Book review – Infectious Greed: How Deceit and Risk Corrupted the Financial Markets Frank Partnoy

The last eighteen months have seen marked hostility towards financial institutions. Critics have a shared distrust of these institutions and of the people who work there. What I find fascinating is that anti-bank sentiment has only reached fever-pitch now: financial scandals are not new, and those which are coming to light now are not even particularly complex. As world leaders attempt to restore confidence in the global financial system and desperately search for solutions to get their economies back on track, it is interesting to note that as far back as 2003 criticisms of the financial system were in the public domain and viable solutions were being offered.
Frank Partnoy is in a unique position to provide meaningful analysis of the financial markets. A former investment banker and derivatives broker, Partnoy left Wall Street to become an academic. In his second book, Infectious Greed, he offers a very comprehensive history of the birth of the modern financial markets, their failings and potential solutions to the problem of corruption and greed.
Partnoy argues that while there has been a dramatic increase in the number of financial scandals from the late-eighties to the early-2000s, these incidents have usually been looked at in isolation rather than as part of a wider problem. Taking a broad view of what has happened to trigger these scandals is what Infectious Greed aims to do.
The book is essentially a history of derivatives – “financial instruments which derive their value from other assets” – and it is these instruments which the author argues are at the root of the form of financial markets which we see today. Partnoy traces their origins, their dissemination throughout the market and, ultimately, their use and abuse by institutions desperate to book profits and hide losses. He guides us through a dizzying array of scandals without once losing the thread of his narrative or obscuring his main point. Although the subject matter is rather technical, the author manages to make it comprehensible to those who have little prior knowledge by including various definitions and examples while avoiding a didactic tone.
Although Partnoy rightly describes the corruption and deceit which taint our modern financial markets as an “epidemic,” he avoids the pessimistic stance which many journalists and pundits are taking today. He identifies the key issues which must be addressed if we are to get our financial markets back on track (and, incidentally, addressing these issues would also prevent difficulties in these markets spilling over into the rest of the economy) and makes six key recommendations. Extensive regulation of all financial instruments, prosecuting those who commit complex financial fraud and loosening the hold of the oligopoly of credit ratings agencies are some of the usual suspects which make it onto the list. Ultimately, though, Partnoy argues that the public must take some responsibility for what has happened. As he says “today, there are an astonishing number of individuals buying and selling stocks” and most of these individuals are unaware of the type of activities in which the companies in which they invest are involved. Lack of oversight by those who at the end of the day own these companies is another reason why the market has succumbed to infection.