Markets and the new (old) themes
The avid readers of this column may sense that books about financial crises, manias, and derivatives as they relate to shifts in the economic universe are fascinating, at least for me. During the early years of my career as a journalist in business and finance, I dared to translate books about finance and economy. My first attempt was interesting. A respected veteran editor, Levent Gurses, advised me to talk with Hakan Feyyat, a publisher and owner of Scala Yayincilik. The date was June 1997.
Mr Feyyat gave me Frank Partnoy’s F.I.A.S.C.O.: The Inside Story of a Wall Street Trader, for translation. As an employee of First Boston, Partnoy was in the eye of the derivatives boom during its invention and mass marketing. The complex derivative instruments on foreign exchange created in the U.S. in the early 1980s was introduced and marketed by First Boston and Morgan Stanley.
During the harsh conditions of my military service, I was fascinated by (and thrilled with) the complex issues that I had read: foreign exchange derivatives, structured notes, all the opaque instruments designed by rocket scientists, as they called themselves according to the book. Well, when I finished the translation in early 1998, an updated version of the book was released covering the later stages of Partnoy’s adventures. I do not want to give any spoiler about the book, you may find it through the Amazon website. Partnoy made a career shift to become a lawyer specializing in securities regulations and then worked as a professor at the University of San Diego.
In 2008, I came across Prof. Partnoy again, but this time was different. While I was trying to write a feature about sophisticated instruments and financialization for Forbes Turkey, just before the sale of Bear Stearns, I asked him questions about CDOs, CMOs, and the dangers related to these instruments. He was already warning about the possible collapse of these types of instruments and harmful side-effects to the economy at large. He said similar things to CBS News, NBC and the Wall Street Journal, but nobody understood (or believed) him.
Bear Stearns was sold to J.P. Morgan Chase on March 16, 2008 in a deal mandated by the US government, to prevent any tremors in the financial universe. During that time, Wall Street had found a new way to profit from the boiling U.S. housing market: mortgage loans securitized and transformed through financial alchemy into an AAA-rated note. Prof. Partnoy was one of the few expressing concern that unchecked speculation in such risky assets could lead to financial ruin.
The widespread issuance of subprime mortgages led to massive defaults and snowballed problems in other areas of the economy. The rest was history: the collapse of Lehman Brothers, the rush of central banks to the rescue of big banks, bail-outs with taxpayer money.
Today, we may sense similar signs of magical thinking in cryptocurrencies. When a company simply changes its name by adding a ‘crypto’ to its title, its share price rises dramatically. Just a tip for issuing cryptocurrency is enough to surge prices. You may find the examples of both, from Long Blockchain (who changed its name from Long Island Iced Tea) or Eastman Kodak ( blockchain, by the way, is the technology behind bitcoin and other cryptocurrencies).
While trying to chase Prof. Partnoy for a new interview about these emerging issues, I came across another book about trading: Reminiscences of a Stock Operator by Edvard Levene (Turkish edition: Bir Borsa Spekülatörünün Anıları, from Scala). The book was published in 1923 and is filled with the jargon of the day. Once you learn the jargon, it is a fascinating book about trading and speculation. You realize that nothing has changed. Even though the markets are global today, more regulated, it is still just speculation and human instincts.