Posts Tagged ‘Financial Crisis’

Book Review: Boomerang

Monday, March 19th, 2012

image courtesy

Lewis, Michael. Boomerang : travels in the new Third World. W.W. Norton & Co., 2011.

Underlying the amusing new book Boomerang is the sad truth that the global economic crisis is far from over.  In the US, the federal government took over the sub-prime loans made by Wall Street banks.  And in Europe, massive private debt was also absorbed by their sovereign governments.  Because people borrowed far more than they could pay, the amount of worldwide debt has more than doubled since 2002.  In Europe, there are at least six nations that are unlikely to pay off their debts.  What then?

Sounds depressing, but in the hands of an expert writer like Michael Lewis, this story becomes a fascinating combination of economics lesson and cultural analysis.  Lewis traveled throughout Europe to explain how the national character of each country played a different role in how the crisis evolved.  In Iceland, young fishermen with little training but with a high tolerance for risk became private bankers who leveraged capital by trading assets among themselves at inflated values.  In the end, Icelanders amassed debts amounting to 850% of GDP.

In Greece, Lewis found an astounding level of waste, theft and bribery.  Greek banks loaned 30 billion euros to the Greek government where they were stolen and wasted.  Raising revenues has been impossible due to massive tax fraud and Greeks have taken to the streets to resist making changes.  By contrast in Ireland, real estate developers used leveraged capital to go on a building boom that bankrupted the country, yet Irish people were resigned to covering the losses.

In Germany, bankers who made conservative investments at home were too trusting of the games played on Wall Street.  They lost giant sums in the risky American subprime and in Greek government bond markets.  Lewis claims that this is in keeping with a German obsession with orderliness, and their fascination with excrement.

At the end of the book, Lewis traveled to California, where his evaluation of Americans was even harsher.  As long term interests were sacrificed for short term rewards, cities were bankrupted.  Americans took cheap money to buy homes far larger than they could afford and allowed the strong to exploit the weak.  Strongly recommended.

This title is also available as an audiobook.

© Reviewer: Meg Trauner & Ford Library – Fuqua School of Business.
All rights reserved.

Book Reviews: Fatal Risk and The Monster

Monday, February 13th, 2012

images courtesy

Boyd, Roddy. Fatal Risk: a cautionary tale of AIG’s corporate suicide. Wiley, 2011.

Hudson, Michael W.  The Monster: How a gang of predatory lenders and Wall Street bankers fleeced America and spawned a global crisis. Times Books/Henry Holt and Co., 2010.

It is fair to say that the average American does not understand what caused the global economic crisis.  The sub-prime mortgage industry played a major role, but did not cause the meltdown by itself.  Financial innovations, such as CDOs, CMOs and CDSs, also contributed.   To explain what spawned the global meltdown to those without an MBA, two engaging new books use the stories of companies and their managers.

In Fatal Risk, Roddy Boyd tells the story about AIG, a company whose management analyzed and modeled risk better than anyone else in the financial business yet ended up needing an $85 billion government bailout.  In The Monster, Michael W. Hudson covers the sub-prime mortgage business through the stories of Ameriquest and Lehman Brothers.

Fatal Risk: From 1962 CEO Hank Greenberg built AIG into the largest and most risk averse financial company on the planet by knitting together a collection of insurance companies from around the world.  Then in 1986, seeking additional growth opportunities, Greenberg raided Drexel Burnham Lambert and launched AIG Financial Products, entering in the market for equity options and derivatives.  Even before CEO Greenberg was forced out in 2005, management changed its focus from risk control to profit maximization.  New management leveraged the business, scrapped the internal controls and ruined the company, nearly bringing down the global financial system in the process.  Roddy Boyd has written a very readable chronicle about a complicated subject.

The Monster: The sub-prime industry was spawned in Orange County CA, home to four of the nation’s six largest sub-prime lenders.  This is a story of Ameriquest Mortgage, the leader in the sub-prime industry, and about its CEO Roland Arnall.  The methods used by Ameriquest and other sub-prime lenders to make loans to unqualified borrowers included falsifying documents, forging signatures, misrepresenting interest rates, inflating appraisals and charging exorbitant fees.  These loans were bundled and sold on Wall Street to unsuspecting investors by firms such as Lehman Brothers, which bankrolled lenders such as Ameriquest.  In this excellent read, author Michael Hudson uses the rise and fall of Ameriquest and Lehman to tell the story of the industry that helped bring about a global crisis.

© Reviewer: Meg Trauner & Ford Library – Fuqua School of Business.
All rights reserved.

Book Review: Reckles$ Endangerment

Monday, August 8th, 2011

image courtesy

Morgenson, Gretchen and Joshua Rosner. Reckles$ endangerment : how outsized ambition, greed, and corruption led to economic armageddon. Henry Holt and Co., 2011.

Why read another book on the housing bubble and financial crisis that led to the recent recession? If you have read the numerous other books released in the past several years and are not familiar with name James Johnson, then that is a reason enough.

The other accounts have understated the role of Johnson, the Chief Executive of Fannie Mae from 1991-1998. Gretchen Morgenson, a New York Times reporter, and Joshua Rosner, an adviser to the financial industry, target Johnson as the architect of the private-public partnership to promote the home ownership drive.

Interestingly, Johnson and the other players in the book draw strikingly familiar parallels to Ayn Rand’s characters a half century ago. Rand demonstrated what can happen if unscrupulous characters in the private sector and the government form an alliance. Although Rand’s characters are fictional, unfortunately Reckless Endangerment’s are not.

Book Review: Crash of the Titans

Wednesday, February 9th, 2011

crash of the titans - image courtesy

Farrell, Greg . Crash of the titans : greed, hubris, the fall of Merrill Lynch, and the near-collapse of Bank of America. Crown Business, 2010.

Engrossing and infuriating in equal measure, Crash of the Titans is a story of two troubled companies during the economic crisis, 2007 -2009. On the surface, this book covers the collapse of Merrill Lynch and its sale to Bank of America. But the real story is about the deeply flawed people who ran those companies, who failed to understand the risks they were undertaking and who failed to act in time to save their firms.

Author Greg Farrell, correspondent for the Financial Times, has written a riveting tale of arrogance, posturing and gamesmanship. On Wall Street, preoccupation with bonuses blinded corporate leaders to the financial risks in fixed income departments at Merrill Lynch and other firms. Colossal losses in these departments threatened to bankrupt their companies. After Merrill’s collapse, executives awarded themselves $3 billion in bonuses at the same time as they were laying off thousands of rank and file employees. Failed leadership and epic mismanagement at Merrill Lynch doomed a company that once epitomized the American spirit.

After a hasty decision to acquire Merrill Lynch, Bank of America executives in Charlotte were blindsided by additional losses. At the same time, the bank generated its own losses that the CEO could not explain. Stockholders were outraged about the bonuses paid to Merrill executives. And merging the cultures of the two companies proved difficult. In two years, a strong and profitable bank was forced to rely on federal bailout funds for survival.

Also available as an audiobook.

© Reviewer: Meg Trauner & Ford Library – Fuqua School of Business.
All rights reserved.

Book Reviews: Devils and Quants

Thursday, July 29th, 2010

images courtesy

End your summer reading with these two entertaining cautionary tales of devilish greed and hubris.

Click the titles below for information on location and availability.

© Meg Trauner & Ford Library – Fuqua School of Business.
All rights reserved.

Book Review: 13 Bankers

Tuesday, June 15th, 2010

image courtesy

Johnson, Simon. 13 bankers : the Wall Street takeover and the next financial meltdown. Pantheon Books, 2010.

Since the economic crisis of 2008, dozens of new books have been written about the meltdown, some of them reviewed in this blog. In this important new work, the authors show how the financial sector and its political influence are a serious risk to the economic well-being of the global economy.

The top six banks together control assets amounting to 60 percent of the U.S. GDP. These top tier financial institutions, including Bank of America, JPMorgan Chase and Goldman Sachs, are too big and too important to fail. The financial crisis made them even bigger, enlarging their market shares in derivatives, mortgages and credit cards. Yet these banks continue to take enormous risks, knowing that the government will shelter them from harm in a downturn.

Significant change is needed to address the disproportionate wealth and power in these large banks. To return to a healthy balance in our economy, the authors recommend that banks be “busted,” such that each bank is no more than 4% of U.S. GDP, with investment banks having a lower limit of 2%. Banks could then be allowed to fail without threatening the entire economy. Reckless borrowing and lending would cease and the boom/bust cycles would end. Taxpayers could stop subsidizing wealthy bankers through bailouts.

Author Simon Johnson was formerly chief economist at the International Monetary Fund. He was a faculty member at Fuqua School 1991-97, and currently teaches at MIT’s Sloan School of Management.

© Reviewer: Meg Trauner & Ford Library – Fuqua School of Business.
All rights reserved.

Book Review: The Big Short

Wednesday, April 14th, 2010

image courtesy

Lewis, Michael. The big short : inside the doomsday machine. W. W. Norton, 2010.

Master storyteller Malcolm Gladwell calls Michael Lewis the finest storyteller of our generation. Moneyball and Liar’s Poker made him one of the best business journalists today. Among his recent successes is The Blind Side.

The Big Short is called the definitive book on the current recession. Having worked at Saloman Brothers in the 1980s, he provides an insider’s view of a perfect storm brewing. Lewis’ story revolves around several obscure Wall Street players who understood the housing market was built on a house of cards.

Although most people are left with the impact of the recession; Steve Eisman, an analyst at Oppenheimer and Co.; Greg Lippman a bond trader for Deutsche Bank; and Michael Burry, who left Stanford Medical School to manage his own hedge fund, acted upon an opportunity to make tremendous profits. (more…)

Book Review: Busted: life inside the great mortgage meltdown

Tuesday, March 30th, 2010

image courtesy
Andrews, Edmund L. Busted : life inside the great mortgage meltdown. W. W. Norton, 2009.

Busted is a personal and penetrating account of one man’s experience with purchasing an overpriced house with a subprime mortgage. Written by an economics reporter for the New York Times, the author is aware of the economic and financial risks, yet he succumbs to temptation and buys a house he cannot afford. With his judgment impaired by his emotions – he is in love – Andrews enters into a vortex of debt from credit cards and desperate refinancing on his home.

Andrews ends up ruined financially. He claims responsibility, but he also blames the mortgage brokers and real estate appraisers, money lenders and Wall Street players, credit rating agencies, institutional investors and Washington policymakers. Eventually he blames his ex-wife. One person he does not blame is his new wife. The Atlantic later reported that he failed to disclose Andrews’s new wife’s history of bankruptcy.

This is not a book with a happy ending. Yet this blunt tale of personal ruin is riveting and well worth the investment in time.

© Reviewer: Meg Trauner & Ford Library – Fuqua School of Business.
All rights reserved.

Book Review: Architects of Ruin

Tuesday, December 22nd, 2009

image courtesy

Schweizer, Peter. Architects of ruin : how big government liberals wrecked the global economy–and how they’ll do it again if no one stops them. HarperCollins, 2009.

We experienced the dot-com bubble when the market crashed in 2000 due to overconfidence in technology. Investors took money out of the stock market and purchased real estate. It was a better investment opportunity thanks to low interest rates, risky mortgages, and relaxed lending standards.

But, economists have different perspectives on the basic questions of what caused the recent housing bubble, and also what to do about it. Peter Schweizer argues the cause was liberal social policy, not a market failure.

He points the finger at a long list of liberal activists. The short list includes Bill Clinton, Rahm Emanuel, Barney Frank, Barack Obama, Robert Rubin, Nancy Pelosi, Jesse Jackson, Ted Kennedy, and Timothy Geithner. (more…)

Book Review: Fool’s Gold

Wednesday, September 9th, 2009

images courtesy

Tett, Gillian. Food’s Gold: How the bold dream of a small tribe at J.P.Morgan was corrupted by Wall Street greed and unleashed a catastrophe. Free Press, 2009.

In 2003, Warren Buffet described derivatives as “financial weapons of mass destruction.” He was later proved to be a prophet. Yet a decade earlier, when credit derivatives were first conceived, they appeared to be a win-win for the financial world, freeing up capital, diversifying risk and increasing profits.

This is the story of a small group of young employees at J.P.Morgan investment bank, who discovered the latent power of derivatives, products which initially seemed so promising, but later evolving into cyber-world instruments that even the financiers struggled to understand.

Fool’s Gold is a lively narrative that reports behind the scenes about the workings of an elite company and its bankers. The story also describes the complicated financial instruments and shows how they combined with greed and stupidity to create a global financial disaster.

© Reviewer: Meg Trauner & Ford Library – Fuqua School of Business.
All rights reserved.