Philip Augar’s Chasing Alpha explores a period when it looked as though the City's financial institutions could not lose and light regulation gave greed and ambition its head in the financial markets, and beyond. But then it all fell apart.
Chasing Alpha is a history in three parts.
Augar sets the scene by showing how uneven the performance of the City of London’s financial institutions was after Big Bang in 1986 until the change of government in 1997. Indeed this was brought home in October 1987 when the equity markets collapsed by 20 per cent in two days. As a consequence investment banks were under-performing and many were taken over by foreign owners and the scene was set for the bull run that eventually came to an end in 2008.
The light regulation in a long period of growth flattered the City’s performance and there grew a belief that boom and bust had been eliminated. Banking practice changed and became more aggressive on the back of the bull market. New products were devised supposedly spreading risk and thereby, it was argued, eliminating the risk of catastrophe that had been seen in previous busts. The boom times were here and were unstoppable or so it seemed to those involved.
It all came to a head in the summer of 2007 as the problems with sub-prime lending in the USA began to unravel the complex web of derivative products that were supposed to reduce risk. It soon became clear that they did not achieve their aim especially as many institutions were dependent on being able to borrow in the wholesale money markets to refinance their highly leveraged positions. Those who had the money had to hang on to it to support their balance sheets and as the flow of money dried up high-flying institutions needed support or actually failed – the Credit Crunch and the deepest global recession since the Second World War had arrived.
Chasing Alpha is not sensational in it presentation of the twenty years leading up to the Credit Crunch. Augar lets the facts speak for themselves by leaving the book largely free of his own opinions. It is a clinical history of financial services in the City of London and the motivations and practices that led to the banking crisis in the summer of 2007 and into 2008.
As a result of the detail it is not a book for everyone as the completeness makes the content complex and potentially heavy reading despite the straightforward writing. However for those interested in finance it will be a compelling and readable history that will enable the reader to make sense of the collapse of confidence that started in 2007 and became the Credit Crunch.
Philip Augar has produced a serious work that should inform historians, financiers and government on how the problem arose. For most readers it will provide a complete and more readable description than will appear in the inevitable government and industry reports. Most importantly it is here now so that investors, government and industry can start to plan for the future without having to wait years for the official reports.
Most importantly Chasing Alpha provides a warning for investors not to get carried away by the financial services industry’s hype and form their own opinions.
Chasing Alpha, How Reckless Growth and Unchecked Ambition Ruined the City’s Golden Decade by Philip Augar (ISBN: 978-1-847-92036-2) is published in hardback by Bodley Head at £20.00 (Can$ 54.95).
Philip Augar worked in the City as an investment banker. He now works as a consultant and writer and Chasing Alpha is his fifth book.