Other People's Money

A real rarity--a book about finance that is both iinstructive and fun to read. Kay is an extremely good writer, who uses simple analogies to underscore his points. The tailgating ultra-high-speed French driver becomes the example of risking a calamity to gain a small advantage. A graphic image which is far better than pages of discussion of risk analysis. I have read several books about the 2008 collapse. This is by far the best of the bunch, providing a clear road map to the problems of the financial industry which made its collapse inevitable. And which will provide another crisis unless the political class can force real change.The basic problem is that too many of the financial institutions have stopped providing a useful service to the society, and become gamblers using the public's money to gamble. That I had realized. And I knew that if the gambles went sour, the Central Banks were ready to pour new money into the institution., so the hapless public covered the downside.;, But I had thought that the profits from the gambling would go to the shareholders. Not so. What I hadn't understood is that most of the profits are paid over to the executives as citizen-infuriating salaries, and to the gamblers who had won their bets, as bonuses. Kay doesn't offer what is, to me, a plausible solution. The key, as he says, is to separate the gamblers from public money and government bail-outs. Sounds a lot like Glass-Stegall, which got the job done for 75 years, but was finally nullified just in time to permit the gamblers to bring us the 2008 disaster; and couldn't get past the bank lobbyists as Congress pretended to look for solutions. So they get Elizabeth Warren's Consumer Protection Board. The Lord works in mysterious ways.

I was looking for a book to provide a critical but reasonably unbiased overview of the finance industry, chose this one, and am not disappointed. John Kay is a good guide. He not only knows the minutia, but also keeps the focus on the basic tasks that we want and need finance to perform. It's a well-balanced, informative book that fortunately isn't difficult for industry outsiders like me to understand. However, I suppose because I had read glowing reviews of this book before I bought it, I was a tad disappointed when I read it myself (and thus don't give it the full five-star rating). The problem, to my mind, is organizational. This is usually the hardest part of writing any book, and you can tell that Kay (as well as perhaps his editors) worked hard to create a strong organizational structure, but it's still a bit disorganized. Kay frequently refers back to previous points or anticipates future points, writing, for example, "as was discussed in chapter 3" or "as will be discussed in chapter 9." As a writer myself, I know that remarks like these scream, "Weak organization!" A really good writer doesn't do this, but rather figures out a way to cover a point thoroughly when it is brought up, instead of constantly referring the reader somewhere else. The consequence of these organizational weaknesses is to muddy up the priorities of the various points. Reading this book reminded me of taking a course (from a good professor) that meets maybe three times a week for an hour over a semester. In each class, the professor makes good points, but some days the points made are more important than the points made on other days, yet the equal time given to the various points on different days makes it difficult to know which points are more important than others. "Other People's Money" struck be as suffering from this difficulty of weighting the priorities of the various points. Maybe it's just my taste, but I felt that the book would have been better with fewer but longer chapters that were each anchored in a broad theme, under which subsidiary points were prioritized. As it is, the book reads a bit like the linear presentations of lectures. But this criticism isn't a huge gripe, and the book isn't disorganized. I just think that for the book to have been excellent, the organization needed to be improved. And while I'm griping, I have a couple other small quibbles. One is that while Kay seems to have a wise grasp of human nature (something people in economics now deny that they talk about, even though they do), he periodically rests arguments on his sense of human nature that is probably debatable. Those in other social sciences would be reluctant to advance these arguments as easily as Kay does, and if they did, they would pause to develop them. I don't disagree with Kay, but he is a bit fast and loose with assumptions that others might question. My second small (and not unreated) quibble is Kay's failure to deal with discriminatory practices in lending. He makes a strong case (with which I agree) for the importance of lenders knowing their borrowers and making loans based in part upon the borrower's characters, but he completely ignores the reality that this practice has had and frequently still has discriminatory results. Good Old Boy white bankers have a tendency to evaluate the characters of other Good Old Boy whites more highly than they do of ethnic minorities and women, making it incumbent upon anyone who argues that lenders should focus on character to deal with the problem that lenders routinely misjudge character. Indeed, while it's funny and I get his point, Kay even celebrates the days when financial deals were hammered out on the "19th hole" of the golf course. Well, that's great for the customers who play golf, but what about the customers who don't but shoot hoops in the 'hood instead? Must they learn to play golf before they qualify for loans, or should bankers be forced to learn to play baskeball as a nondiscriminatory condition of becoming bankers? It's usually unfair to criticize a book for what it doesn't cover, and it gets tiring when people inject the race-class-gender trinity into discussions of issues where they are tangents. However, Kay is the one who emphasizes the importance of lenders judging borrowers' characters and even illustrates that with golf. Since he does, he is obligated to deal with the usual discriminatory consequences of that approach, but he doesn't even mention them. Overall, though, this book is a good overview of the finance industry and Kay is a good guide.

Really found this book insightful and thought-provoking. I'm probably a little too young and not well versed enough in finance to have understood everything, which is to say, at times it was a little over my head. However, for it being a finance book, it was rather engaging and I liked the writing style of the author. He seemed like an exceptionally smart and reasonable guy and I found the arguments he presented in the book to be very sensible. It helped that this book didn't have an overt political sway, in fact, I found it difficult to figure out exactly where the author stood. So don't be afraid that if you read this book you're going to be necessarily politically persuaded in some way or another, as it's not really focused on that. The author was also able to describe our financial system almost in a detached, very critical and observational type of way but, as well, he also had an insiders perspective. The gist is that our financial system is too complex and interdependent and this is the source of it's underlying fragility. As well, we have a lot of misconceived regulation. Overall, I really appreciated what I learned from this book, definitely buy it if you are unsure. It's very relevant.

I liked this book because it gives an overview of the banking industry which i have not seen in other books and articles I have read, especially regarding the crisis of 2008 and the role played by the financial system in this. Rather than just finding serious flaws in this or that aspect of the banking system, which he does, the author provides convincing reasons how and why the entire financial system in developed countries basically lost its compass, and has ended up as something entirely different from its original purpose. He advocates scrapping or seriously reducing much of the activity which characterises modern banking, and provides original insights for approaches to regulation and reform to encourage this. The author's style is somewhat desultory, branching off occasionally from the themes he expounds with small related anecdotes or related thoughts, which can make the reading a little heavy. However, these fill the book with fascinating gems wittily questioning the standard wisdom, and even the basic tenets, of modern financial theory, and its application to the banking industry. The chapter on risk I found particularly enlightening. All through the author condemns the lack of ethical standards and attributes this to the rise of "gesselschaft" vs "gemeinschaft" in managing risk, the broad berth given by common law to boiler-plate derivative contracts, and other factors. ( The best book I have read on ethics - or lack thereof - in business is by the French philosopher André Compte-Sponville: "Le Capitalisme, est-il Morale?" ). The author wraps up profound insights and trenchant observations in a colloquial writing style. However, i found the book deep enough to merit a second reading, which I am in the process of doing.

Other People's Money takes a common sense look at the financial markets and asks important questions. In particular the author looks to the question of what the true value add of finance is, how the industry has changed over the decades and how its profit and economic value add have no correspondence. The author clears up several misconceptions about finance as well as its role in the economy and familiarizes the reader with modern financial economics in plain words. The book is intuitive and appealing but it has become a bit inaccurate and is probably 2 years old in its sentiment towards the industry. Nonetheless it gives an important perspective on how to think about financial services as a an industry. Other People's Money has many goals embedded in it. The most immediate are to discuss what financial services currently does and what it does not as well as how to think about its actual productivity vs its accounting profit. The author looks at finance as its evolved over the decades from a sleepy industry matching savings and loans in a prudent relationship dependent framework to the one it is now, which he believes is predominantly regulatory arbitrage and tax avoidance. The author discusses how the euro dollar market emerged to escape the constraints of interest rate ceilings from regulation Q and how capital and tax treatment are at the heart of why the interbank market is so massive relative to its actual need. The author clears up the idea that investment banks channel savers money into prudent investment by noting the vast majority of profits are generated from trading. The author also discusses how the value of trading is ambiguous as one has to recognize the zero-sum aspect of it especially in a high frequency environment. The author also pokes holes in the idea that IPO financing is for capital growth and makes the argument it allows promoters to liquefy their own net worth. Another point the author focuses on is how debt financing is also not for capex often and instead it is for tax arbitrage as evidenced by Apple's recent mega bond which allowed for larger dividend payments. There is an element of truth in all of this but it is a very biased and statistically inaccurate picture. The author also focuses on the idiocy of the idea that all people can out trade the market and how the growth of trading profits has been built on false principles and is a house of cards that can fall down like it did during the financial crisis. He also points out that trading is not about the distribution of risks to those who can bear it but a combination of multiple agendas a large one of which is gambling. He highlights the volume of the CDS markets relative to underlying credit risks and how there have been cases where credit protection volume is a multiple of the event at risk (hence speculative money is clearly at play). He also discusses at length the value system that goes into the trading mindset, in particular that people don't worry about losses in the future as both parties will be long gone by then. The author is concerned that regulation isn't the answer as intelligent market participants will always be ahead of the regulators and greater accountability is what is more important which requires greater skin in the game. The author brings up a host of real issues that finance has faced and points out the lack of value add of much of financial services other than a transfer of wealth from industry into banking. The criticisms are clear and partially valid. There are many things wrong with finance and the credit intensity of the economy is creating global issues. That being said this book is out of date and even though it sounds reasonable the industry is nowhere near the profit engine it was as one can see major banks retrenching massively from trading in FICC as well closing investment banking. Thus the real evidence of regulation having its intended effect is in the job losses from the sector. This is no claim that the industry is right sized but the author's comments would have more resonance if this was 2009 when bankers paid themselves with bailout money, not 2015 where bank balances have been in sharp decline for risk capital and desks headcount reduce everyday. This addresses another criticism of the author which is regulation is inadequate. Inevitably regulation is the least preferable way to attain good behavior but nonetheless the regulatory issues faced by the banking system have forced change and the author's suggestion though appealing in commonsense terms is not a realistic policy prescription despite it sounding so nice to turn back the clock. The idea that IPOs and debt markets only serve to liquidate promoter's stakes and create tax loop holes is totally absurd. The shale gas boom in the US was financed through debt and equity. This book is a good read to get a skeptic's view of the value of finance and the criticisms should resonate with all. The books value largely ends there though. The financial crisis has catalyzed fewer changes than it should have and there are major changes that are likely required but to think in an age of global capital flows we can go back to banking from the 70s and have less regulation is naïve to say the least.

One of my favorite books is The Art Of War, though I can't help feeling that I had to read a particularly unskilled translation, as I was born several thousand years too late. The invention of gunpowder, the consequent refinement of artillery science, and the wholesaling of death by bombardment...all contributed to highlight the quaintness of the concepts of the warlike state, as the pinnacle of empire. With the development of thermonuclear munitions, we don't even have time to read books anymore, and war is largely automated. Wealth of Nations enjoys the same outdated cachet of Art of War. One would do well to make time for Other People's Money, especially as a companion piece to Other People's Houses. The Black-Scholes Formula can be compared to the invention of black powder, in it's effects and it's widespread adoption. The ubiquity of the computer, and it's accessibility to any jungle predator, has enabled the same thermonuclear angst in the world. I greatly enjoyed the Story of the Ox, unfinished though it was. The statistic that jumped off the pages was the claim that today, 70% of financial investments are other financial investments. I hope the reader is able to work through this valuable guide, and absorb some useful knowledge, before we are all overcome by events.

Kay’s book has one of the most honest parentheticals in the history of finance books. After a sentence on synthetic CDOs, he has an aside where he says quote: “(You really don’t want to know)” (p 60). So you get a sense of the tone and intended audience of this book here. I liked about the first two thirds of the book, but he ends up after looking at all the problems with the finance industry that the issue with the industry is “too much government involvement in the financial sector, not too little” (p 203). And with me being a statist and an interventionist, I reluctantly followed him down the path for the last third where he approving cited Austrian school thinkers and even worse – he mentions Nassim Taleb approvingly (which is an impeachable offense in my Republic). So it is interesting to look at a thinker who can identify many of the same problems that you do but who has a vastly different prescription than you do, but the enjoyment level dropped from when I was reading as a compatriot to when I was forced to read as a critoc. Not everyone will follow that path and Kay is smart and a clear writer, so this is a book that I would mostly recommend.

A terrific book, which exposes the utter dysfunctionality of the contemporary American financial system in a clear, engaging, and fully persuasive manner. The author also provides guidelines for fundamental reform of the financial system; what is needed now is the political will and strength to achieve that objective.