'Fool's Gold' blazes trail of understanding on credit crisis

— -- Pointing fingers of blame can be unseemly and unproductive. Following the sheer magnitude of the financial crisis ignited by J.P. Morgan's creation of a new kind of investment product — credit derivatives — in the early 1990s, Financial Times journalist Gillian Tett's narrative Fool's Gold is a welcome and engaging read.

She details how the investment strategy began innocently enough, then directs blame at how it was misused in the hands of other banks, including Merrill Lynch and Lehman Bros., who latched onto the concept and applied it to subprime mortgage loans, pushing immense amounts of mortgage loans into the formula under the auspices of a risk-free investment.

Tett's reports that even as J.P. Morgan and a few other banks accurately saw that the housing bubble was bursting, and assessed the horrible risks of huge losses for CDOs, others such as Bear Stearns turned a blind eye to that information and boosted their business in the toxic-bound assets, despite warning signs.

Her J.P. Morgan sources begin by sharing backroom stories of how the exotic investment product was conceived on a rollicking summer's weekend at the luxurious Boca Raton Hotel in Florida in June 1994. "It was in Boca where we started talking seriously about credit derivatives," Peter Hancock, the British-born leader of the group recalls to Tett. "That was where the idea really took off, where we really had a vision of how big it could be."

Tett steadily unravels how what began as an alcohol-fueled, youthful brainstorming getaway by several dozen young bankers who worked for the "swaps" department — a corner of the derivatives universe that was one of the fastest-growing areas of finance — went haywire.