Enter your mobile number or email address below and we'll send you a link to download the free Kindle App. Then you can start reading Kindle books on your smartphone, tablet, or computer - no Kindle device required.
To get the free app, enter your mobile phone number.
Way Too Big to Fail: How Government and Private Industry Can Build a Fail-Safe Mortgage System Paperback – October 31, 2011
|New from||Used from|
"Way Too Big to Fail is an essential book on the mortgage crisis. The book is invaluable for understanding not just what made the bubble, but everything that transpired after it burst. It should be required reading for anyone thinking about how to rebuild U.S. housing finance."
Adam J. Levitin, Professor of Law, Georgetown University
From the Author
WILLIAM A. FREY began his career on Wall Street in 1981 in the then nascent field of securitization. After nearly fifteen years in major firms including Morgan Stanley, Smith Barney, and Bear Stearns, Bill founded Greenwich Financial Services (GFS) in 1995, where he serves as principal and CEO today. Under Frey's leadership, GFS has structured and sold billions of dollars of mortgage backed securities. In 2003, recognizing that the U.S. MBS market was fueled by loans that were unlikely to be repaid, Frey decided to look for opportunities in other countries. GFS completed the first Russian securitization transaction with auto loans in 2005 and followed in 2006 with the first MBS for Russian mortgage certificates. Each of these deals won a "Deal of the Year" award from industry groups. More importantly, neither has suffered any credit losses during the recent worldwide financial turmoil. Recently Frey has emerged as the most vocal advocate for bondholder rights in the wake of the Mortgage Crisis. The central theme of Frey's advocacy is that the solutions proposed by federal and state governments will do more harm than good. The proposed changes usually ignore the contracts that govern mortgage securities, massively increasing losses to bondholders who are typically pension and retirement funds. Furthermore, the U.S. forced abrogation of trillions of dollars of investor contracts will stop the flow of private capital to the United States, thereby choking off the eventual recovery of the housing market and, indeed, the entire U.S. economy. Frey's advocacy for contract integrity and his visionary solutions that work for all market participants are recognized as key components in the eventual recovery of the mortgage capital markets.
Top customer reviews
There was a problem filtering reviews right now. Please try again later.
One of the great tidbits of the book is back on page 264, a letter from Barney Frank acting as Chm of the House Committee on Financial Services and signed by 6 members. Most likely the letter was drafted by outraged banks whose blatant attempt at theft by government gift from the noteholders had been dragged into the light. The letter from Barney begins with "We are outraged...."and continues on to demand that Frey appear before the Committee to explain his crimes of free speech. Frey relates his amazement that during the pre appearance interviews, Barney's staff demonstrated time and again that they had no concept of how the securitization process worked or the content of the basic documents. In the end they decided that hauling Frey into the tv lights would simply prove what the public had come to suspect, they were idiots on the payroll of the perps.
Most of us are likely to finish the decade from 2005 to 2015 poorer than we started. OK our financial statements may not reflect the loss, but that's only because we do not carry our share of the national, state and local debt plus underfunded government pensions on our financial statements. The primary cause of this debacle was the widespread malfeasance and corruption in the real estate and securities industries during the middle of the last decade.
A few hours before starting the book I read an article on the California AG and the 49 state settlement in one of the national magazines. Nowhere in the article did it mention that the settlement is a sellout to the banks. The essence of what the Frey documents is that all of these settlements have enriched the banks at the expense of the innocent investors who in most cases suffered due to corruption in the banking and investment banking industries.
Frey continues on to explain that the stakes are much higher than the press discusses. In order to make the investors responsible for the bank's corruption, greed and/or stupidity the government is trashing the contracts between the investors and the banks and wall street. All of us in the United States have enjoyed a lower cost of capital and loans than the rest of the world due in large part to the perception that we are a nation of laws. That includes the laws of contracts.
Frey infuriated Barney Frank and Diane Watson (perhaps the dumbest person to ever be elected to the house) and 4 others when he wrote and editorial pointing out that Congress, under a flood of bank money, was robbing the innocent to reward the guilty. Barney called him irresponsible; but later backed down on calling Frey to testify after Frey showed the congressional staffers that they simply did not understand what they were doing.
Frey does not just criticize, rather he goes on to analyze the foundational problems and provides real solutions. I may not agree with some of his solutions but overall he has done an incredible job.
Isaac Gradman, who edited the book offers priceless wisdom in subprimeshakeout.com, a great site focusing on the ongoing problems in the industry.
In the runup up to the collapse we were surrounded by early warning signals that a crash was near certain. Prof Cauley at UCLA made no friends when he told a large audience of largely financial services folks that there was simply not enough personal income to support the housing prices and that a 30%-40% correction was near certain. My former grad students were picking up the same vibrations. One commented that they decided to get out of the development business when their deadbeat, blue collar tenants were able to move into new homes. A Saturday morning spent in the offices of a real estate agent or loan broker would have exposed the chilling truth, that the pyramid was built on falsified financial statements or no statements. Home appreciation had become an entitlement. A very few like Andrew Lahde understood that the rotted foundation of the securitized debt rested on and even more unstable base of wishful debt ratings, credit default swaps designed to produce reportable income with little thought to the risks and end to end greed.
If somebody tells you that nobody saw this coming, ask them to watch the hearing on YouTube where Congress (Barney Frank and friends) killed the investigation into the true condition of the GSE's. Raines and Gorelick were looting the GSE with manufactured earnings which lead to millions in unearned bonuses.
If there is an area where I disagree with Frey it is in some of the factors leading up to the debacle and the treatment of borrowers who go to foreclosure. It may be related to us looking at the problem from opposite ends of the financial pipeline. My experience is focused in real estate development as a developer, educator and consultant.
I believe that homebuyers acted in a somewhat rational manner given what they were seeing in the market and what incentives they were offered to participate in the process. While I share the belief that more prudent lending practices would have largely stemmed the flow of capital into the bubble, the problem was largely concentrated in the seller, broker, loan broker, originator, appraiser and escrow functions. While reducing non-recourse loans might help bankers it would serve only to move more borrowers from foreclosure to bankruptcy.
Shortly after the debacle I was asked to look at a deal entered into by a young woman. She was in the entertainment business and had a highly variable income. A promoter sold her on the concept of making a no cash investment in a beachfront condo across the country. The promoter assured her that he would cover any negative cash flows.
The promoter and notary arrived at her home with all the documents (150 pages) ready for signature. The first TD lender was one of the government GSE's, the originator of the first, maker of the second and escrow holder was the local (to the project) office of a national bank. For purposes of the discussion we'll call them Stagecoach Bank . The package assembled by Stagecoach's escrow dept included an appraisal at the purchase price, a closing statement that disclosed a normal real estate commission to a local broker and an additional payment of 10% of the purchase price to the promoter, an agreement that the property was the borrower's primary residence and would not be rented and a few pages later a rental pool agreement. With the first and heloc the borrower even got some cash back from escrow. In the words of our Senator, it requires the willing suspension of disbelief to accept that Stagecoach was not a well informed participant in the process which violated virtually every principle of sound lending along with a number of laws.
Other investigations have documented large lenders and developers demanding that appraisers increase values to facilitate making loans that were doomed to fail on day 1. There's also a vast amount of email traffic documenting that originators knew the loans were toxic from day 1 and were in a mad rush to get the loans out the door before they collapsed. Perhaps that why some retained the first loan payment at closing so that the loan would be "seasoned" when passed on.
Giving lenders access to buyers assets may improve the lender's position. However, any increase in security is likely to be offset by a decrease in lender standards. Commercial real estate lending works with non recourse lending at more conservative underwriting standards.
In summary, my belief is that the problem is not the borrower but the chain of self serving financial intermediaries who were thoroughly corrupted by their greed. Yes, in some cases the borrowers submitted falsified statements regarding income and assets but all too frequently that was at the instigation of the loan originator.
If the government paid one of the Beltway Bandits $50 million to write an analysis of the failure and how to prevent it in the future they would fall far short of a report of this quality. Simply put, Frey has a unique background and skillset that has allowed him (with the assistance of Gradman) to write the textbook analysis of the crash and how to avoid it in the future. He accomplishes the task in less than 250 pages and then added extensive references, the infamous Barney Frank letter and other source material, all in a highly readable format.
We are fortunate to have people of Frey's and Gradman's intellect and integrity. The author notes that he worked hard to steer a middle course, presenting the facts but not making a political statement. It's a plague on both political houses and perhaps time for a wholesale housecleaning in Washington, including the Czars, agencies and wonks. We were threatened with 8% unemployment if we did not fork over a trillion dollars. But, unemployment rose far above 8% and real unemployment is much greater.
If you read only one book on this issue , read this.
In particular, the book excels in two major ways:
First, it discusses important issues regarding the U.S. real estate market and overall economy in an easy and enjoyable way.
Second, it proposes solutions rather than just re-telling the story of how we got into this mess (although it also does an excellent job of providing a holistic historical backdrop in addition to proposing solutions on how to best fix the mess).
I highly recommend all citizens concerned with the future of our economy to add this insightful book to their collection.
As someone who has worked in the financial services industry for over 30 years, I found it very insightful. I stayed up too late a couple of nights because I found it difficult to put down. However, this book is not only for financial professionals. It is written in a very clear and simple style. I believe anyone interested in what happened to cause the financial crisis could understand it.
Many of our politicians and policy makers could benefit greatly from reading this book.
Most recent customer reviews
William A.Read more