Practical analysis for investment professionals
20 March 2020

Book Review: How Money Became Dangerous

How Money Became Dangerous: The Inside Story of Our Turbulent Relationship with Modern Finance. 2019. Christopher Varelas and Dan Stone. HarperCollins.

Early in How Money Became Dangerous, we read of a bank manager in 1970 urging school children to develop a habit of saving. Toward the end of the book, we meet an aging former bank CEO who chooses to work in a branch as a “greeter,” meeting in person as many of his customers as he possibly can. These stories of traditional, no-nonsense finance contrast with many of the tales we read throughout the book, tales of an industry that has become complex and, for authors Christopher Varelas and Dan Stone, dangerous. (While both Varelas and Stone are credited as authors, Stone has a background as a writer and editor, while Varelas has spent all of his career in the world of finance, and the book is presented entirely from his point of view.)

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Varelas clearly has mixed feelings about modern finance. He has worked in the industry for over 30 years, including almost 20 years at Salomon Brothers/Citigroup. He is very aware of the advantages that finance has brought to society (the ability to borrow, to invest, to insure) but sees modern finance as “a double-edged sword.” These mixed feelings become manifest chapter after chapter, with Varelas often describing a negative aspect of modern finance only to immediately offset it with a positive. For example, he decries the development of gigantic banking supermarkets such as Citigroup but then points out that sometimes only a sizable organization can solve big problems.

The book is structured episodically, with each episode focusing on a time in Varelas’s professional life, from which he then draws more general conclusions. One strength of the book is how close Varelas was to many of the incidents that he recalls. We meet a diverse cast of characters who contribute color and make this an engaging read — but an engaging read with serious intent.

Varelas’s early years at Salomon Brothers are a rich source of material on the shadier side of finance. He recounts in detail how one government bond trader repeatedly manipulated the Treasury market, even after intervention by the US Treasury — a series of transgressions that ultimately led to the resignation of the firm’s CEO and chairman, John Gutfreund. He also tells a story (both to us and to a young woman he met at a party) about a stock manipulation scheme he witnessed. The scheme would almost certainly violate the CFA Institute Code of Ethics and Standards of Professional Conduct — in particular, Standard II(B), which deals with market manipulation. Such incidents, part of what Varelas refers to as “Salomon’s Wild West culture,” illustrate the need for strong professional standards to ensure the integrity of markets and to protect those who transact in them.

Another noteworthy story involves the 1994 municipal bankruptcy of Orange County, California — the largest in US history. Varelas grew up in Orange County and ultimately worked on the repair of its finances. The county’s financial difficulties originated in the trust placed in its treasurer, Robert Citron, who invested in financial instruments that he did not understand. These instruments — bond derivatives linked to interest rate movements — had an inappropriate risk profile, and the value of the county’s portfolio eventually collapsed. The financial mismanagement’s impact was felt in areas such as water and transportation services. Varelas’s depiction of this impact helps bring to life a concept addressed in the CFA Institute code and standards — Suitability, Standard III(C), one of the key duties to clients. One of the book’s most important recommendations is that anyone running for election as public treasurer or other financial officer should have a qualification in finance.

Varelas identifies various causes of money becoming “dangerous,” including the simple spreadsheet, the end of the partnership structure in large institutions, the emergence of the corporate raider, and the pressures caused by the quarterly earnings cycle. Numerous dangers arise as a consequence of these factors (e.g., restrictions on public services, loss of faith in financial markets, and threats to public pension systems). Many more such dangers are brought to life throughout the book.

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Surprisingly, Varelas reaches a somewhat upbeat conclusion. He has a plan, which he breaks down into three sets of “action items” — for financial institutions, for regulators, and for users of financial services. One focus of these action items is financial incentives, which the author urges should be long term. Other suggestions deal with areas such as financial education and culture. All nine suggestions are worthy of serious consideration.

This book covers a fascinating period in the development of modern finance, but the reader may be disappointed that certain topics are not explored in greater depth — for example, the nature of economic cycles and financial bubbles, complex financial instruments such as mortgage-backed securities and credit default swaps, and the problems associated with banks’ reliance on short-term funding. Perhaps these activities were not part of Varelas’s direct professional experience and consequently seemed off-topic. The result, however, is a book that is less a financial history and more a personal memoir.

Nonetheless, How Money Became Dangerous is an insightful account of a key period in the development of finance. It highlights dangers to the markets and to wider society that could result from the failure of the financial system. It also, however, suggests ways to protect that system, head off its dangers, and help make it safe for future generations.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Matt Lyons, CFA

Matt Lyons, CFA, has worked in the finance industry for more than 20 years. He currently works at Bank of Ireland in Dublin, where his role includes investment appraisal and performance measurement. He began his career with Thomson (now Refinitiv), where he was head of operations for the Irish business, specializing in securities pricing, fundamental analysis, and earnings forecasts. Lyons has degrees from Trinity College Dublin and the University of Ulster, and he is a CFA charterholder.

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