on March 6, 2009
Mr. Gross has given us a clear, non-technical account of our current financial crisis, credit lockdown and recession. It makes for lively reading as well, since many of the key players of this account are allowed to characterize themselves in their own words (quoted mostly in context). Mr. Gross falls just short of self-righteous indignation by reminding himself and us of the parts we played in enabling the players. There are enough facts and figures to refute the idea that somehow the people who did not make money were to blame for the excesses into which the money-makers were enticed. I do have two complaints about the story. First, there is a lack of discussion of the involvement of international credit markets connected with international trade - what I believe were the "canary in the mineshaft" - that dragged down central banks once counterparty trust was lost. Secondly, I accuse Mr. Gross of copping out in his concluding chapter. Following such a story of legal, ethical, and moral drama, I would expect the author to give us an account of the lessons he learned, and lessons we might carry away. However, he was gun-shy, and said as much, about making "predictions" about future events. The reader will have to write his or her own conclusions. For me, it was the old virtues of honesty, thriftiness and hard work. You cannot write a credit default swap on those. Other people will have other lessons.
Recently I read a Newsweek column by Daniel Gross documenting that U.S. private employment today is less than in 2000, despite population having grown 9%. That bit of basic insight led me to read his "Dumb Money" about how the Ownership Society quickly degenerated into the Bailout Nation during the same time period. The book is short (101 paperback-sized pages), interesting (even entertaining), yet comprehensive, covering all the decade's financial 'stars' - Ben Bernanke - keeping interest rates low, continuing Greenspan's rosy forecasts), Christopher Cox (ineffectual SEC head), Alan Greenspan (keeping interest rates too low for too long, lobbying for deregulation, blindly following philosopher Ayn Rand instead of economic data and theorists), Edward Lambert (acquired K-Mart and Sears early in the decade, then spent $4.9 billion to buy back shares at an average $118 - now $70), Richard Fuld (named a #1 CEO by Institutional Investor magazine in 2006, received a $22 million bonus in 2007, and then watched the 28,000+ firm Lehman Brothers collapse in a market-terrorizing bankruptcy in 2008), Angelo Mozilo (making mortgages available to almost everyone in his pursuit of #1 market share), Henry Paulson (a latecomer to the crisis, he then created a bailout for the institutions that created the crisis), Robert Rubin (lobbyist for deregulation, Citibank board member while sailed into a major government rescue), John Thain (CEO NYSE from 2004-2007, paid $83,785,021 in 2007 - mostly by his not-yet employer Merrill Lynch, requested a $10 million 2008 bonus for 'saving' Merrill by selling it to Bank of America for $28 billion + $20 billion in government money, spent $1.22 million in 2008 corporate funds to renovate two conference rooms, a reception area, and his office, and was fired in January, 2009), the fine folks (both legislators and regulators) behind the Community Reinvestment Act, and countless financial geniuses that bought up every exotic three-letter financial instrument, company M&A or LBO, and mirage within sight.
Gross even managed to 'share the blame' (sarcastically) with China for our low interest rate-fueled housing bubble. Institutional players involved and included in Gross' accounting included insurance giant AIG, banks, bond rating agencies, builders, Congress (bought, paid-for, and asleep), Fannie-Mae and Freddie-Mac (repeatedly raised their loan limits, allowing the bubble to keep inflating), mortgage originators, and the shadow bankers. Dumb money players were not limited to the private sector - California and the U.S. government also were major participants, followed by New York, New Jersey, Illinois, etc. - all but North Dakota, Wyoming, Montana and Alaska. And none of this could have happened without the little people (you and I) who bought ARMs, balloons, HELOCs, liar's loans, and no-down loans by the millions and then got stuck with them after the crash; regardless, we're all paying now for the private and public sector bailouts, along with our children, grandchildren, great-grandchildren, etc.
Gross' Recommendations? Outlaw stupidity, and create some sort of fiscal lithium (sprayed over Wall Street?) for starters. Gross is not enthusiastic about more regulation (too easy to get around). Perhaps a tax on securities trading and the creation of structured financial products to be used to help cover future messes.
on February 7, 2010
Hindsight is always 20-20 and everything is always so obvious after the fact. Daniel Gross offers a concise view at the mechanics of the financial meltdown, which points out the root problems, how they developed, and the mania that ensued. Refreshingly, the author does not carry any political biases and instead focuses on the facts. If you're looking for a short and approachable summary of the meltdown, then this is it.
On the other hand, what makes this book so good as a summary, is also its weakness in the broader context of financial & market policy moving forward - I would be careful about drawing generalized conclusions based on the analysis.
on January 21, 2012
This book is a really great starting place to begin to understand the financial cataclysm of 2008 that was so large that there don't even exist adjectives to span its enormity - words like "colossal", "monumental", "humongous", all seem too small or ordinary for this extraordinary financial castasrophe. Everyone should try to understand an event of this magnitude and for those like myself who are not finance professionals, this short (101 pages of surprisingly readable text) is a great place to start. Gross informs us at the outset that he set out to try to understand why "it suddenly became acceptable for the United States to start guzzling debt the way fraternity boys pound beers on spring break" and he mostly succeeds.
It's all here: the steady loss of our manufacturing base to China, the rise of "cheap money" (loans at temptingly low interest rates), "securitization" (the packaging of high and low risk mortgage debt into "mortgage-backed securities"), Enron and Worldcom, the epidemic of sub-prime, risky home loans, the wanton use of debt as "leverage" to finance more and more absurd take-overs, soaring government debt levels fueled by the low cost of borrowing, and the addictive need for constantly rising values in all asset classes to prevent total collapse of over-leveraged hedge funds, private equity groups, and investment banks. Large investment banks inexplicably thought they could carry 30 dollars in debt for every dollar of capital. Sub-prime lenders offered no-down-payment home loans to borrowers with undocumentable income. Government regulators obligingly eased requirements for reserves in order to keep the party going.
Faced with stagnating wages, average workers borrowed their way into affluence through refinancing mortgages and running up credit card balances until they could not longer safely get off the treadmill. Hungry for profits, the rest of the world joined in the frenzy and got burned as well. Gross gives the sense that the lethal overdose of borrowing was a juggernaut that no one individual or institution could control. In his somewhat underwhelming concluding chapter, Gross seems to think that the world financial crisis of 2008 is neither the first nor the last of an inevitable series of bubbles that inhere in free markets. He anticlimactically recommends we be "smarter" and more restrained in our investment choices.
I learned many interesting specifics about the financial crisis of 2008, and overall, that it really was what most of us suspected it was: a lethal admixture of greed, narcissism, diabolical ingenuity, and lemming-like, imitative behavior on a grand scale. This is a great, painless introduction to a disturbing, complicated, important tale of capitalism gone wild.