2nd July 2013: The Essential Wall Street Summer Reading List

Andrew Ross Sorkin has posted his Essential Wall Street Summer Reading List:

 

This year, however, a reader, an M.B.A. student, asked the question slightly differently. The reader, who approached me on the subway with a copy of “Barbarians at the Gate” in hand, asked, “If you wanted to get smart about business by reading your way through the summer, what would your master reading list look like?”

I had to get off the subway before I was able to answer the question.

 

To Sorkin’s list I would add:

 

● Connie Bruck’s The Predator’s Ball on Michael Milken and Drexel Burnham Lambert.

 

● Roger Lowenstein’s When Genius Failed on the 1998 collapse of the hedge fund Long-Term Capital Management.

 

● Either Bethany McLean and Peter Elkind’s Smartest Guys In The Room or Kurt Eichenwald’s Conspiracy of Fools on Enron’s demise.

 

● Jeff Madrick’s Age of Greed on Wall Street’s financial revolution from 1970 to today.

 

● Aaron C. Brown’s Red-Blooded Risk: how the AQR Capital risk manager views financial markets.

 

● Michael Mauboussin’s More Than You Know on alpha generation and investment idea screening.

 

● On the GFC, Sorkin’s Too Big To Fail; William H. Cohan’s House of Cards and Money & Power; or Lawrence G. McDonald’s A Colossal Failure of Common Sense.

 

The above list is heavily biased toward financial journalist reportage.

 

These books are useful for the self-development of new traders:

 

● Ari Kiev’s The Mental Strategies of Top Traders on trader psychology, leadership, and variant perception.

 

● John Coates’ The Hour Between Dog and Wolf on the neuroscience of trading.

 

● Daniel Kahneman’s Thinking, Fast and Slow on cognitive biases and decision heuristics.

 

● Mihaly Csikzentmihalyi’s Flow: The Psychology of Optimal Experience on ‘flow’ psychological states.

 

In May 2012, I compiled a Wall Street Reading List of books I had read in 2010-12 to understand financial markets.

23rd March 2010: The Callan-Einhorn Battle

Provisional go-ahead to work on a new journal article with Ben Eltham.

CFA Institute‘s strategies after the global financial crisis: raise awareness of the CFA Charter through regional investment conferences such as in Bahrain, with CFA Bahrain; and new memoranda of understandings with capital market regulators.

A profile of Lehman Bros. fallen CFO Erin Callan revisits an early chapter in Andrew Ross Sorkin‘s Too Big To Fail. Sorkin recounts how Callan is promoted too quickly by Lehman’s board, and then forced into a corner by market volatility. As the firm’s CFO, Callan then adopts a charm offensive strategy with analysts and financial media. The strategy fails, most spectacularly when Callan has a war-of-words with David Einhorn, the hedge fund manager of Greenlight Capital who ‘shorts’ Lehman’s stock. Guardian scribe Andrew Clark blames the ‘glass ceiling’ and trader floor misogyny. Perhaps true, but for me there’s another, more compelling explanation: Callan opted for media-savvy public relations strategies which Einhorn as a masterful short-seller was trained to see through. For more on his investment research process, see Einhorn’s book Fooling Some of the People All of the Time (Hoboken, NJ John Wiley &.Sons, 2008).

CNBC: The Fall of Erin Callan, CFO (March 2010)

CNBC: David Einhorn on Lehman Bros. and Erin Callan (June 2008)

10th March 2010: Three Chapters in Too Big To Fail

Follow-up emails with internal clients on various projects. Publication Syndicate written feedback.

Cover of

Three chapters into the audiobook edition of Andrew Ross Sorkin‘s book Too Big To Fail (New York: Viking, 2009). Sorkin did over 500 interviews and looked at primary and forensic evidence. Already, this book has loads of succinct, nuanced details of decisions, meetings, and organisational politics. Maybe Sorkin can be on CNBC ‘Squawk on the Street’ as a regular guest co-anchor.

In contrast, Gillian Tett‘s book Fool’s Gold (New York: The Free Press, 2009), which I wrote about here, is focussed on the J.P. Morgan team, its peers, and anthropological visits to securitisation fora.

It will be interesting to contrast how Tett and Sorkin portray decision-makers such as J.P. Morgan banker Jamie Dimon.

Tett and Sorkin’s books on the 2007-09 global financial crisis also illustrate two key points I made in November 2009 academic conference paper and presentation on journalists cowritten with Barry Saunders:

(i) Journalists are adopting methodological practices and innovations from areas outside media, such as anthropology, investment banking and criminology.

(ii) Business and financial journalists will conduct an average 250+ interviews for their investigations, which will take an average 9 months to 2 years to research and write. Some of the most influential investigations will have 300 to 500 interviews, which will include with key decision-makers.

Compare (ii) with many PhDs that can take 4 to 6.5 years to research and write instead of the allotted 3 years, and that may have only 20 to 40 interviews. Sorkin’s journalistic and non-fiction craft leads him to create a strong narrative, to condense the key facts and details, and to use ‘deep background’ interviews to cross-check and verify meeting accounts.

Foreclosure Of A Hedge Fund Dream

Media personalities who took a career detour into managing hedge funds are the latest casualty of the subprime fallout, reports New York Times journalist Andrew Ross Sorkin.

Sorkin profiles Ron Insana the former CNBC news anchor who founded Insana Capital Partners at the height of easy credit in 2006 and closed ICP in August 2008.  Insana raised $US116 million from major investor Deutsche Bank and media contacts.  Rather than invest directly in complex financial instruments Insana chose an intermediary position: a fund of funds investor in a diversified portfolio of hedge funds.

Insana made several errors that led to ICP’s blow-up.  Sorkin notes the US$116 million was a smaller capital raising than its blue chip competitors.  The fund of funds positioning meant a rational herds strategy on the hedge funds that ICP invested in.  Subprime-caused market volatility set off a cascade: the hedge funds didn’t make alpha returns above the market and ICP didn’t have the diversified portfolio to weather the volatility.  Consequently, ICP still had to pay out investors in full for their original investments (the ‘high water mark’ rule) before it could earn its ‘1.5 of 20’ fee (1.5% management fee on funds and 20% of fund profits).

Sorkin is insightful about the cost structures of hedge funds:

That would have been enough if it was just Mr. Insana, a secretary and
a dog. But Mr. Insana was hoping to attract more than $1 billion from
investors. And most big institutions won’t even consider investing in a
fund that doesn’t have a proper infrastructure: a compliance officer,
an accountant, analysts and so on. Mr. Insana had seven employees, and
was paying for office space in the former CNBC studios in Fort Lee,
N.J., and Bloomberg terminals — at more than $1,500 a pop a month —
while traveling the globe in search of investors. Under the
circumstances, $870,000 just wasn’t going to last very long.

This ‘contrarian’ observation highlights the leverage of institutional investors, and, in contrast to the usual media portrayal, the regulatory burdens of institutional compliance on funds.

Sorkin’s profile raises some interesting questions beyond his comparison of Insana and the media-savvy millionaires who blew-up after the April 2000 dotcom crash.  Did ICP adopt the trend following strategy from CNBC’s media coverage and Insana’s popular books?  If so, could Insana distinguish between market noise and critical events?  How did Insana grapple with the career change from CNBC news anchor to hedge fund head?  What risk mitigation steps did ICP’s investors demand, and did Insana exercise prudential caution? When he had to close ICP was Insana able to be self-critical about his past decisions and errrors?  Are there firm-specific, operational and positioning risks for fund of funds?  That would be a really interesting post-implementation review for aspiring hedge fund mavens.

Don’t expect to see it in CNBC European Business or Bloomberg Markets anytime soon.