My favorite books on financial schemes

I read J R the first time in college, and it was the ideal combination of challenging, cynical, illuminating – and hilarious. The novel is a cult classic among well-read Wall Street types, but be warned: it’s 726 pages of almost entirely dialogue, with not much to guide you about who is speaking or where. Once you figure out what Gaddis is up to, the writing becomes immersive and you join a wild ride with the eponymous sixth-grader, who uses the school’s payphone between classes to trade surplus picnic forks, free catalog samples, and eventually controlling stakes in major companies. J R is one of those books you’ll be proud to finish, and never forget.

This is the oldest book on my list, a nineteenth-century compilation of lunacy of all sorts, with a focus on financial lunacy. Mackay aptly compares widespread mass delusions (think Nostradamus, or alchemy) to financial bubbles, including the frenzies surrounding the South Sea Company in England and tulip bulbs in Holland. Some scholars question the historical accuracy of Mackay’s stories, particularly about valuable tulip bulbs being accidentally eaten, but he has the money quote of all time regarding financial scandals: “Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” If you want a more scholarly description of how speculative bubbles form and burst, try Charles P. Kindleberger’s Manias, Panics, and Crashes. But if you want to be shocked and entertained, read Mackay.

We shouldn’t forget about the collapse of Enron, and this is the definitive book on the company, the one that has survived the test of time. All of the living Enron executives who were sentenced to prison are now out, so it’s a good time to take a look at them, not only to realize how gripping their stories still are, but to see how much they parallel some shenanigans in the markets today. Many companies continue to use accounting schemes that are similar to Enron’s, so it’s worth going back inside Enron, even if all you want is a how-to lesson. The book was adapted into a documentary film, but so you can read the book first, and then see the movie.

This book also was made into a film, a feature with Robert De Nirro starring as Bernie Madoff. It also is definitive, a meticulously researched account of what is still, in dollar terms, the largest pyramid scheme in modern history. Henriques interviewed Madoff in person, and she skillfully tells his story, along with truly stunning details about how he pulled off the scheme, and for so long. When you finish reading, you likely will want Madoff to spend even more than 100 years in prison, the sentence he received for harming thousands of investors in an epic multi-billion dollar fraud.

There should be at least one book about the 1920s on this list, and this one deserves mention because it elegantly brings to life several of the most interesting characters from that era. There are some dubious ones, such as Jesse Livermore, the “Boy Plunger” who operated bucket shops, shady financial firms that manipulated stocks with fake news. And there are more legitimate leaders of the era: Pierpont Morgan’s son, Jack, and his brainier partner, Tom Lamont, and the power brokers of Kuhn Loeb. Brooks vividly skewers all of them. He misspelled “Golkonda,” but the essence of his story nails the excesses of the era, and is an apt reminder of how much wealth and economic inequality can result from the Federal Reserve going wild with loose monetary policy.