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The Road to Financial Reformation: Warnings, Consequences, Reforms

ISBN: 978-0-470-53212-6
260 pages
August 2009
The Road to Financial Reformation: Warnings, Consequences, Reforms  (0470532122) cover image

Our financial crisis: what happened, how we got here, and what needs to be done

Henry Kaufman-an esteemed economist and statesman-is one of the most preeminent financial figures of the day, with a history of success from the 1980s, when his firm, Salomon Brothers, ruled the bond markets.

In The Road to Financial Reformation, Dr. Kaufman, who has spent a lifetime entrenched in the world of finance, provides an insightful account of the history and impact of post-World War II financial markets on the economy-what happened, how we got to where we are today, and what needs to be done. Drawing on his vast breadth of knowledge and experience, Kaufman reveals the mistakes that got us into this debacle, the consequences-as they have not been fully realized-and how to put our derailed economy back on track. This book details Dr. Kaufman's warnings and concerns expressed repeatedly throughout the last quarter century, and shows that what he predicted came to pass.

  • Provides an insightful account of the history and impact of post-World War II financial markets on the economy
  • Explores the erosion of credit ratings on corporate debt in the late 1980s and the rapid increase in financial concentration of institutions
  • Discusses the blinding faith in models that rely on historical data but fail to take into account economic and financial market structural changes

With his breadth of knowledge and experience, Kaufman details that this crisis was foreseeable (he saw it coming), and how we created this history-making financial crisis. He also explains the consequences still to come, and presents solutions on how we can recover and reform the markets.

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Foreword by Niall Ferguson.

Acknowledgments.

Introduction.

PART I: IN PERSPECTIVE.

1 Past Blunders and Future Choices.

2 Reflections on Business, the Lessons of History, and Globalization.

3 If Adam Smith Were Alive Today.

PART II: NEGLECTED EARLY WARNINGS.

4 Troubling Trends in Financial Markets and Official Policies.

5 Debt: The Threat to Economic and Financial Stability.

6 The Decapitalization of American Corporations.

7 Shortcomings in Financial Oversight.

PART III: THE BIGNESS DILEMMA.

8 From Financial Segmentation to Concentration.

9 Financial Concentration in Economic Thought.

10 Do We Still Need Glass-Steagall?

11 Banking and Commerce Should Not Merge.

PART IV: FINANCIAL CRISES.

12 Postwar Financial Crises, 1966–2001.

13 The Great Financial Crisis of 2007–2009.

PART V: POLICY FAILURES AND REFORMS.

14 Public Policy and the Markets.

15 The Perils of Monetary Gradualism.

16 The Fed and the Governance of Financial Institutions.

17 Transparency and the Fed.

PART VI: PROSPECTS.

18 Prospects for Interest Rates.

19 The Financial Consequences of the Credit Crisis.

Selected Bibliography.

About the Author.

Index.

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Henry Kaufman, PhD, has been President of Henry Kaufman & Company Inc., an investment management and economic and financial consulting firm, since April 1988. For twenty-six years, Kaufman was with Salomon Brothers Inc., where he served as a managing director, vice chairman, and member of the executive committee, and was in charge of Salomon's four research departments. He currently is a trustee at New York University; Chairman Emeritus of the Board of Overseers at the NYU Stern School of Business; Chairman Emeritus of the Institute of International Education; and trustee of the Norton Museum. Kaufman is author of On Money and Markets and Interest Rates, the Markets, and the New Financial World, and a regular contributor to the New York Times, Wall Street Journal, and Financial Times (London). He received a BA in economics from New York University, an MS in finance from Columbia University, a PhD in banking and finance from the New York University Graduate School of Business Administration, and was awarded honorary doctorates from NYU, Yeshiva University, and Trinity College.
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"OF THE torrent of books being spewed out on the global financial crisis, most fall into one of two categories: the microscopic exploration of a particular episode or scandal, such as the fall of Bear Stearns, or the sweeping attempt to map the meltdown’s moving parts and put it all in an historical context. Henry Kaufman is well placed to deliver the latter, having earned the nickname "Dr Doom"—for his warnings about the dangers of debt bubbles—back in the days when today’s doomster-in-chief, New York University’s Nouriel Roubini, was still in short trousers. His book is an accessible exposition of the causes and consequences of the market trauma . . . Mr Kaufman ruthlessly dissects the past quarter of a century’s financial deregulation. . . He showers his argument with supporting facts and figures. . . A deep thinker on the workings of markets . . ."
—The Economist

"A good read -- and a thought-provoking one."
—Financial World

"Wisdom for a punch-drunk Wall Street. . . gives the lie to the notion that no one saw the financial crisis coming. [Kaufman] was not alone, but was earlier than most. . . In his latest book, Kaufman once again aligns himself with those who believe that a vital task of the central bank is to take away the punchbowl just as the party gets going. Kaufman’s prejudices are well grounded. . . His central insight about banking is old, simple, but profound. . . The occupational hazard of being a financial prophet is that it is impossible to forecast exactly when a bubble will burst. This means that hard-nosed market practitioners tend to discount early warnings. What a shame that Dick Fuld, chief executive of the ill-fated Lehman Brothers, on whose board Kaufman sat, failed to heed the warnings of this remarkable economic sage."
—Financial Times

"Provides an insightful account of the history and impact of post-World War II financial markets on the economy-what happened, how we got to where we are today, and what needs to be done. Drawing on his vast breadth of knowledge and experience, Kaufman reveals the mistakes that got us into this debacle, the consequences-as they have not been fully realized-and how to put our derailed economy back on track. This book details Dr. Kaufman’s warnings and concerns expressed repeatedly throughout the last quarter century, and shows that what he predicted came to pass. . . Provides an insightful account of the history and impact of post-World War II financial markets on the economy. Explores the erosion of credit ratings on corporate debt in the late 1980s and the rapid increase in financial concentration of institutions. Discusses the blinding faith in models that rely on historical data but fail to take into account economic and financial market structural changes. With his breadth of knowledge and experience, Kaufman details that this crisis was foreseeable (he saw it coming), and how we created this history-making financial crisis. He also explains the consequences still to come, and presents solutions on how we can recover and reform the markets."
—The Financial Regulation Forum

"THE ORIGINAL DOCTOR DOOM IS BACK, with some fresh warnings. Henry Kaufman, famous for his bearish views in the 1970s and '80s, now takes up the financial crisis of the past year and urges major reforms. . . chock full of ideas and insightful analysis. . . belongs on the bookshelf of every serious participant in finance and economics."
—Barron’s

"For those interested in why Wall Street imploded and what needs to be done to prevent this in the future will find this book thought provoking. . . provides ideas for potential business opportunities."
—The Bulletin

“If only we had heeded the other Dr. Doom, Henry Kaufman. Bear Stearns Cos. might still be standing. Americans wouldn’t have run up some $34 trillion in domestic nonfinancial debt. And Ben Bernanke could have kept his dollar-spewing helicopter in the hangar. . . Nobody listens to Cassandra, of course, and everybody hates hearing “I told you so” . . . Yet Kaufman’s insider status is the very reason why you should read this book. Here is a withering critique of the follies of deregulation from one of Wall Street’s own. . . Books on financial regulation are by definition dry . . . If the prose gets you down, flip to the telling tables and charts. My favorite is Exhibit 12.1, which lists 15 major credit crises since 1945, starting with a credit crunch in 1966 and running through the various bank failures, crashes, bailouts and bubbles that led inexorably to our own mess. Keep that timeline handy for the next banker, senator or Fed governor who says the financial sector doesn’t need re- regulation. “
— Bloomberg

“A . . . Cassandra of the credit crunch, Henry Kaufman—whose constant warnings about debt bubbles earned him the nickname “Dr Doom”—spends 260 pages relishing reminding us how he told us so.”
—The Economist Online

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August 12, 2009
The Road to Financial Reformation: Warnings, Consequences, Reforms

“A devastating critique of our troubled financial system with clear explanations of how we got here, and what we must do to get our economy back on track—written by someone who consistently and correctly warned us of the dangers. If Presidents, Congresspersons, and Federal Reserve Chairmen had listened to Henry Kaufman, we wouldn’t be in our current fix.” —BILL BRADLEY, former U.S. Senator

August 12, 2009 – For more than a half century, acclaimed financial analyst Henry Kaufman has seen it all: the risks, the rewards, the foibles of financial markets, and now, the mother of all financial crises.

Having spent a lifetime entrenched in the world of finance, serving in senior positions at Salomon Brothers Inc. and as an economist for the Federal Reserve, Kaufman has earned the well-respected reputation and popular nickname of “Dr. Doom” for his consistent bearish views on the markets. True to this epithet, Kaufman delivers a smart and fiercely critical financial history in his new book The Road to Financial Reformation: Warnings, Consequences, Reforms (Wiley; August 2009; $29.95; ISBN: 978-0-470-53212-6). By explaining the politics and policies behind the past fifty years of American finance, Kaufman reveals the complexities and problems imbedded in the current financial system.

As the economy continues its downward spiral, people are asking: “How did we get into this mess and why?” In his new book, Kaufman answers these tough questions in a highly engaging manner, walking readers through the mistakes that got us into this debacle, the previously unrealized consequences, and most importantly, how to put our derailed economy back on track.

In the financial crises of the early postwar decades, both the economy and financial markets rebounded quickly. Unfortunately, that is far from likely this time around. But with The Road to Financial Reformation, we will at least see a path for moving in the right direction.

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