Financial History Issue 117 (Spring 2016) | Page 40

BOOK REVIEW  BY JAMES P. PROUT Wall Streeters: The Creators and Corruptors of American Finance By Edward Morris Columbia Business School Publishing, 2015 329 pages with appendices, $29.95 We are bombarded with market-oriented news and information. Meetings of the Federal Reserve generate as much gossip and speculation as the last royal birth. By any measure, Americans should be the most financially-savvy population in the world. Unfortunately, almost every public and private study confirms that too many people don’t know what a rate rise does, what “too big to fail” means or why Wall Street should have less or more regulation. In short, more information hasn’t improved the general population’s understanding of finance. This isn’t a news flash for readers of this magazine. And we could sit back congratulating ourselves that we think we know more than everyone else. That was largely my attitude when I opened Professor Edward Morris’s book, Wall Streeters: The Creators and Corruptors of American Finance. Early on, however, I realized that Morris has produced a book which is a fast and timely primer on how the US got the financial markets it has today. He has cleverly imbedded crucial and complex but sometimes dry financial topics — money supply, central banking, market regulation, securitization and more — within a tour of 14 personalities who created the “Wall Street” America loves and hates. This is a book that every college student, baby boomer and voter ought to read. Morris goes to central casting for his first profile: the imperious, bulbous-nosed plutocrat, J.P. Morgan. At the turn of the last century, no one matched Morgan’s singular ability to control finance through force of influence and personality. This is the starting point for the book, but it is also an ending. There would never be another Morgan because the environment that nurtured him was dying. Financial markets were no longer the purview of a privileged few; they were subject to examination and regulation by progressive elements in America. Morris next briskly tackles an issue that had been contentious since the country’s founding. At the beginning of the 20th century, the United States was alone in the industrialized world in lacking a central bank. Avoiding a long exegesis on the history and theory of central banking, Morris highlights how the home-grown US banking system could not handle the currency and credit flows needed for the rapidlyexpanding economy. He focuses on Paul Warburg and Carter Glass, who provided the financial framework and political acumen to get the Federal Reserve in place. 38    FINANCIAL HISTORY  |  Spring 2016  | www.MoAF.org From there, Wall Streeters follows the sometimes fast, sometimes slow “democratization” of US finance and financial markets. Charles Merrill, of course, professionalized the brokerage business, broadening and deepening the stock market’s reach into Main Street. Where there is wealth, there is greed, and Ferdinand Pecora’s unmasking of the corrupt market practices in the 1920s led to the first comprehensive set of financial regulations. Moving through the mid-century, we meet the men who filled out the array of financial products and offerings that we have today. We learn about the origins of venture capital, hedge funds and indexing, and why they appeal to investors. Morris is entertaining throughout — who knew that socially-challenged Benjamin Graham, father of modern securities analysis, was a serial philanderer? As the century closes, the complexity of new financial products increases, as does the pace of their introduction. In rapid succession, we meet derivative maven Myron Scholes, junk bond impresario Mike Milken and Louis Ranieri, who saw the value in “securitizing” the most boring of all instruments: the home mortgage. Ranieri’s idea, and its toxic off-spring, have recently starred in Hollywood’s The Big Short. All in all, Wall Streeters is a good read, and a good way to ease non-financial people into how the various moving parts of markets work. I disliked the title — the most cumbersome part of the book – and I wish there was more room for guys like John McChesney Martin (look him up), but these are quibbles. As the 2016 election heats up, we should do ourselves a favor and read Professor Morris’s book so that we may be able to have a sensible discussion about what works and what doesn’t work in the US financial markets.  Jim Prout is a lawyer and business consultant. He can be reached at jpprout@ gmail.com.