Gillian Tett's "Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe"

This is a good accounting of the mid-1980s until 2008 of how "financial engineering" creating the problem that led to the crash. This story focuses on JP Morgan and their derivatives unit. This group was at the heart of things, so you get a good idea of how things unfolded. As usual, it was a series of small steps, none of which seemed to imply Armageddon, but in fact this group and others like it did in fact nuke the world economy.


To understand the blame that needs to be distributed, here is a bit from the book dealing with the need in 1994 to "sell" the idea that banks should be trusted to be "self regulating" with respect to these innovations in finance. The JP Morgan lobbyist was Mark Brickell:

But Brickell was relentless, and as the weeks passed, against expectations, his campaign turned the tide. One reason was that the Clinton administration was receptive. Before Clinton entered the White House, in 1992, he had taken an anti-Wall Street stance. Once ensconced, faced with the formidable lobbying power of Wall Street, the Clinton camp shifted view. "Derivatives are perfectly legitimate tools to manage risk." Treasury Secretary Lloyd Bentsen said in a May 1994 speech to securities dealers. "Derivatives are not a dirty world. We need to be careful about interfering in markets in too heavy-handed a way. Right now our principal emphasis is on making sure existing regulatory authority is fully reviewed and implemented."

Or as Kevin Phillips, the historian, noted in a book at that time: Even before the man from Arkansaswas inaugurated, it was clear that strategists from the financial sector, more than most other Washington lobbyists, had managed the Bush-to-Clinton transition without missing a stroke. Well-connected Democratic financiers stepped easily into the alligator loafers of departing Republicans. The accusatory rhetoric of the campaign dried up. The head of Clinton's new National Economic Council, Robert Rubin, turned out to have spent the 1980s as a arbitrageur for Goldman Sachs."

This reminds me of the Obama administration. During their campaign they sounded like they would defend ordinary Americans from the shenanigans of Wall Street, but once in power it became obvious that Wall Street money and people had infiltrated the Obama "team" and Obama backed down and has continued the Bush friendly affair with Wall Street. This despite the disaster that Wall Street has created! Oh, and notice how the key malfactor, Goldman Sachs, had its fingers in the pie via Robert Rubin. The same Goldman Sachs that had Henry Paulson as Bush's Secretary of Treasury.