Other People's Money: The Real Business of Finance
Format: PDF / Kindle (mobi) / ePub
An Economist Best Book of the Year, 2015
A Bloomberg Best Book of the Year, 2015
The finance sector of Western economies is too large and attracts too many of the smartest college graduates. Financialization over the past three decades has created a structure that lacks resilience and supports absurd volumes of trading. The finance sector devotes too little attention to the search for new investment opportunities and the stewardship of existing ones, and far too much to secondary-market dealing in existing assets. Regulation has contributed more to the problems than the solutions.
Why? What is finance for? John Kay, with wide practical and academic experience in the world of finance, understands the operation of the financial sector better than most. He believes in good banks and effective asset managers, but good banks and effective asset managers are not what he sees.
In a dazzling and revelatory tour of the financial world as it has emerged from the wreckage of the 2008 crisis, Kay does not flinch in his criticism: we do need some of the things that Citigroup and Goldman Sachs do, but we do not need Citigroup and Goldman to do them. And many of the things done by Citigroup and Goldman do not need to be done at all. The finance sector needs to be reminded of its primary purpose: to manage other people’s money for the benefit of businesses and households. It is an aberration when the some of the finest mathematical and scientific minds are tasked with devising algorithms for the sole purpose of exploiting the weakness of other algorithms for computerized trading in securities. To travel further down that road leads to ruin.
in business strategy. The urge to consolidate—a polite term for the attempt to create monopolies—is always strong in the business community, and had not died with the introduction of anti-trust policies in the USA. A new wave of mergers in the 1920s established companies such as General Motors and Imperial Chemical Industries (ICI). In the 1960s domestic consolidation was widely seen, for no obvious reason, as an appropriate response to growing international competition. The conceit that great
in finance. Investors employed a broker or asset manager to handle their money. These were agency relations. Those old-fashioned bank managers were paternalistic, notorious for their caution. Company directors have specific legal duties towards shareholders and creditors. And agency stockbrokers did their best for their clients. Regulated, managed agency, imposed by law and buttressed by regulation and practice, is the natural model for financial intermediation, but any strict application of the
modern building that dominates the town of Halifax, West Yorkshire. The location is the boardroom of the Halifax Building Society. The proposal before the board was that Group Treasury, which managed the cash held by the Society from day to day, should no longer simply serve the needs of the business—taking deposits from savers and making loans to home-buyers. Treasury should take active positions in money markets, and become another profit centre. The plan was to trade debt instruments: usually
Misallocation of housing finance was central to the global financial crisis. Mortgages did become cheaper, for a time, and then more expensive. Many individuals who had unwisely dabbled in the housing market suffered hardship or foreclosure. Every major bank suffered substantial losses, and some, such as Washington Mutual, which had specialised in housing finance, failed altogether. Fannie Mae and Freddie Mac, the two parastatal agencies that dominated US housing finance, collapsed. The share of
different regulatory, accounting or fiscal rules that are employed in different countries around the world. All these manoeuvres have the same underlying purpose: to gain financial advantage by devising transactions with similar commercial effect but different regulatory, accounting or fiscal form. These arbitrage activities normally have negative economic value: the gain to the initiating business (and the agents who facilitate the transaction) is offset, or more than offset, by the loss to