In 1997 it seemed that things in the City could only get better.
The incoming Labour government gave the Bank of England independence, it introduced a state of the art system of light-touch regulation; and it signalled that it was happy to see finance let rip.
For ten years everything went according to plan. Buoyed by a strong pound and cheered on by an excitable media, the bankers became the heroes of the age.
The City embarked on a giddy programme of innovation, asset prices boomed and Britain seemed at last to have shaken off its post-war malaise.
Politicians took to lecturing their European counterparts on the need to deregulate, to focus on shareholder value and to dispense with an outdated and discredited social market model. And then in the summer of 2007 everything began to collapse.
One household name after another - Northern Rock, Bradford & Bingley, HBOS - failed or was forcibly merged.
Barely a year later the government took controlling stakes in the banking sector and the reputation of the City was in tatters.
In "Chasing Alpha" Philip Augar tells the extraordinary story of how a major economy tried to reinvent itself as a hedge fund crossed with an offshore tax haven. It is all here: the greed, the guile, the excess. Anyone who worked in finance, and anyone who watched the disaster unfold, will be riveted by this, the first sober history of an intoxicated decade.
- Format: Hardback
- Pages: 272 pages
- Publisher: Vintage Publishing
- Publication Date: 15/02/2009
- Category: Economics
- ISBN: 9781847920362
Showing 1 - 2 of 2 reviews.
Review by ElectricRay
I really enjoyed Philip Augar's The Death of Gentlemanly Capitalism: The Rise and Fall of London's Investment Banks, about the aftermath of the UK financial services "big bang" in 1986: In that book Augar is a credible witness, having held a senior post at J. Henry Schroder, and he writes in a lively and measured way. But in the last eight years Augar has been "writing and consulting" and his absence from the industry in that time is a little telling. I was looking forward to Chasing Alpha, and was surprised to see him fluff his lines in the very first sentence of the preface, in giving an erroneous definition of "alpha" - significant as it is ostensibly (but as it transpires, not actually) the subject of the book. Alpha, in the sense understood in the city, is not simply "supercharged profits" as Augar claims, though certainly positive alpha can create them, but a technical term gauging the variance of an instrument's (or more usually, a hedge fund's) performance over the market average, or "beta". An investment manager's alpha, therefore, is the added value it brings you that you would miss out on if you just invested in the benchmark. Hence the supercharged profits. Strictly speaking, the measure of alpha excludes the amplifying effects of leverage (borrowing to invest in the strategy, magnifying profits and losses of a dollar invested). Leverage increases the volatility of portfolio returns. Volatility is measured by vega, not alpha. You may think I'm splitting hairs, but for two reasons I'm not: firstly, "alpha" is therefore only relevant to investment advisers (such as hedge fund managers) and is not a meaningful gauge for corporate chief executives nor, really, investment bankers (though granted, as with all buzzwords, it was - and still is - heavily overused in selling structured products). Secondly, by definition, not everyone in the market can generate positive alpha - it is a measure of outperformance of the mean. Therefore, in the fund context, it was a far more credible label when hedge funds were a small segment of the market comprising the crème de la crème of the city's trading talent - the Soroses and GLGs of the world, who really could outperform the rest of the market. Nowadays, as Augar clearly recounts, the unregulated fund industry amounts to a massive shadow banking system which dwarfs the rest of the market, and all too often the supercharged profits were not generated by "alpha" but by leveraging something looking a lot more like beta. As long as the cost of funding the leverage was cheaper than the return of the benchmark, the strategy worked very well. But it amounted to a massive asymmetrical bet that this benign state of affairs wouldn't reverse. And, as we know know, it did, with a vengeance. The conflation of leverage (common) with alpha (extremely rare), leading the city to believe it had eradicated risk was a large part of the complacency which led to the rout. Enough of portfolio theory. Having mis-described alpha, Augar then barely mentions it, making you wonder why he chose that title. For the credit crunch, as he patiently recounts, was not caused by chasing alpha. Even for the hedgies, chasing alpha wasn't the problem, deluding oneself that you were catching it was (what the 2 and 20 model called "alpha" was more like the premium on a deep out-of-the-money-put). Augar seems to have in this way tabloidised his delivery - he's looser than he ought to be with the technical details (he misdescribes investments in SIV vehicles as "shares" - actually they're short-term debt investments, and that makes a world of difference) and his estimation both of the size of the alternative fund space and the extent to which it relied on leverage seemed pretty rudimentary. My own anecdotal experience suggests it was way bigger and way more highly geared than Augar suspects. Away from the hedge funds the rest of his analysis settles down somewhat, and Augar's history is comprehensive enough, and it does read rather like a sequel to the Death of Gentlemanly Capitalism. However, in content, it doesn't cover colossally more than could have been extracted from careful reading the FT over the last couple of years. If you haven't done that, this book comes well recommended. If you have, you're not going to learn much here. While it was an enjoyable enough read, I don't think Augar really gets to the nub of what caused the meltdown - he drops many names and spends too much time telling individual corporate stories with which he seems very familiar, but which don't really bear on the crisis. By contrast, his treatment of the phenomena that did (the originate and distribute model, for example) is cursory and his effort to tie it to the explosion in CDOs and the consequent effect on the mortgage market is salutary. That's the real story here and we are all implicated; not just the chasers of alpha. Gillian Tett, who has been one of the best writers in the FT over the last couple of years, has recently published a book (Fool's Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe) which looks like it might get nearer to the real story; if you were going to read one book about the credit crunch you might be advised to look to that.
Review by annbury
An interesting history of English financial markets over the last twenty years