9780137142903

The subprime financial crisis is the decade's #1 financial story. What happened? How did it occur? And how can we prevent similar crises from happening again? Dr. Mark Zandi answers all these critical questions - systematically, carefully, and in plain English. Zandi begins with a fast-paced "history" of the crisis: where it started, how it spread, and where the fallout has landed. Next, he illuminates its deepest causes, ranging from the psychology of homeownership to Alan Greenspan's missteps. You'll watch the "flippers" at work and the real estate agents who cheered them on. You'll learn how Internet technology and access to global capital transformed mortgage lending, helping irresponsible lenders "drive out" good ones. Zandi demystifies the complex financial engineering that enabled lenders to hide growing risks...reveals how rating agencies relied on poor data and naiuml;ve assumptions to approve risky instruments...shows how global investors eagerly bought in, despite key warning signs. You'll discover how homebuilders contributed to the crisis, and how flummoxed regulators and policymakers failed to prevent it. Most important, Zandi previews tomorrow's financial shocks, offering indispensable advice for everyone they will impact: investors who must recognize emerging bubbles, policymakers who must improve oversight and citizens who must reduce their risks, so they can survive whatever comes next.

Mark Zandi is Chief Economist and co-founder of Moody’s Economy.com, Inc., where he directs the firm’s research and consulting activities. Moody’s Economy.com is an independent subsidiary of the Moody’s Corporation and provides economic research and consulting services to global businesses, governments and other institutions. His research interests include macroeconomic and financial economics, and his recent areas of research include an assessment of the economic impacts of various tax and government spending policies, the incorporation of economic information into credit risk analysis, and an assessment of the appropriate policy response to real estate and stock market bubbles. He received his PhD from the University of Pennsylvania, where he did his PhD research with Gerard Adams and Nobel Laureate Lawrence Klein, and his BS degree from the Wharton School at the University of Pennsylvania.

Introduction	p. 1
Subprime Precis	p. 9
Sizing Up Subprime	p. 29
Everyone Should Own a Home	p. 45
Chairman Greenspan Counts on Housing	p. 63
Global Money Men Want a Piece	p. 79
Bad Lenders Drive Out the Good	p. 95
Financial Engineers and Their Creations	p. 111
Home Builders Run Aground	p. 129
As the Regulatory Cycle Turns	p. 143
Boom, Bubble, Bust, and Crash	p. 159
Credit Crunch	p. 173
Timid Policymakers Turn Bold	p. 191
Economic Fallout	p. 213
Back to the Future	p. 229
Endnotes	p. 245
Index	p. 259
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Introduction Introduction"If it's growing like a weed, it's probably a weed." So I was once told by the CEO of a major financial institution. He was talking about the credit card business in the mid-1990s, a time when lenders were mailing out new cards with abandon and cardholders were piling up huge debts. He was worried, and correctly so. Debt-swollen households were soon filing for bankruptcy at a record rate, contributing to the financial crisis that ultimately culminated in the collapse of mega-hedge fund Long-Term Capital Management. The CEO's bank didn't survive.A decade later the world was engulfed by an even more severe financial crisis. This time the weed was the subprime mortgage: a loan to someone with a less-than-perfect credit history.Financial crises are disconcerting events. At first they seem impenetrable, even as their damage undeniably grows and becomes increasingly widespread. Behind the confusion often lie esoteric and complicated financial institutions and instruments: program-trading during the 1987 stock market crash; junk corporate bonds in the savings & loan debacle in the early 1990s; the Thai baht and Russian bonds in the late 1990s; and the technology-stock bust at the turn of the millennium.Yet the genesis of the subprime financial shock has been even more baffling than past crises. Lending money to American homebuyers had been one of the least risky and most profitable businesses a bank could engage in for nearly a century. How could so many mortgages have gone bad? And even if they did, how could even a couple of trillion dollars in bad loans come so close to derailing a global financial system that is valued in the hundreds of trillions?Adding to the puzzlement is the complexity of the financial institutions and securities involved in the subprime financial shock. What are subprime, Alt-A, and jumbo IO mortgages, asset-backed securities, CDOs, CPDOs, CDSs, and SIVs? How did this meacute;lange of acronyms lead to plunging house prices, soaring foreclosures, wobbling stock markets, inflation, and recession? Who or what is to blame?The reality is that there is plenty of blame to go around. A financial calamity of this magnitude could not have taken root without a great many hands tilling the soil and planting the seeds. Among the elements that fed the crisis were a rapidly evolving financial system, an eroding sense of responsibility in the lending process among both lenders and borrowers, the explosive growth of new, emerging economies amassing cash for their low-cost goods, lax oversight by policymakers skeptical of market regulation, incorrect ratings, and of course, what economists call the "animal spirits" of investors and entrepreneurs.America's financial system has long been the envy of the world. It is incredibly efficient at investing the nation's savings--so efficient, in fact, that although our savings are meager by world standards, they bring returns greater than those nations that save many times more. So it wasn't surprising when Wall Street engineers devised a new and ingenious way for global money managers to finance ordinary Americans buying homes: Bundle the mortgages and sell them as securities. Henceforth, when the average family in Anytown, U.S.A. wrote a monthly mortgage check, the cash would become part of a money machine as sophisticated as anything ever designed in any of the world's financial capitals.But the machine didn't work as so carefully planned. First it spun out of control--turning U.S. housing markets white-hot--then it broke, its financial nuts and bolts seizing up while springs and wires flew out, spreading damage in all directions.What went wrong? First and foremost, the risks inherent in mortgage lending became so widely disp

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Financial Shock : A 360 Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis

Financial Shock : A 360 Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis

0137142900

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