November 12, 2007
Conglomerate Books: FIASCO and Derivatives: The Critics
Posted by David Zaring

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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