Book Review: I.O.U. by John Lanchester

By The Banker | Book Reviews, Wall Street
22 Jan 2014
  • Sumo

In reading and reviewing John Lanchester’s I.O.U. – Why Everyone Owes Everyone and No One Can Pay I continue my quest for the best contemporary histories of the 2008 Crisis.

One reason to study and understand a crisis like 2008 is to avoid repeating it.  George Santayana’s pithy justification for historical review – “those who do not learn from history are doomed to repeat it,” – is apt, and not just because my father-in-law is a Santayana scholar.[1]

Another reason to study the 2008 crisis is to respond appropriately with a public narrative, and ultimately with financial policy, based on what we learned.  I frequently shake my head at both the public narrative about what happened, and I also grit my teeth about financial policy.  So I keep looking for the best accounts of the crisis.

Lanchester’s I.O.U. is one of the best.  He’s a stunningly clear writer who usefully adopts colloquial language to explain financial concepts.  Most non-finance readers need analogies and narratives to grasp a synthetic credit default-swap CDO, and Lanchester wields these beautifully.

Lanchester was researching contemporary City of London[2] life for his excellent Capital – which I reviewed here – when he realized that the financial innovations of The City were:

  1. Fascinating in and of themselves
  2. Completely opaque to non-financial people
  3. Suddenly wreaking havoc around the world


The result is a clear, entertaining, and informative analysis of the causes of the crisis.  Lanchester’s review is more comprehensive about the global financial system, for example, than Michael Lewis’ more narrowly-cast The Big Short, which relied on a few closely-drawn characters and their profitable trade against the sub-prime mortgage market.

Unlike the US-oriented histories of the 2008 crisis, Lanchester writes from the UK perspective, rounding out what we may already know from Andrew Ross Sorkin’s Wall Street-oriented Too Big To Fail, for example.

Lanchester reviews the proximate causes of the crisis

a)    Extraordinary, hidden leverage in the world’s largest banks (Chapter 1)

b)   Financial innovation in securitization models but with limited actual historical data behind the models (Chapter 2)

c)    An over-reliance on home ownership as an investment, both in the UK as well as in the USA (Chapter 3)

d)   A system of mortgage underwriting and securitization that removed consequences from the originators (Chapter 4)

e)    An intellectual failure to consider our tendencies to misunderstand risk (Chapter 5)[3] and

f)     A blindness of regulators to the hints of future disaster (Chapter 6).

Lanchester does not risk readers’ ire by shifting some portion of responsibility for the crisis from lenders to borrowers – something I actually appreciated about Edward Conard’s Unintended Consequences – but he’s got a satisfactorily complete narrative of the causes of the crisis.

Have you read a book yet on the 2008 Crisis that is funny, clear, accurate, and in plain English?

I owe you a recommendation.

Try I.O.U.

Now you owe me.


Please see related post: Book Review of Capital by John Lanchester

And related post: Michael Lewis on John Lanchester’s Capital

and please also see All Bankers Anonymous Book Reviews in one place


[1] Can I interest you in Santayana’s most accessible work, the 1935 novel The Last Pilgrim?  This edition is edited by my father-in-law, and overall, good stuff.  Among other things, The Last Pilgrim offers an interesting view of turn-of-the-last-century Boston Brahmin life.  Boston Brahmins were, and are, some impressively thrifty folks.

[2] “The City of London,” or “The City” for non-financial folks does not mean the whole municipal entity including Buckingham Palace and Parliament and all the rest, but rather is shorthand for the capital city’s financial sector.  In the UK when people say “The City of London” they mean the equivalent of saying “Wall Street” in the U.S.

[3] Lanchester acknowledges an intellectual debt to Nassim Taleb in this chapter, from his excellent books Fooled by Randomness and Black Swan.

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One Comment

  1. Steve says:

    I view d as a major contributor to the housing bubble. Never could have happened without subprime loans feeding about a third of excess demand with attendant evaporation of underwriting criteria that logically followed originators not holding the loans.

    Its crazy to have to actually pass laws requiring sane underwriting standards. A good case for making banks eat at least some of their own cooking.

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