Customer Reviews

Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable (Bloomberg)

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There aren't many people who can say they've sailed through this latest financial blip unscathed. Most of us have been impacted in some way or another. Many of us have looked for someone to blame the credit crisis on. Mark Gilbert thinks we're all to blame either by active participation or by being bystanders.

In Complicit: How greed and collusion made the credit crisis unstoppable, he explains why. The securities industry grew with leaps and bounds over the past few years and society as a whole reaped the rewards of freely available credit at super-low interest rates. The global financial authorities like the government, the banks and the money managers all looked the other way while lining their pockets.

The list of those to blame doesn't stop there. Realtors freely took advantage of the increase in home buying and appraised houses at fictitious levels. Banks and credit unions lent money to people who had no hope of paying back their mortgages. Homeowners bought properties at rates they knew they wouldn't be able to afford to repay. The average price of a U.S. single family home doubled in the period from 1989 to 2003 from $113,000 to $229,000.

In 2006, at the same time the US housing marketed rocketed, the global derivatives market grew at the fastest pace on record. The total outstanding amount grew by 40% to an amazing $415 trillion according to Gilbert. This uncheck growth could only continue as long as people kept ignorning the warning signs of a coming collapse. In 2006, some markets began to make the connection and the impact of years of risky financial decisions began to be felt.

Mark Gilbert offers an in depth explanation of how this credit crisis grew to the point where it was felt around the world. He explains how each segment of the market was involved in the crisis and backs up his findings with facts, figures and percentages.

If you want to understand how this became a crisis so that you can be aware of the warning signs if it happens again, I highly recommend this informative read.

Mark's orange-box approach to finance is always refreshing. As in his regular columns, Complicit avoids financial jargon, and shuns the usual splurge of rumour and myth. His specialty is often in spotting the obvious when everyone else has missed it, which makes the credit crisis an ideal target. But the book also carries a harsh message which is that if you allow yourself to be uniformed about something that matters, you can't then complain when it smacks you on the back of your head. In essence, we let the "bankers" turn the health of the global economy into their day spa. If we don't step up and take charge, it will happen again, and again. If you don't let someone take advantage of you, they can't take advantage of you... Mark says it's time to take charge... I'd recommend this book as compulsory reading for economics students at every level and anyone who has even a casual interest in finance and markets.

Gilbert sets out the timeline and triggers for the Global Recession in an easy-to-read style that will appeal to all and is well enough explained for those outside of the City to follow easily.

None of the "I single-handedy invented the CDO market" or "I told you it was going to happen in my previous book" rubbish but an in-depth explanation from a man who was sat in the Bloomberg news room watching it all unfold.

"Complicit" has the potential to be compulsory reading for future generations wishing to try and learn from the mistakes that were made.

I really enjoyed reading into the small details that captured what exactly went on when the money markets froze. From the plethora of books I have read about the crisis, I found Complicit to be the most engaging and clear. As a first-year undergraduate student it has been a perfect time to witness the cataclysmic events that took place over the course of 2008-2009 (and some that are yet to come).

I highly recommend this book to anyone who wants a deeper analysis and broader understanding of the crisis that nearly brought down the banking system.

I am not sure how many current economic crisis books I have reviewed. I think I am getting close to a dozen and I am currently reading "Fault Lines." I'm not sure I want to do many more crisis book reviews. Tonight's review is Complicit, by Mark Gilbert of Bloomberg.

Bloomberg columnists are typically good writers, with detailed knowledge of their subject areas, and a no-nonsense approach to writing. This book from Mark Gilbert is no different. As Joe Friday often said, "All we want are the facts, ma'am."

And for the most part, that's what you get in Complicit. It is not a long book at 173 pages, but it comprehensively chronicles the growth in leverage, and how it spread to many areas of the investment markets.

When bubbles grow, everyone is a friend. Underwriting becomes lax, limits are stretchable, FICO scores are pessimistic approximations, etc. Risk is transitory; we originate to sell. Regulators don't want to stand in the way of seeming prosperity. Nor do politicians.

Leverage gets higher in explicit and implicit ways. Credit spreads get tight as a drum. It is a virtuous cycle... until it become a vicious cycle.

In the bust, credit spreads rise, cutting off the possibility of refinancing. Then asset defaults come, and GSE and bank insolvencies.

Central banks did not view inflation broadly enough, focusing on goods price inflation, and ignoring the asset inflation that was distorting the economy. They disclaimed an ability to see, much less deal with bubbles.

The high yield market became a frenzy for yield, with CDO equity bidding for lousy bonds and default protection on lousy corporations. Debt spreads tightened to levels that indicated perfection had arrived.

Investors chased risk, seeking returns. There were too many parties willing to make fixed commitments, because they needed to earn a lot. Balance sheets were ignored, and income statements were everything. History being bunk, was thrown out the window, because it was different this time, we were in a new era.

The crash in Shanghai was the first warning in February 2007, followed by the equity quant crisis in August 2007, and the breakdown in the money markets. All of the clever ways parties used to lever up short-term credit blew up, forcing banks to take credit back onto their balance sheets. At that point, everyone should have dumped the banks, but few did; leverage was too high, and asset prices were falling.

The critical decision was bailing out Bear Stearns. I agree with Gilbert; either both Lehman and Bear should have been bailed out or neither. I think not bailing Bear and Lehman out would have led to the best outcome. After Bear failed, other banks would have moved to straighten themselves out. We might not have had as much failure had as we eventually did. The inconsistency of regulation, as well as the unwillingness or regulators to be tough added to the crisis.

The book covers the September 2008 climax well, but takes us past that, offering possible solutions. I particularly liked the ideas of limiting the number of academics in important regulatory posts, and having more regulators with practical experience. I also liked central bankers being proactive on bubbles, and the asset/liability matching inherent in paying those that make long term decisions with financial instruments that last for the term of the decision, and are contingent on the credit quality of that decision. An example would be paying securitization originators with pieces of the subordinated tranches.

I liked the book; for those with limited time, the book is particularly suitable, because it is brief.

Quibbles

Gilbert's style is hard-hitting; though many financial companies took advantage of government largesse, few practically considered the possibility of bailouts while the boom was going on; they were pursuing profit with little thought of systemic risk. There was a lot of greed, but in my opinion, few expected bailouts, but took them when they were offered.

Who would benefit from this book?

Most people would benefit from this book on the crisis.

If you are looking for a book that covers every aspect of the financial crisis which began in 2006, look no further. This is one of those books that come along once in a while that teach you a tremendous amount and has a lot of information but is a pleasure to read. The author's style is straight forward and has an entertaining dry with to it. The thing that makes this concise book so special is the author introduces the reader to tough topics such as derivatives and credit investments and does it in such a way that anyone can understand it. I will say there were a few terms that the author defined but didn't fully explain such as CDO's and SIV's but I was able to look these up in Wikipedia to enhance my understanding. The books stay away from the politics of the credit crunch and ensuing recession. The author skillfully explains all the conditions and players leading up to the credit crunch /real estate bubble burst and recession. It's truly a comprehensive work. It does a wonderful job at showing how the entire investment market was so interrelated on a global scale, that any falling would effect everything.

Chapter 1 explains how real estate values were completely overinflated and made for an attractive investment as the stock market was stagnant at the time. It was an investing crazy with no thought to risk behind it. It further explains how banks that made mortgage loans no longer had a stake in the risks as the debts were sold off to investors therefore the bank had no further risk once they were sold off. Home owners also used their houses as ATM machines continually drawing on the equity. All the while, history teaches us what goes up must come down. All the players bet on values just going up and up.

Chapter 2 explains how when the debt derivatives created by the financial world were sold off, the ratings companies were paid by the originators to give it high ratings (a big conflict of interest) Furthermore since these investments were brand new, there really was no reliable way of rating them. High ratings proven dreadfully wrong. Derivatives have no intrinsic value like a business does with its assets, revenues, reputation... Derivatives are only worth what someone else will pay for them. And when no one wants them, guess what?

Chapter 3 goes into how there was a flood of cash into the market that volatility disappeared giving the false impression to investors that risk has declined. There were warning signs though, ignored by all. Everyone wanted the party to continue.

Chapter 4 explains how China flooded the world with cheap goods and reinvested it's profits in the financial institutions allowing money to flow freely and keeping inflation incredibly low. Another false sign of stability. When the housing markets had some shocks, money then moved into equity invest markets furthermore making the supply of money so cheap.

Chapter 5 shows how banks only reward brokers when they make gains and do little to no studying on investments that tank to understand why. As the market unraveled, banks reluctantly tried to write off losses which were truly understated losses as the bank could not comprehend just how toxic the assets were. They tried to offset losses with their own capital to save their reputation. The reality was there wasn't enough capital to curtail losses ultimately and firms like Bear and Lehman found themselves in a true liquidity problem.

Chapters 6, 7 8 and 9 explains how as the market unraveled banks lost trust in each other, as well as depositors and liquidity essentially froze. Therefore they could not return capital as investors demanded. LIBOR soared and cash became even more expensive and liquidity further froze and banks would not lend to other banks - Everyone was on their own! As a result, banks glutted money and would not release any to consumers. The credit crunch was in full swing.

Chapter 10 discusses how Bear Sterns fell and was saved by the Fed, Lehman went bankrupt, Merrill was purchased and AIG saved. This created a moral hazard as bankers now knew risk was irrelevant as the Fed and central banks would bail them out if they got into trouble. The Feds choice of saving one but not the other gave the wrong signal. It also delves into how central banks had academics not real business people running the show therefore they made the rules up as they went along to solve the crisis because they had no real knowledge to go by.

Chapter 11 gives possible future solutions to prevent this crisis from happening again. In my opinion some are naive since bankers will do everything they can to prevent these fixes from happening as they will curtail profits through regulations.

Everyone is to blame for this crisis. The author explains what happened in other country's markets not just the US.

Complicit, by Mark Gilbert, the London bureau chief for Bloomberg financial news, is unusual -- a book concerning our recently demised speculative boom that you can still take along to the beach. Using that peculiar British talent of evoking laughter by the use of sneering disdain (he refers to the last suckers to buy into the mania as "the hindmost"), Mr. Gilbert takes the reader on a tour of almost-impossible-to-believe tales of greed, stupidity, and woe across eleven short, engaging chapters.

[...].

Complicit is a must read for market practitioners and those with a more general interest. For so-called professionals Mark Gilbert has produced a compact, yet detailed, analysis of events that lead to what we now call the credit crunch. Most importantly, those not familiar with the jargon-laden techno speak of the banking industry will find this insightful and highly readable. Having read numerous takes on the crisis I rate Complicit as my favourite so far.

I first met Mark in London several years ago when he was covering a conference for Bloomberg News. Since then I have read all of his Bloomberg posts including a chapter from this book.

I find him insightful and with a dry wit. But the main thing is we Americans tend to view the world from Washington or New York. As a result we miss much of what is occurring, especially when our economists and talking heads don't realize there are people out there not making $250,000 or more, which is why they do not understand what is happening. Like the FT and The Economist, Mark provides that perspective.

There are two books which I believe you should consider to accompany this book:

Simon Johnson, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown"
and

Edward M. Gramlich, "Subprime Mortgages; America's Latest Boom or Bust"

Both of these men have done a great service...perhaps they and Mark can wake us up before it is too late.

COMPLICIT: HOW GREED AND COLLUSION MADE THE CREDIT CRISIS UNSTOPPABLE examines the credit crisis and how the problems of subprime debt took down institutions and large parts of the world economy. Professionals in the banking, finance and real estate industries fostered this crisis through their vested interests: chapters explore exactly how this happened and its long-term results.