Morgan Stanley was managed by people more notable for their tempers than their understanding of exotic financial instruments. Today, Citigroup and Merrill Lynch (maybe Bear Stearns will be next) have rid themselves of tempestuous CEOs seemingly addicted to golf.  Are there meaningful parallels that can be drawn? Would Frank like to be able to rethink any of the conclusions he drew in 1997 in light of what has happened since then (fortunes made, markets grown, and so on)?

That’s what we’d like to find out. So if this post is the scene setter, in the next post, so Frank doesn’t think he has it too easy, we’ll reprint a couple a couple of the critics of his “excellent kiss-and-tell tale” (that’s the NYT) and “blistering indictment,” (that’s JIS).

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Remember that next week, we'll be reading Frank Partnoy's FIASCO and think about what it has to tell us about the roiling derivatives business today.  You can order the book here, and we'll look forward to seeing you next week.

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As blog-savvy readers know, some corporate law professors are big fans of fantasy novels. And I confess, I too have a weakness a few  books in the genre.

But how many readers know that a corporate law professor wrote a classic of fantasy literature?

The professor was Austin Tappan Wright; the book, Islandia. Wright, who was born in 1883 and was killed in a car accident in 1931, was a graduate of Harvard Law (his father had been dean of the graduate school at Harvard), and worked for Brandeis's law firm before moving on to teach corporation, partnership, and maritime law, first at Berkeley and then at Penn.  From the obituaries that appeared at the time of his death, he appeared to be a well-liked teacher and solid scholar, but there was little to suggest that his work would be read seventy years later.

After his death, however, his wife found in his papers a handwritten, 2300-page novel: Islandia, which was published (to rave reviews) in an edited, 1000-page edition in 1942.   According to his daughter, Wright's family knew he had been working on an account of Islandia, but few outside the family did.   Islandia is an account of the nation of Islandia (which, as we all know, is located in the southern hemisphere at the tip of the Karain continent).  The novel, set in the early years of the twentieth century, tells of John Lang, the new American counsel to long-isolated Islandia (kind of like a pre-Perry Japan), and his attempts to open it up for trade with the rest of the world, even as he slowly falls in love with the land and begins to doubt his modernizing mission. On publication, Islandia was hailed as a classic, and many readers claimed it changed their lives; a quick look at reviews posted at Amazon shows that some readers still recall it as “life altering” and “breathtaking” (among those praising it is the fantasy novelist Vonda McIntyre). Although the novel doesn't include all of the trappings of fantasy novels -- no dragons or wizards -- I think its imaginary setting qualifies it as a fantasy.

At this point, I have to confess to a problem: I was originally going to blog about Islandia and speculate lightly on the oddity of a corporate law professor spending his idle hours writing a huge fantasy novel. But when I picked up the novel again (I read some of it as a teenager), I found it hard going. Wright’s prose is wooden, the characters are not especially interesting, the novel reflects the prejudices of its day (Wright needs to tell his readers, repeatedly, that the Islandians are “Caucasian"), and the romance scenes, and there are several, read as though they're written by, well, a corporate law professor born in 1883.  It's by no means a terrible book, and some of the world-building is interesting, but neither is it particularly good, and life’s too short to read a 1000-page novel you're not enjoying.  So I quit after 200 pages.  After reading part of the book I can kind of understand why readers in the 1940s would have embraced Wright’s picture of a civilized but pre-industrial South Seas utopia, but I certainly can’t recommend the book as a good read to anyone in the twenty-first century.

But, having given up on Islandia, I still wonder about Austin Wright, a productive law scholar popular with colleagues and students, married and with four children, scribbling away in whatever free moments he had (between classes? late at night?), producing a 600,000 word novel before age fifty. His thoroughness was astonishing; according to his daughter's afterwards to the novel, not only did Wright write Islandia itself, he produced, with detail reminiscent of Tolkien, appendices for the novel that included a glossary of the Islandian language, tables of population, a complete historic peerage, and even a "gazetteer of the provinces with a history of each" (all were cut from the published work). Was Islandia strictly a private entertainment? Was he ever planning to publish it?  Wright wasn't the only writer in the past century who lived an outwardly dutiful life yet labored in private to create a richly realized alternative world (again, think Tolkien), but his split life still strikes me as extraordinary.

Or have I underestimated what people are doing in their spare time? Are there more fantasy manuscripts tucked in law professors' desk drawers?

Note: After finishing this post, I remembered that there is at least one other law professor who has written a fantasy novel.

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The NYT is asking readers, "What do you think are the lessons of 'On the Road'?" A silly question deserves some silly answers. Here are some favorites:

"That the man who caused millions of kids to run away from home, drop out of school and hit the road in the Sixties lived with his mother."

"The only lesson i got out of it was to stay the hell out of Denver!"

"That the prettiest girls in the world come from Des Moines. . ."

Obviously, I stayed away from the ponderous comments, of which there are many. Some commenters complained that asking such a question misses the point. ("There is no lesson. That is the lesson.") But here is a comment that captures my thoughts about the book almost exactly:

The lessons have faded: the joy and fellowship of travel, the openness to life, the inspiration to write. What I remember most of "On the Road" is the cadence–the poetry in Kerouac’s prose that surpassed the poems of his friends, Ferlingetti and Ginsburg.

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What goes into the canon of popular business literature?  I've read a bunch of business books, but many of them have been histories, and many of those have been unsatisfying.  Can't say the same about Barbarians at the Gate, the tick tock of the KKR LBO of RJR Nabisco - it's every bit as good as everyone tells you it is.  And Liar's Poker, about the go go junk bond era from the perspective of Michael Lewis, who spent some time in Salomon's bond department, is also really, really memorable.  There's no doubt that James Suroweicki's The Wisdom of Crowds and Malcolm Gladwell's Blink have made both authors rich on business meeting speaking engagements, but it's not easy to pin down the precise implications of their theses (which are "crowds are [sometimes] magic!" and "initial reactions are [sometimes] magic!" respectively).  And the canonical business case study text, In Search of Excellence, by Peters and Waterman, is fascinating, but characterized by, and, heck, maybe invented, what I call the "eight squishy rules" rule of how-to business books.  P&W recommend "simple form lean staff" and "simultaneous loose-tight properties," that sort of thing.  Which is thought-provoking, and maybe that's all you want, but is also the kind of thing that, if these rules were laws, would drive lawyers nuts.

Any other suggestions for the canon? Please do comment.

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Pottermania began this morning in the Smith household. The nearest bookstore, Barnes & Noble, is employing a distribution system that is ostensibly designed to eliminate the need to stand in lines. (At least that's what the store's employees claimed.) The bookstore began distributing wristbands this morning at 9 am, and those wristbands will determine purchasing priority for the midnight sale.

Of course, this system didn't eliminate lines. When my daughter and I arrived at the store at 7:30 am, a healthy line (100 or so people) had already formed, and it more than doubled by the time the doors opened. We are in group BB. "It's like boarding a plane," the B&N employee proclaimed.

Oh, and don't bother going to the party at the store. They will shoo everyone out at 11 pm to prepare for the sale, then reopen again around 11:45 pm ... allowing staggered entries by the designated groups.

This is my fourth midnight with Harry Potter, but I have never seen a system quite like this. Is this a Utah thing? I ask only because BYU was forever trying innovative ticket distribution schemes during my undergraduate years, and most of the schemes were disastrous. None more than the time they decided to eliminate lines by announcing the location of the ticket office for a concert on the radio at 9 am. Of course, everyone was prowling the campus in cars or bikes waiting for the announcement. No one was killed in the ensuring stampede, but several people were injured.

Finally, we prepared for the event tonight by going to Harry Potter and the Order of the Phoenix. Lots of great actors, but all in all, a pretty forgettable movie. Like the books, I'm afraid.

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My wife's cousin works for a large regional bookstore, and yesterday she described some of the elaborate security measures taken by Bloomsbury to protect the newest installment of Harry Potter. Today, in an email to the Contracts professors listserv, Elizabeth Winston conveniently linked to a story about the security measures in The Economic Times, which describes the booksellers' contracts near the end:

London-based Bloomsbury,which publishes the Potter books in Britain, has hired secure sites across the country to house the book prior to distribution early this week. Several dozen security teams will protect the sites round the clock. Experts say security staff will earn up to £30 an hour with a guard dog, up to £20 without.

Print factory workers in Britain have been threatened with the sack if they leak any details,while German publishers banned mobiles and even packed lunches in the printing plant. Some employees reportedly had to work in near-darkness to prevent them reading the book. It is from Tuesday, however, when copies begin to be sent out to retailers, that the most crucial part of the security operation will come into effect.

The trucks Bloomsbury will use are fitted with satellite tracking systems costing up to £1,000 pounds,which will reveal whether any of the vehicles deviate from their intended route. The books are on sealed pallets fitted with alarms to prevent tampering. At one of the world’s biggest booksellers, Barnes and Noble in America, the books are being kept in padlocked trucks at the insistence of Scholastic. Amazon, the online retailer, has cordoned off special sections of its warehouse to ensure restricted access.

All retailers have had to sign a legal embargo preventing them from divulging any of the book’s content or selling copies before the release time. A spokesman for Bloomsbury said: “we have a litigation specialist poised 24 hours a day, seven days a week to deal with any breaches. It is our intention to enforce the embargo vigorously and seek an immediate injunction if required.” While experts put the cost of all this at £10 million, the lengths to which publishers have gone are not surprising.

Four years ago, Donald Parfitt, a fork-lift driver from Suffolk, was ordered to do 180 hours community service after he admitted stealing pages from Harry Potter and the Order of The Phoenix from the printing plant where he worked. Last year, one Aaron Lambert was jailed for 4 1/2 years for stealing copies of Harry Potter and The Half-Blood Prince and trying to sell them. Rowling has reportedly received letters from people asking her to reveal the ending of the seventh book because their terminally-ill relative may not live until Saturday.

If you are that desperate, you may be able to find an advance copy on BitTorrent. I am waiting for Saturday, when I will get my copy at Barnes & Noble. Everyone seems to think that Harry is a goner, but I am not so sure. Rowling is nothing if not surprising.

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I recently finished listening to the pretty slapdash Dynasties, which is David Landes' take on family businesses, beginning with the Barings and Rothschilds, and ending with the Toyodas and Fords.  His thesis, to the extent that a historian is ever willing to claim such a thing (sometimes I wonder if in history workshops it's a race to get your hand up first so that you can be the one to say "actually, I think it is a little more complicated than your account would have it") is that family businesses can matter.  Not that they persist in unique ways, or that they are more likely to take long term, rather than short term views on investment or whatever, or that they usually decline through the generations.  Just: check out all the family businesses out there.  Not much to build a book around, things proceed through a series of pretty surface oriented profiles of various family CEOs, where we learn whether they had affairs, drank a lot, and often how they felt about religious minorities.

Anyway, the book is more about that sort of bland gossip than it is about business.  I can't really recommend it.  But I can leave you with this interesting factoid: a third of the Fortune 500 is family controlled.

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As I posted yesterday, I began experimenting with an online book swapping service in an attempt to see how close to a 1 to 1 used book swap technology could get me.  Well, the answer is not that close.

Yesterday morning, I posted for swapping 9 paperbacks.  Within an hour, someone had requested The Memory Keeper's Daughter; with another hour, The Other Boleyn Girl.  So now it was up to me to mail these books to their new owners, one in PA and one in NY.  PaperbackSwap.com (PBS) tries to eliminate as much of the transaction costs as possible.  The site generated a 2-page "wrapper" with my return address and the intended delivery address.  I wrapped up my books in these printing paper wrappers (with lots of tape), and the packages were almost ready to go.  But, I had to put postage on the packages.  Although the site had assured me that most books cost $1.59 to ship, my books cost $2.13 and $2.47.  The Other Boleyn Girl is a thick book, but I would have thought The Memory Keeper's Daughter was average.  I'm not sure what book the $1.59 rate applies to -- Harlequin Romances and Louis L'Amour books, I guess.

Also, the site told me that most books could be mailed from my home without going to the post office.  Well, that's true if I had my own PItney-Bowes postage meter.  Instead, I have stamps.  So, if I were going to mail the books from home using my new "Forever" stamps, I would have had to use six stamps on one (at a cost of $2.46) and seven on the other (at a cost of $2.87).  So, my estimated cost of shipping two books ($3.18) is now much higher, $5.33.  (I ended up going to the post office anyway.)  In addition, the rate is the "media mail" rate, and the site told me (after the transaction) that my books will get to their intended recipients in 14 to 21 days.  I get my credits on receipt.

So, the swap is not 1 to 1.  The swap is one book, over $2 in postage, and a waiting period.  For many books, this may be entirely worth it.  The Other Boleyn Girl costs $16 on Amazon, plus $3.99 in shipping (unless bundled for free shipping).  To get it at $2.47 is a good deal, if you're willing to wait.  It's even cheaper than the Half Price Book Store, which we don't have in Champaign anyway.  Maybe the key is to swap really short books and request really long books!

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I come from a family of readers, so I spent much of my formative youth at our neighborhood used book store.  Every couple of months, my mom would gather up paperbacks from around the house and put them in brown grocery bags, and we would carry them to a small storefront where we could trade these books for different ones.  While we browsed the shelves, an elderly gentlemen would rummage through our bags, sorting the books into stacks by way of a process that was only logical to him.  He would then take my mom's 3 x 5 index card that he kept on file in a small box and add our credits to that card.  Every visit, one or two rejected books would be placed back in our grocery bags.  The shelves were filled with a lot of mass market fiction, and of course there were whole rooms full of Westerns, mysteries and romance novels.  (Unfortunately, I spent too much of my formative youth in the Silhouette Romance room.)  My mom still goes to the used book swap store, and we even took my kids there last year.  I think Luke chose a Rescue Heroes book, and Carter got an "abridged" Little House on the Prairie Book.

Once I was older, I wondered if we got a good deal on the swap.  The swap was not 1 to 1.  It was more like 2 to 1, if that.  Surely, if we could eliminate the rent on the storefront and the gentlemen with the index file, it could be closer to 1 to 1.  I have found a web