Saturday, September 8, 2007

Book Review: SuperMoney

This post is a review on SuperMoney by Adam Smith. The book is first published in 1972 and re-introduced in 2006. The NLB does not seem to have the book.

The book is a description of financial markets in the period roughly around 1965-1975. Supermoney is interesting to me in a few aspects.

1) Supermoney has a chapter on Benjamin Graham and Warren Buffett, even before Warren Buffett becomes famous. The author conducts his interview at around the time where Buffett no longer manages money (somewhere after 1969) but rather working as an owner of Bershire. And it seems that Buffet's famous Rule of 'Don't lose money' comes from Benjamin Graham. I shan't say much here, since it will spoil the joy of reading that chapter.

2) Another interesting event is the Penn Central bankruptcy. The event is a bit similar to the subprime fallout now. I shall briefly describe what happen from my understanding from the book.

At that point of time, Penn Central files for bankruptcy and its commercial paper (or bonds) naturally will become worthless. And at that time, not only Penn Central but also other corporations with similar credit-worthiness are having the commercial papers out in the market too.

The financial circle become worried that the Penn Central incident would spread to other commercial papers from similar corporations. People may become scared to own commercial papers due to Penn Central incident. Corporations may not be able to sell their commercial papers or they have to issue their commercial papers at a much lower price. And when price becomes lower, the yield becomes higher. Note that this may indirectly affect the stock market as money may flow from stock market to purchase higher yielding commercial papers.

To cut the story short, Penn Central incident's final impact is reduced due to actions by the Fed. The corporations who are unable to sell their commercial papers go to the banks. The banks then go to the Fed and borrow money to lend to the corporations. A potential large fallout was averted.

In conclusion, Super Money is interesting to read, especially if you are interested in US financial history.

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