Financial Shock A 360 Look at the Subprime Mortgage Implosion and How to Avoid the Next Financial Crisis
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“The obvious place to start is the financial crisis and the clearest guide to it that I’ve read is Financial Shock by Mark Zandi…it is an impressively lucid guide to the big issues.” –The New York Times “In Financial Shock, Mr. Zandi provides a concise and lucid account of the economic, political and regulatory forces behind this binge.” –The Wall Street Journal “Aggressive builders, greedy lenders, optimistic home buyers: Zandi succinctly dissects the mortgage mess from start to (one hopes) finish.” –U.S. News and World Report “A more detailed look at the crisis comes from economist Mark Zandi, co-founder of Moody’s Economy.com. His “Financial Shock” delves deeply into the history of the mortgage market, the bad loans, the globalization of trashy subprime paper and how homebuilders ran amok. Zandi’s analysis is eye-opening…he paints an impressive, more nuanced picture.” –Kiplinger’s Personal Finance Magazine “If you wonder how it could be possible for a subprime mortgage loan to bring the global financial system and the U.S. economy to its knees, you should read this book. No one is better qualified to provide this insight and advice than Mark Zandi.” –Larry Kudlow, Host, CNBC’s Kudlow & Company “Every once in a while a book comes along that’s so important, it commands recognition. This is one of them. Zandi provides a rilliant blow-by-blow account of how greed, stupidity, and recklessness brought the first major economic crises of the 21st entury and the most serious since the Great Depression.” –Bernard Baumohl,Managing Director, The Economic Outlook Group and best-selling author, The Secrets of Economic Indicators “Throughout the financial crisis Mark Zandi has played two important roles. He has insightfully analyzed its causes and thoughtfully recommended steps to alleviate it. This book continues those tasks and adds a third–providing a comprehensive and comprehensible explanation of the issues that is accessible to the general public and extremely useful to those who specialize in the area.” –Barney Frank, Chairman, House Financial Services Committee The subprime crisis created a gigantic financial catastrophe. What happened? How did it happen? How can we prevent similar crises from happening again? Mark Zandi answers all these critical questions–systematically, carefully, and in plain English. Zandi begins with a fast-paced overview and then illuminates the deepest causes, from the psychology of homeownership to Alan Greenspan’s missteps. You’ll see the home “flippers” at work and the real estate agents who cheered them on. You’ll learn how Internet technology and access to global capital transformed the mortgage industry, helping irresponsible lenders drive out good ones. Zandi demystifies the complex financial engineering that enabled lenders to hide deepening risks, shows how global investors eagerly bought in, and explains how flummoxed regulators failed to prevent disaster, despite crucial warning signs. Most important, Zandi offers indispensable advice for investors who must recognize emerging bubbles, policymakers who must improve oversight, and citizens who must survive whatever comes next. *Liar’s loans, flippers, predatory lenders, delusional homebuilders How the housing market came unhinged, and the whirlwind came together*Alan Greenspan’s trillion-dollar bet Betting on the boom, ignoring the bubble*The subprime market goes global Worldwide investors get a piece of the action–and reap the results*Wall Street’s alchemists: conjuring up Frankenstein New financial instruments and their hidden contents*Back to the future: risk management for the 21st century Respecting the “animal spirits” that drive even the most sophisticated markets
User Ratings and Reviews
3 Stars Like An Autopsy While The Corpse Is Still Twitching
This review is being written two days before Barack Obama takes the oath of office, facing the worst economy any President has had to deal with in decades. This book by Mark Zandi came out in July, 2008. The title of this review reflects the fact that much of what Zandi was writing about back in the spring of 2008 was still unfolding.
Much has happened since then. Lehmann Brothers went under, the government rushed into a huge bail out of the banks and billions of dollars have been thrown around with seeming little effect. The economy has failed to respond, conventional monetary policy remedies seem to be ineffective, unemployment is rising, and the global economy is also tanking.
Zandi is already moving to update his account; a new edition is scheduled for March 23, 2009 so save your money for that one. Financial Shock (Revised and Expanded Edition), (Paperback): Global Panic and Government Bailouts — How We Got Here and What Must Be Done to Fix It
This edition nonetheless does have some use still. In a chapter by chapter progression, Zandi begins with the subprime market, moves on to look at how the housing market became such an important basis of the economy, and then starts unraveling all of the acronyms and other machinations that led us to the great unraveling we’re now facing.
If there is one thing that might be useful for the new edition, it would be the inclusion of a handy glossary for quick reference; while Zandi does a good job explaining what the various acronyms are and how they work, keeping them all straight is a bit of work. (ie: Alt A, CDOs, CDSs, SIVs, etc.) I found myself wishing I had made notes while reading each chapter. There’s a lot of material which may seem exotic to someone not immersed in economics and finance. That being said, Zandi does his best to make his explanations clear and accessible.
Nonetheless, this book should be taken with a grain of salt. Zandi notes that as someone intimately connected to the credit rating industry via his relationship with Moody’s, he is not at liberty to address that component of the collapse. In the months since the book came out, much has come out about the role of credit ratings agencies in events. Supposed to be impartial watchmen over the actual worth of assets and financial deals, they instead became co-cospirators enabling the worst behavior. Zandi is donating all profits from the book to a non-profit organization working to invest in inner city projects. Whether that can be taken as an act of penance I can not say.
There’s also the political aspect to consider. Much of what has happened to the markets could not have happened without years of conservative fiscal policies that deregulated markets and removed long standing legal firewalls intended to keep banks from getting into troubles that would spread. In addition there was a nearly complete failure to realize how much financial activity was moving into institutions with almost no government oversight or regulation. As an advisor and contributor to the campaign of John McCain, Zandi’s credibility should be more than a little tarnished by this connection to the failed economic ideology McCain champions. Caveat emptor.
4 Stars The Story of 2008
This book simply lays out how we got to where we are. It is written for the non-accountant, non-economist types (like me) who follow the markets out of interest.
It is timely (to some degree) and explains recent history. I would recommend it to anyone who has an interest in finances or anyone wondering how we got here.
It is mostly about the mortgage crisis, and not the recent credit crisis developments. He looks at all players, including banks, the Government, investors, home buyers, and many more.
The only issue I have with this book is that there needs to be a sequel to explain what has devloped since its publication!
5 Stars Absolutely the best book on the sub-prime crisis
I have been reading a number of books on the sub-prime crisis. Some of them are quite good. The Trillion-Dollar Meltdown, for example, is an excellent introduction to the high-level hocus-pocus that Wall Street was engaging in to bring on the crisis. Chain of Blame gives a good journalistic description of the history of the major players in the sub-prime industry. Greenpan’s Bubbles gives an excellent summation of the prosecution’s opening argument in People v. Alan Greenspan, making the case that it was all the fault of the Fed.
This book, however, is absolutely, unequivocally the best book on the subject. It is everything that you want such a book to be. First, and foremost, Zandi knows the subject. He has in-depth knowledge of both economic theory and of the details of what actually happened in the market. His depth of knowledge is astonishing
Second, he covers every aspect of the subject. Most of the books written on this subject cover only part of it. Zandi covers the waterfront. He understands the issues, in detail, from the policy decisions of the Federal Reserve Board to the cyclic nature of the housing industry. In a relatively short book, he covers literally every aspect of the subject.
Finally, he makes balanced judgments without being judgmental or moralzing. His tone is very detached. He actually wants to understand what happened, not find the bad guys to pillory. On the Fed, for example, he gives a very clear explanation of what Greenspan was thinking, what he was trying to do, how it worked in some ways and was a disaster in other ways.
He has the expected final chapter on how to fix things. It was short, but very good. I thought some of his ideas were kind of screwy — why would it help to have national uniformity in foreclosure laws, for example? — but, by and large, his ideas were practical and judicious. I think that every sane observer of the situation agrees that better regulation of the out of control mortgage and mortage-backed security industry is needed, and Zandi gives a good idea of how to do that, without overdoing it.
5 Stars Outstanding!!
This book is very well written. Zandi writes in an easy to read style that is informative and interesting. I really enjoyed this book. It is simple enough for the laymen, but still extremely interesting and informative for someone with extensive financial and economic knowledge.
4 Stars Educational & Sometimes Shocking
Billed as “A 360 degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis”, Mark Zandi’s “Financial Shock” looks way beyond subprime mortgages, as well it should, to underlying problems of the credit markets, financial engineering of mortgage backed securities and derivatives, home builders, etc. and ultimately to a world-wide debt binge that led to over-leveraging and the collective failure of investors of all stripes to adequately hedge or otherwise protect themselves against the risk of adverse events like the collapse of the housing bubble.
Many readers will know enough to breeze through the chapter on subprime mortgages and those with humdrum titles like “Everyone Should Own a Home” and “Home Builders Run Aground”. But this reader found Zandi’s explanation of global participation in the US credit markets fascinating. For example did you know that “foreigners” held approximately $7 trillion in U.S. “credit market instruments” and nearly a third of all U.S. mortgages
Also interesting is the chapter on financial engineering, which explains the alphabet soup of residential mortgage backed securities (RMBS), collateralized debt obligations (CDOs) and structured investment vehicles (SIVs) and their respective roles in offloading the risk of home mortgages from the originating lenders onto the “shadow banking system.” In this chapter Zandi cites the following statistic: “By the second quarter of 2007, … the shadow banking system provided an astounding $6 trillion in credit …” , almost as much as traditional banks.
Zandi ignores the role of his own employer (Moody’s) in providing optimistic credit ratings for mortgage-backed securities by stating in the introduction, “To avoid any appearance of conflict of interest, I have no choice but to leave discussion of that facet of the subprime shock to others.”
“Boom, Bubble, Bust and Crash” will be a tough chapter to read if you ignored the early warning signs of a real bubble bursting. Zandi cites July 30, 2007 when two of Bear Stearns’ hedge funds collapsed as the start of the crash. If you connected those dots with the ensuing credit crunch that destroyed the stock market in the second half of 2008, you’re going to feel pretty smart after reading this and the ensuing chapter, “Credit Crunch.” The rest of you (self included) will feel pretty sheepish. Or maybe you’ll ask, “Why didn’t my financial advisor or broker warn me?”
One quibble is that Zandi uses the Price-to-rent Ratio to track relative home values rather than the more meaningful price-to-median income, a measure of affordability. And by failing to adjust for declining cost of capital (mortgage rates) since the 1980s, Zandi overstates the relative increase in home valuations in the mid 2000s. I expected more from Moody’s chief economist.
The “Credit Crunch” chapter explains how the problem was much, much bigger than subprime mortgages. Zandi states, “It is difficult to see how mortgages could have been the catalyst for such a wrenching financial crisis” because “mortgage loan losses were less than 5% of the $11 trillion … U.S. mortgage loans outstanding” and less than
