Most helpful critical review
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Good but fails to assess blame
on November 19, 2010
This is the story of how the financial meltdown came about. It begins at the beginning and continues until the end. It is a carefully constructed chronicle of the systemic greed and hubris, clueless shortsightedness and incompetence that brought the U.S. financial system to its knees. Although well written, and reads like a novel, it still is not an easy read and in the end it fails to place or assess blame. The authors make clear that the fundamental hidden assumption that drove the collapse (and that proved to be fatal in the end) was the notion that home prices would continue to rise indefinitely. Feeding this assumption were a host of enabling factors, most of which straddled the borders of both immorality and corrupt business practices. Every one of the participants listed in the book was in part complicit and culpable. Yet the authors "pulled their punches" when it came to assessing blame:
Loan standards were weakened until they were non-existent. Lenders, as well as the recipients of loans, were both drunk on the home-lending madness, which driven by Congress and Freddie Mac and Fanny Mae, became a national orgy. The ratings of the rating agencies were worthless primarily because they not only lagged the housing market but at the same time depended on and mimicked the very company and markets they were trying to rate? Rules regarding capital requirements became worthless, and thus increasingly were skirted - as was generally true with other aspects of the process. This continued throughout the evolution of the process.
The train of "packaged loans (virtually worthless paper)" were leveraged to the sky, without even a semblance of an institutional safety net. Insurance on the loan packages, and the CDOs, too were inherently worthless. Bankers lied to themselves and to their buyers, just as the buyers lied to themselves - all in an orgy of deception and self-deception that constituted a cycle that could not be either turned around or turned off.
Homeowners were greedy & irresponsible borrowers: The mortgages they owned, were not bought, they were sold to them; and what the owners got in turn was not a home but a piece of paper that became worthless as soon as the ink dried. Regulations were in place sufficient to manage the process, but were not enforced. Nor as the book makes clear, can we ever guarantee that any regulations ever will be enforced. Or for that matter, can we guarantee that any rating agency can exist as a truly independent and thus valid rating agency.
In the end, the CDOs amounted to a clever version of a Ponzi scheme - primarily because they did not bring in capital, only provided prices for more and more markets, so that banks could hedge and leverage their exposure, brokers could get paid their lavish bonuses -- allowing everyone to ignore the inevitable and live with their heads in the sand for another day. They did this until the collapse finally brought the whole scheme down.
The authors cover each area with the technical skills of the consummate experts they are; and with a political sensitivity that finessed the issue of blame and culpability. This was the only aspect that actually annoyed me: Even though they named all of the players, they left it up to the reader to draw conclusions about the guilt or innocence of the players. Thus, they were much too careful in avoiding engaging in finger pointing. I ended the book with a very uneasy feeling that all this work was in vain: At some point blame must be assessed if systemic problems of this nature are to be fixed once and for all, and if similar ones are too be avoided in the future. Three stars.