Book Review: Henry Kaufman, The Road to Financial Reformation

532126_cover.inddAbout 1 in 5 people I know expert in financial policy has written, is writing, or wants to write a book about the prevailing crisis. Every editor at commercial publishers I know is salivating to get such books under contract and sold to a voracious public. The result is and will be many books that should be not be written, published or read.


One of these is the product released late summer by the “anything-for-a-buck” John Wiley & Sons, to the discredit of its “author,” famed Wall Street denizen and critic, Henry Kaufman (The Road to Financial Reformation: Warnings, Consequences and Reform, 2009, 240 pp.).

I like Kaufman, nicknamed “Dr. Doom,” having read many of his writings. But this contains virtually no  current analysis of the present situation, instead repackaging old pieces in the veneer of current commentary.

A guess is editors at Wiley reached out to many potentially successful “authors” and that Kaufman, among them, said he could not write a fresh comprehensive account but would let them republish old stuff, stitched together in a new guise. Pity that many are spending $30 for 240 pages of text (double-spaced) that contains essentially nothing new—but many old pieces that enable the current packaging to say “I told you so.”   Wiley editors may think that a selling point, but I don’t (nor did The Economist’s reviewer).

The volume’s only important idea is this: business schools are culprits in the crisis for their excessive devotion, for forty years, to research and teaching of models of modern finance theory, and subordination or exclusion of research and teaching in economic and financial history. I endorse the rebuke, which I also repeatedly say includes the elevation of elegant finance by subordination of sturdy old-fashioned principles of accounting.

Following is a summary of this digest, which I discourage anyone to buy. Shoppers more astute than I may detect the absence of value from three squibs Wiley managed to include on the outside jacket: (a) journalist  Amity Shlaes says “buy it for Figure 12-1 alone;”* (b) former Senator Bill Bradley says Kaufman has “consistently and correctly warned us of the dangers;” and (c) former Fed Chair Paul Volcker notes the volume is “drawing in part on earlier writings” (an understatement and revealing to the discerning).

Part I’s Chapters, called Perspectives, read as old news, circa 1988, with Chapter 1 exuding angst about securities price volatility, globalization, portfolio insurance(!), and securitization; Chapter 2 underscoring the “value of history” in finance, routinely neglected by each new generation’s Wall Street denizens; and Chapter 3 reminding everyone that Adam Smith endorsed not only economic freedom and government reticence, but also warned of excessive financial concentration.

Part II, Chapters 4 through 7 expressly acknowledge their vintage: reprinting speeches or writings made in 1987, 1986, 1989 and 1981, respectively. These are portrayed under the heading, Neglected Early Warnings. These lament regulatory lag compared to financial innovation, excessive debt, and intensifying financial concentration.

Part III, The Bigness Dilemma, reviews old Mr. Kaufman works on concentration (Chapter 8); offers a trot (Chapter 9) on how every famous economist, except extremist on the left Karl Marx and extremist on the right Milton Friedman, prescribed government oversight of financial institutions; presents (in Chapter 10) a speech vintage circa 1987, revealingly entitled “Do We Still Need Glass-Steagall?”, endorsing that statute repealed a decade ago now; and culminating in a likewise long-rejected cautionary tale called “Banking and Commerce Should Not Merge” (Chapter 11).

Part IV, Financial Crises, has two Chapters: 12, called Postwar Financial Crises: 1966-2001, obviously written at least 8 years ago, culminating with the tech bubble burst, without even referencing Enron; and followed by what appear to be 14 pages of new writing, Chapter 13, called “The Great Financial Crisis of 2007-2009,” which is the first time, beginning at page 153 of 240 textual pages, that the author gives a current evaluation of the present situation.

It may be the intended heart of the book, wherein the author demonstrates how everything he has been warning and writing about for 30 years, digested in the previous 152 pages, was on the money. When drafting this review, I struggled to include a sentence here beginning with the phrase, “The Chapter’s interesting new insight is . . .” but found nothing to fill in that predicate. “I told you so” is not a reason to compile old writings into a new book.

Part V, Chapters 14-17, show the same motif of republishing old thoughts and writings, these appearing to date to about 1999. Chapter 14 repeats earlier chapters, reprinting yet earlier works, about the hazards of securitization and derivatives, and repeating old and earlier here-reprinted prescriptions for developments, like meeting globalization by creating a Board of Overseers of Major Institutions and Markets (here on p. 175 and earlier on p. 126). Chapter 15 is a vintage piece called “The Perils of Monetary Gradualism,” discussing problems using analysis that could have (and may have) been written two decades ago. Chapter 16 repeats the lecture on the value of history in finance from Chapter 2 (and many of Kaufman’s writings, those both reprinted here and not reprinted here). Chapter 17 registers a standard and oft-made objection to the lack of financial transparency in our system, starting with the Federal Reserve.

The final two Chapters, apparently written recently, add little value to a book priced at $30, offering 6 pages on interest rates (Chapter 18) that could have been a blog post and, in Chapter 19, a more essayistic and moderately interesting meditation on what the crisis implies for economics: less debt, an increased savings rate, less focus on finance theory’s risk models, increased financial concentration but that must be reversed, how the dollar will yet remain the global reserve currency, and how important reforming financial regulation is—primarily focused on reforming the Federal Reserve.

In short, everything in this book has been said before—not only by Mr. Kaufman, but by many others. I don’t fault Mr. Kaufman as much as I fault the editors at Wiley for what I consider an irresponsible publishing snare. It does suggest the editors at Wiley could have made a good living peddling sub-prime mortgage loans (a subject the volume does not analyze at all).


*  The jacket squib’s reference to “Figure 12-1” must be a mistake.  There is no Figure 12-1.  There is an Exhibit 12.1 but this is a quotidian list of important financial crises since 1945.  The reference probably was intended to Exhibit 8.3 or 8.4, showing massive concentration in US banks and massive leverage of those banks, respectively.  Chalk this up to sloppy work at Wiley, more interested in selling books  commercially than publishing them with integrity.

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