Best of 2007 Book Awards

December 20, 2007  permalink  e-mail

It is that festive time of year again, when everyone is scrambling to complete whatever financial tasks are required by year end, and satisfy all the season's social obligations, and send out holiday greetings, and find the right gifts for all the loved ones. The season of "silent night" is more the season of frenetic activity. But I love it. A gentle snow is falling. I have a large mug of coffee in hand and Christmas carols playing, and I am taking time off to announce the Best of 2007 book awards. Go to riskbook.com to see the list of ten winners. Below is my commentary on the year in financial publishing. I place the ten winners in context, pointing out major trends this year as well as some gems that may not have won awards but that you won't want to miss.

If there is a predominant theme to this year's awards, it is history and biography. There are many excellent new releases in this category. See William Cohan's Last Tycoons, an "unauthorized" history of Lazard Freres; Patricia Beard's Blue Blood and Mutiny about the overthrow of Philip Purcell at Morgan Stanley; and Ranald Michie's Global Securities Market, a sweeping look at the development of securities markets from the middle ages to the present day:

Among this year's award recipients was Michael Yogg's Passion for Reality. This is a biography of Paul Cabot, a Boston Brahmin and cofounder of one of the first mutual funds. But it is more. The book is a fascinating look at the origins of mutual funds in the United States.

Charles Gasparino's King of the Club won an award for recounting the life of former New York Stock Exchange (NYSE) CEO Richard Grasso—his rise, the 1987 crash, the 9/11 attacks and the scandal that ultimately did him in. The book is also an outstanding history of the NYSE in the second half of the 20th century. The exchange has undergone a dramatic transformation from non-profit with regulatory authority to for-profit corporation. It is moving away from its traditional floor-trader model to embrace electronic trading. If all the change is a little mind boggling, read Gasparino's book to understand how it transpired.

An award goes to William Silber's When Washington Shut Down Wall Street. This recounts how, in August 1914, as Europe went to war, The NYSE was closed. Investors assumed this was done to avert a crash, but it wasn't. The order came from Washington, where the US Treasury Secretary had his own reasons—reasons that would keep the exchange shuttered for four and a half months. Silber's meticulously-researched history takes you back to a time when America was on the gold standard and money traveled as fast as steamers could haul the precious metal across the Atlantic.

Finally, Lawrence Mitchell's The Speculation Economy won an award for documenting the emergence of the modern industrial corporation in a dramatic merger wave between 1897 and 1903. Financiers, including JP Morgan, combined regional firms into "trusts" and amassing fortunes by issuing watered stock. Not only was America's business landscape transformed, but a new form of "capitalism" was spawned. It is a capitalism Adam Smith wouldn't recognize, but it is the capitalism of America today.

Another wonderful publishing trend started years ago but accelerated in 2007. It is a category of books largely dominated by the publisher John Wiley & Sons, who is celebrated their 200th year in publishing. These are books that walk quantitative professionals through implementing various financial applications in Excel, Visual Basic or some other accessible coding environment. This genre first hit my radar screen back in 2001 with Jackson and Staunton's hugely popular Advanced Modeling in Finance Using Excel and VBA.

Books of this genre dispense with theory and embrace "learning by doing." There were a bunch of new releases in the genre this year. None won an award, but there are several that I highly recommend. Evan Tick's Structured Finance Modeling With Object-Oriented VBA and Keith Allman's Modeling Structured Finance Cash Flows with Microsoft Excel are excellent for modeling securitizations. For credit risk modeling, see Loeffler and Porsch's Credit Risk Modeling using Excel and VBA. Rouah and Vainberg's Option Pricing Models & Volatility Using Excel-VBA is for financial engineering.

A less fortunate trend this year is the emergence of books celebrating hedge fund managers—with a chapter on each of selected hedge fund managers lucky enough to have a winning track record. If you placed 10,000 monkeys in a stadium and had each flip a coin ten times, about ten of the monkeys would get ten heads in a row. Would someone publish a book highlighting those ten or so "superstar" monkeys' achievements? I suppose not, but no one is getting filthy rich off monkeys flipping coins. People are getting filthy rich off the hedge fund scam, so there is a need for promotional books to keep the gravy train rolling. This trend of celebrating hedge fund managers got started last year with Steven Drobney's trashy Inside the House of Money. This year it continued with Katherine Burton's sycophantic Hedge Hunters and Lindsey and Schachter's How I [Became A] Quant. The latter book isn't only about hedge fund managers, but the authors stretch the definition of "quant" beyond financial engineering to include people who do technical analysis for hedge funds. Of the people the book highlights, only one is a practicing financial engineer who works on a trading floor.

This silly hedge-fund-managers-as-heroes trend is an exception to something nice that has transpired in 2007. Last year I put out a call to publishers to staunch the flow of sleazy books promoting hedge funds. I am pleased to note that my wish was granted. The flow of books on hedge funds has slowed, and most of the books published in 2007 were already in the works when I made my plea. If this saves just one pension plan, endowment or foundation from being ripped off, it will be worth it.

We are still picking up the pieces from the Summer's sub-prime mortgage meltdown. Securitized pools of mortgages traditionally entailed pre-payment risk but no credit risk. This changed dramatically in recent years. The housing market bubble was fueled by sub-prime mortgages, which brokers repackaged as securitizations. Frank Fabozzi et al released their book Mortgage-Backed Securities just before sub-prime hit the fan. It wins an award for explaining this new market in the overall context of the mortgage-backed securities market. Two other excellent books on securitization did not win awards but must be mentioned. Servigny and Jobst's Handbook of Structured Finance focuses on pricing and risk modeling of CDOs, but it includes chapters on residential mortgage-backed securities and structured investment vehicles, which are experiencing their own meltdown. While other books on securitization discuss credit risk, this one also delves into market risk, including the Greeks applied to CDOs. Rajan, McDermott and Roy's Structured Credit Handbook is an outstanding resource on the products and workings of the credit derivatives and CDO markets. It explains products in plain language: credit swaps and swaptions, index products, spread options, CDOs, equity CDOs, CDOs "squared", etc. The mechanics of trades and settlement are explained. Trading strategies are illustrated with case studies.

Rodney Sullivan's Global Perspectives on Investment Management won an award. Released to commemorate 50 years of the CFA Institute's annual Financial Analysts Seminar, it is an edited collection of the best presentations from recent seminars. There is a chapter by Norren Harrington, who blew the whistle to launch the 2003 mutual fund trading abuse scandal. David Tweedie, chair of the International Accounting Standards Board, contributes an informative piece on global convergence to a common accounting standard. There are chapters on economics, regulation, investing and risk management. Most authors have names you will recognize—or should recognize. This is the kind of book that is worth setting on your night stand and reading a chapter each evening. The CFA Institute kindly sent a free copy to every one of its members, many of whom turned around and posted theirs for sale on Amazon's used book section. Last time I checked, the going price was less than a dollar. That's not exactly a free lunch, but it is the best price you will find anywhere for fine (intellectual) dining.

Scandal, abuse and fraud have been a recurring presence in the financial markets since the turn of the millennium. There are plenty of books hitting the market on regulation and corporate governance. Two on SOX that are worth recommending are Stephen Bainbridge's Complete Guide to Sarbanes-Oxley, which will appeal to senior managers and board members, and Sanjay Anand's Essentials of Sarbanes-Oxley, which is more suitable for middle managers. The really outstanding book on regulation this year, which won a Best of 2007 Award, is Justin O'Brien's Redesigning Financial Regulation. The book pulls no punches in exploring how financial regulation is fundamentally flawed and can't be fixed while politics plays the role it does. Not another populist diatribes, the book is compelling because it is so scholarly. I highly recommend it.

One embarrassing trend that has gained steam this year is that of authors who previously published successful technical finance books repackaging themselves as financial gurus and writing more populist books. This genre was launched by Nassim Taleb who published an outstanding technical book, Dynamic Hedging, about derivatives trading back in 1996. He followed that up with a pretentious book, Fooled By Randomness, that appealed to the high-school dropout, weekend trader crowd. It was a bestseller. As confirmation of how much notoriety and connections can accomplish, this year he released another pseudo-philosophical trader book: Black Swan. It is as shallow and as successful as the last book. It was even named one of BusinessWeek's top finance books for the year. Don't get me started on the state of financial journalism today ...

Last year, Satyajit Das chose to emulate Taleb with his Traders, Guns and Money. The "guns" piece requires some explaining, but the book mostly tries to seem savvy while introducing OTC derivatives markets to laymen. This year there were several new books in the genre. Espen Haug's Derivatives Models on Models serves up a bizarre mix of derivatives comics, artworks and guest articles. Riccardo Rebonato also bellied up to the bar with his non-contribution to risk management Plight of the Fortune Tellers.

One book in the finance guru genre actually won a Best of 2007 Award. It is Richard Bookstaber's Demon of Our Own Design. Like other books in the genre, it is flawed. Bookstaber develops a thesis that financial markets are a complex, tightly-coupled system that inevitably produces the occasional bubble or blow-up. In his view, regulation can exasperate rather than alleviate the problem. He makes his argument heuristically and with analogies rather than financial facts. Instead of looking at specific regulatory initiatives, we read about the Three Mile Island nuclear catastrophe and the Jet Blue airliner crash. There are lengthy discussions of biology and "survival of the fittest." Bookstaber concludes from all this that markets need to be simplified rather than overregulated. But he waits until the book's last page to say this, too late to explain or clarify the proposal, let alone address implementation.

That being said, simplify-rather-than-regulate is just one of several topics percolating through the book, and the others make for wonderful reading. Bookstaber offers a revealing account of his years at Morgan Stanley, Salomon Brothers and then Citigroup. He worked in portfolio insurance during the 1987 stock market meltdown. He interacted daily with the Salomon Brothers fixed income arbitrage group—the same people who launched the disastrous hedge fund LTCM. He witnessed the origins, spectacular success and ultimate decline of pairs trading. There are so many anecdotes, insights and historical clarifications here. Anyone who knows their vega from their gamma will love the material. Of all this year's award winners, Bookstaber's book is the one everyone will be reading on the trading floor. (Almost everyone, by the way, will also be reading Charles Gasparino's King of the Club, which I have already mentioned.)

The two final winners of awards this year are Jochen Andritzky's Sovereign Default Risk Valuation and Sergio Scandizzo's Operational Risk Manager's Guide. The former is an expansive look at sovereign debt leading up to a sophisticated discussion of valuation. History is recounted back to the early 1800's, with especially detailed accounts of recent restructurings. The latter is one of the most practical books on operational risk—actually, risk management generally—I have ever read.

That's it until next year. Happy reading!

Glyn A. Holton