November 14, 2007
Conglomerate Books: FIASCO and Derivatives: Comments from Matt Bodie
Posted by David Zaring

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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