Book Review: Shock Exchange

The book Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead, by Ralph W. Baker Jr., is an interesting blend of a personal memoir and an analysis of the defects of modern capitalism as was uncovered by the Financial Crisis. Ralph Baker worked as an investment banker, and formed the "Shock Exchange," a travelling youth basketball team/mentorship programme based in Brooklyn (web site: www.newyorkshockexchange.com)  . In addition to teaching the kids basketball skills, the programme also taught them the fundamentals of investing. Interestingly enough, the players in the programme had a better idea of how the American economy was unravelling than the various "experts" on television. "If a bunch of 12-year-olds from the inner city could see it then why couldn't they?"

Book Description

The book was published in 2012, and is 346 pages. The book is self-published, and the economics of small print runs means that the paperback version is somewhat expensive, but a more competitively priced ebook version (Kindle) is available.

It needs to be kept in mind that this is essentially the combination of two books, partially a memoir, and partially an analysis of the Financial Crisis. Unfortunately, the impression conveyed by the book title and packaging is that the focus is on the Shock Exchange programme itself. I do not view this necessarily as a problem of the book text, rather the book title should have been adjusted to fit the contents. Additionally, the flow of the text is uneven at times, as it jumping between the two narrative modes.

About The Author

The beginning of the book covers the life story of the author from his early years. Since my reading audience is presumably mainly interested in the financial/economic analysis of the book, I would note that he later became an investment banker at GE Capital. The description of the business world is quite entertaining, as it is much closer to my limited experiences than the airbrushed world of the business press, where management consists of "leaders" creating "synergies" and building the "core competencies" of their firms. Instead, it's office politics with roughly the same ethos as playing basketball. (The author played college basketball, and it provides a running thread throughout the book.)

For example, one section was entertainingly titled: "For Mistakes, Position Yourself So Someone Else Takes The Fall." The leading sentences:

From the outside it appears as if people rise through the ranks in corporate America based on talent, drive and business acumen. The true reason is due to their mastery of office politics. The first step in this mastery is to take credit for the ideas of others. The second step is to position yourself so that others take the blame for your mistakes. (Page 120.)

The author recounts examples of his own office trench warfare. I found this to be entertaining, but it is admittedly a distraction from what is supposed to be the theme of the book (the Shock Exchange and the Financial Crisis).

From an analytical perspective, I follow an extreme top-down macro viewpoint, and I have always been allergic to company-level analysis. Correspondingly, I would not approach the financial crisis in the same way as discussed in the book. That said, the analysis is reasonable, and probably would make a lot more sense to most readers than the more theoretical approach that I would use. Since the majority of people working in finance are biased to look at the economy through the prism of corporate finance, his views should be straightforward for most readers.

Although I will not be discussing the "memoir" aspect of this book, I viewed it to be the most interesting and educational part. For example, as a Canadian, I had heard about the "Brown v. Board of Education" U.S. Supreme Court ruling of 1954, but I knew nothing of the context. It turns out that that ruling was based on the conditions at 4 counties, one of which was Price Edward County, where Ralph Baker Jr. was born. Although the ruling was just over a decade before he was born, the events were still fresh when he was growing up. Additionally, his home town of Farmville, Virginia was unusual in that it was a majority African-American, and was the subject of the 1898 book by W.E.B. Du Bois. However, these topics might be less novel to American readers.

Analysis

The book covers many of the big scandals and stupidities that were uncovered by the Financial Crisis. Although this might be somewhat familiar, it is possibly a useful reference to have them covered in one place. As I noted before, I would take a top-down macro view as to the roots of the crisis, his discussion of the particular actors shows the weaknesses created within the financial sector as a result of the lack of adult supervision by regulators. He offered some technical fixes with regards to fixing various regulatory problems, but I lack the experience to comment upon them.

He also covers various personalities. Even Donald Trump made it into the book. The author offers a somewhat ambivalent assessment of Trump:

For customers. the "Trump" name carries a certain cache[t] and an expectation of quality. For lenders, it connotes that project's debt will eventually have to be restructured. (Page 250.) 

He ends with a section "The Pain Ahead," which discusses some underlying trends, along with his suggestions to fix various ills.

• Re-institute Glass-Steagall, and prosecute various crimes uncovered by the crisis. (Although the statute of limitations may make that moot.) He argues that previous financial frauds were successfully penalised in the 1990s under the rubric of fraudulent conveyance. He also noted the success of "Neutron Jack" Welch at GE for punishing a rogue trader.
• He has a discussion of trends in China. I do not follow China enough to comment on his analysis.
• He discusses the spiral of rising costs in healthcare and higher education (although the book is pre-"Obamacare.")
• The problems that will be uncovered by the next recession. He analyses the Treasury market like it is a market for corporate issuers, which I view to be a common error by those with a training in corporate finance.

Although the final sections are interesting, they are undermined by a lack of structure in the text. Within non-fiction, the typical pattern of writing is as follows:

1. You have an introductory section that tells the reader what you are going to tell them.
2. You tell the reader something.
3. You have a concluding section that tells the reader what you told them.

Although repeating points appears inefficient or boring, it is needed to help the reader. In practice, readers skim or can be distracted. You need to call out and repeat key points so that they do not lose the thread of your argument. In this case, the final section needed a more comprehensive introduction and conclusion, so as to tie the text together.

Concluding Remarks

The ideas and stories in Shock Exchange are both informative and entertaining. However, the text needs to incorporate more sections outlining the logical threads tying the book together. The best way to approach the books is that it is a group of linked essays, with the linkage provided by the world view of Ralph Baker.

Note: As a disclaimer, I received a review copy of the book.

(c) Brian Romanchuk 2015