Whoops!

Over the weekend I read John Lanchester’s brilliant book, Whoops! Why Everyone Owes Everyone and No one Can Pay. It really is as good as the majority of reviews have been saying.

If you want to understand how how the various parts of the financial crisis are inter-related and why the current situation — punitive spending cuts which hit the poor and the innocent hardest, without any reform of banking and finance sector practices — is the gravest missed opportunity in generations, then this is the book for you. And moreover, it’s well written and funny.

To take just one example, banking practices led us, Lanchester, explains, to

…the bizarre position in which poor people struggling to pay back their mortgages had miraculously produced the world’s most secure financial instruments.

And this isn’t just hyperbole on Lanchester’s part: it is literally true. The CDOs — the collateralised debt obligations or ‘securities’ — into which sub-prime mortgages (and of course many other kinds of derivatives) were packaged up and sold on literally were as safe as, in fact safer than, houses. Almost 90% of them were graded AAA, which means that the agencies responsible for rating the risk attached to corporate debt and securities regarded these CDOs as amongst the safest investments money could buy.

How is that possible? Well, as Lanchester explains, (a) the ratings agencies were paid by volume: the more securities they graded for the banks, the more they got paid. And (b) guess what: the work of rating a mortgage-backed CDO earned the agencies three times more than the work involved in rating a bog-standard corporate bond…..

There are good, objective reviews of Whoops in the Independent (some reservations) and the Guardian, both of which are warm to the book’s central effort but have some reservations about some of its broader historical conclusions.

Nonetheless, I guarantee you won’t finish it without laughing out loud; and I guarantee you won’t finish it without wondering where, when and how one’s rage should best be directed….

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