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Gillian Tett, Little, Brown, 2009,338 + xiv pages, hardback, £18.99.

By her own admission Gillian Tett's training at Cambridge University in the early 1980s as a social anthropologist makes her at first sight an unlikely rapporteur on the inner workings of the off-balance sheet credit markets and the brave new world of financial innovation that have been at the heart of our current financial woes. Indeed as she explains in the Preface (pp xi and xii), although already an experienced journalist with the Financial Times, capital markets were for her an obscure and arcane area of financial activity. But she began to report regularly for the paper from the spring of 2005 on the world of credit derivatives and the shadow banking structures that by the early part of the decade had emerged to sustain them. And as she understood more she writes, she "became seriously alarmed by what I saw and started to warn that a reckoning loomed" (p xiv).

What follows is not the definitive account of the origins and development of the financial crisis of 2007-09 in Britain and the United States. For one thing the narrative ends in January 2009 with chastened international bankers and business leaders gathering in Davos, Switzerland for the annual World Economic Forum (p 287 ff). For another it only touches lightly on some of the wider economic consequences of the financial crisis in terms of lost output, the fall in world trade and rising jobless totals in the major Western economies.

What it does do - and does very readably - is to locate and clearly explain the new techniques of financial intermediation that were developed by the J P Morgan team in London in the 1990s. This was the team which put in place the new financial architecture of credit derivatives and of credit dispersion techniques that a decade later in the 2000s - in Wall Street, in the City of London and elsewhere - was to crumble with such devastating consequences for the wider economy.

Along the way, in Parts I and II, we are introduced to a whole cast of new financial players including the hedge funds, the private equity groups, the credit-rating agencies and the monoline insurers. Gillian Tett explains helpfully how, together with the use of off-balance sheet vehicles, the big US and European banks created a parallel world of almost unregulated and toxic financial activity in the decade to 2007. As she explains on page 249, "Back in the 1990s the (J P Morgan) team had all believed ….that innovation would create a more robust and efficient financial world….Now it turned out that the risks had not been dispersed at all, but concentrated and concealed."

Part III ('Disaster') tells the now sad and familiar tale of the unravelling of an over-leveraged and unbalanced banking system in both the US and Western Europe from 'the day the markets froze' in August 2007 to the collapse of Lehman Brothers and the rescue of AIG in September and October 2008. All the key financial events are narrated but the coverage here is a bit rushed; for British readers the account of the collapse of Northern Rock in September 2007, together with the subsequent closure of Bradford and Bingley eleven months later, will seem a little skimpy. (Alex Brummer's The Crunch, reviewed by me in this Journal last year, is a fuller and more satisfying account of the former). And we don't really get any significant feel in the narrative of the devastating impact that the collapse of the financial markets since mid-2007 has had on real output, jobs and the public finances in the US and in Britain.

None of this, however, detracts from the usefulness of the book as a whole and the main thrust of the arguments Gillian Tett deploys: that the financial innovations of the 1990s in the credit markets adopted almost universally by the big banks in Wall Street and by many elsewhere (in the decade or so that followed) were at the heart of the financial meltdown that we have since suffered. Academics failed to understand these innovations properly; regulators on both sides of the Atlantic were complacent and/or complicit in roughly equal measures; and the practitioners themselves were far too sanguine about the huge risks they were embedding in credit markets as a whole. Truly, as was said of Robespierre and the Jacobins in the 1790s, "the Revolution devoured its own children".

Charles Whitworth
Formerly Senior Economist in OFWAT and the Office of Fair Trading

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