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Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis |  | Author: Mark Zandi
Publisher: FT Press
Category: Book
List Price: $24.99
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Seller: ph9
Rating:  107 reviews
Sales Rank: 395574
Media: Hardcover
Edition: 1
Pages: 288
Number Of Items: 1
Shipping Weight (lbs): 1.7
Dimensions (in): 9.1 x 6.1 x 0.9
ISBN: 0137142900
Dewey Decimal Number: 332.7220973
EAN: 9780137142903
ASIN: 0137142900
Publication Date: July 19, 2008
Availability: Usually ships in 1-2 business days
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Product Description
“The obvious place to start is the financial crisis and the clearest guide to it that I’ve read is Financial Shock by Mark Zandi. ... it is an impressively lucid guide to the big issues.” âThe New York Times “In Financial Shock, Mr. Zandi provides a concise and lucid account of the economic, political and regulatory forces behind this binge.” âThe Wall Street Journal “Aggressive builders, greedy lenders, optimistic home buyers: Zandi succinctly dissects the mortgage mess from start to (one hopes) finish.” âU.S. News and World Report
“A more detailed look at the crisis comes from economist Mark Zandi, co-founder of Moody's Economy.com. His “Financial Shock” delves deeply into the history of the mortgage market, the bad loans, the globalization of trashy subprime paper and how homebuilders ran amok. Zandi's analysis is eye-opening. ... he paints an impressive, more nuanced picture.” âKiplinger's Personal Finance Magazine “If you wonder how it could be possible for a subprime mortgage loan to bring the global financial system and the U.S. economy to its knees, you should read this book. No one is better qualified to provide this insight and advice than Mark Zandi.” âLarry Kudlow, Host, CNBC’s Kudlow & Company “Every once in a while a book comes along that’s so important, it commands recognition. This is one of them. Zandi provides a rilliant blow-by-blow account of how greed, stupidity, and recklessness brought the first major economic crises of the 21st entury and the most serious since the Great Depression.” âBernard Baumohl,Managing Director, The Economic Outlook Group and best-selling author, The Secrets of Economic Indicators “Throughout the financial crisis Mark Zandi has played two important roles. He has insightfully analyzed its causes and thoughtfully recommended steps to alleviate it. This book continues those tasks and adds a thirdâproviding a comprehensive and comprehensible explanation of the issues that is accessible to the general public and extremely useful to those who specialize in the area.” âBarney Frank, Chairman, House Financial Services Committee The subprime crisis created a gigantic financial catastrophe. What happened? How did it happen? How can we prevent similar crises from happening again? Mark Zandi answers all these critical questionsâsystematically, carefully, and in plain English. Zandi begins with a fast-paced overview and then illuminates the deepest causes, from the psychology of homeownership to Alan Greenspan’s missteps. You’ll see the home “flippers” at work and the real estate agents who cheered them on. You’ll learn how Internet technology and access to global capital transformed the mortgage industry, helping irresponsible lenders drive out good ones. Zandi demystifies the complex financial engineering that enabled lenders to hide deepening risks, shows how global investors eagerly bought in, and explains how flummoxed regulators failed to prevent disaster, despite crucial warning signs. Most important, Zandi offers indispensable advice for investors who must recognize emerging bubbles, policymakers who must improve oversight, and citizens who must survive whatever comes next. Liar’s loans, flippers, predatory lenders, delusional homebuilders
How the housing market came unhinged, and the whirlwind came together -
Alan Greenspan’s trillion-dollar bet
Betting on the boom, ignoring the bubble -
The subprime market goes global
Worldwide investors get a piece of the actionâand reap the results -
Wall Street’s alchemists: conjuring up Frankenstein
New financial instruments and their hidden contents -
Back to the future: risk management for the 21st century
Respecting the “animal spirits” that drive even the most sophisticated markets
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| Customer Reviews:
Showing reviews 1-5 of 107
 Easy to read expose of the Sub-Prime guilty parties September 5, 2008
Dale C. Maley (Fairbury, IL United States)
48 out of 50 found this review helpful
In this age of full disclosure, I received this book free from the Amazon Vine program....with the condition that I publish a book review.
I may have purchased this book anyway. Back in the middle of 2007 when the sub-prime problem first surfaced......I remember a talking head on TV saying the sub-prime issue would not become a problem. His rationale was that sub-prime only represented a single digit percentage of the total mortgage market......and therefore it would have no major impact on financial markets......even if all sub-prime debt went bad. Boy was he wrong!! I have been curious how the sub-prime fiasco almost brought down the entire world financial markets.
Another disclaimer is that I have not personally been involved much with mortgage loans. My first mortgage was back in 1978. It was a 30 year fixed mortgage, and since I only put 10% down, it was mandatory to have mortgage insurance......until my equity reached 20%. I got additional 30 year fixed mortgages in 1980, 1994, and 1995 due to job location changes. In 1999, I got a variable rate loan on a new home.......put 50% down......and then converted to a 15 year fixed rate in early 2007. I also live in Illinois, not one of the national hotbed markets for sub-prime lending.
Zandi says there has been a financial markets panic about every 10 years. He predicts the next one will involve U.S. government debt with all our under-funded liabilities. Other authors have said there is a stock market crisis about every 25 years........because it takes this long for the "burned" generation to retire and be replaced with youngsters who have no memory of the last bubble.
Zandi explains the sequence of the sub-prime fiasco like this:
1. Fed lowered interest rates after 9/11 to stimulate the economy
2. Fed was not worried about creating inflation because the shift in manufacturing to China actually threatened deflation, not inflation
3. With returns on savings accounts being so low, plus the stock market going nowhere after the Tech stock bubble burst.......people chose to invest in their homes
4. Foreign countries could not get decent returns on fixed income investments due to low interest rates......so they chose to buy slightly higher yielding mortgage backed investments
5. Local banks changed from being prudent lenders holding mortgages to simply financial intermediaries driven by loan processing fees. Since they no longer held any mortgages, they didn't have to worry about making sure they were issuing loans that homeowners could really afford.
6. New companies jumped into the mortgage lending market ...with the same motives as the banks. The majority of borrowers did not even realize how risky their new loans were....especially if home prices declined.
7. Wall Street created exotic mortgage backed financial instruments and marketed their higher returns.
8. The Federal Reserve Chairman and all the regulators were asleep at the wheel.
9. Financial rating firms completely missed the boat on how risky these new financial instruments really were.
10. Eventually the music stopped.....there were no people left to keep bidding up the prices of homes. The house of cards came tumbling down.
Zandi points out that sub-prime mortgages peaked at ½ of all mortgage originations.
A way was found to avoid the mortgage insurance if you put down less than 20%. You simply borrowed 80% on the first loan, then immediately took out a 2nd loan for the remaining 20%......apparently mortgage insurance is not required on either the 1st or 2nd loan.
Verification of income also went out the window.
Zandi points out that Americans lead the world in terms of how much housing cost we incur. Americans spend 33% of spending on their homes, while New Zealand spends 25%, France 20% and Japan 14%.
Zandi points out that at the peak of the boom in 2006, foreign investors owned 1/3 of all U.S. mortgages.
Zandi also points out that the price-to-rent ratio is a good bubble indicator.......analogous to the PE ratio in stocks. This ratio has been about 17 the last 25 years......but it peaked at 25 at the height of the boom. For this ratio to return to its 25 year average of 17, national U.S. house prices must drop 25%........and the hottest markets must drop 35%.
The author says the sub-prime bubble is 4 times as bad as the S&L fiasco ($1 Trillion versus $250B).
The author has some recommendations to avoid another sub-prime crisis including:
1. Lenders must verify income and assets
2. Lenders must verify borrowers are able to pay back the loan
3. Mandatory escrow for taxes and insurance
4. Start teaching personal finance in high school
I found the book easy to read and entertaining. However, I got very frustrated with the color coding of his charts. I could not distinguish what the variables were in most of his charts. Maybe he made them in color, and then the black-white conversion process made them illegible.
Given my background, I am shocked at how loose the lending process has become compared to 20 or 30 years ago. As the author points out, everyone in the lending food chain assumed "the other guy" had checked out the quality of the loan made...and in reality nobody checked it out.
After reading about the Tulip bulb and South Seas bubble......plus living through the 1989 S&L crisis, the 2000 Tech wreck, and the 2007 sub-prime fiasco.........this book has help give me a better idea of how to recognize the next financial bubble.
Some of the key indicators of bubbles include:
1. "It's different this time"
2. TV shows and advertisements on speculating including store owners who sell stock instead of their normal goods (Tulip craze), ads showing taxi drivers who quit hauling passengers and day-trade (Tech Stocks), and TV shows dedicated to flipping houses
3. Historic valuation ratios are far exceeded (Tulip bulbs, PE ratios of 100 for Tech Stocks, Price-to-rent ratio for housing)
All in all, I thought the author did a good job of exposing the role of each member in the housing loan food chain had in creating the sub-prime mess.
In this age of full disclosure, it can be noted that I am the author and publisher of the book INDEX MUTUAL FUNDS: HOW TO SIMPLIFY YOUR LIFE AND BEAT THE PROS. This book is an introduction to the concept of index funds is and is sold on Amazon. I am also a contributing author to the book THE BOGLEHEADS GUIDE TO RETIREMENT PLANNING available from Amazon with an estimated release date of October 2009. I have also written 21 short stories on investing which are also available on Amazon.
If you are done speculating in the housing market, these books on conventional stock and bond investing may help you slowly grow more wealthy:
The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing
Phenomenally Educational for Even the Most Financially Illerate August 31, 2008
Kathleen San Martino (New Jersey)
15 out of 16 found this review helpful
I've learned how securitization, unsavory lending, lies by borrowers and lenders, the effect home flippers had on the market, the accounting standard of "mark to market," and other various lending practices and financial instruments have caused the economic havoc we are now experiencing. Lenders are currently leary of lending money to financially sound borrowers due to fears of further financial crises. There are also more rigid lending criteria which further compounds the problem.
The author does a fantastic job of explaining the complexity that evolved in the mortgage market over the last 10+ years. As a result, this book is a plethora of information on how the housing crisis has snowballed into what we are experiencing now.
The author explains everything in detail in an engaging and easy-to-understand narrative that even the most financially illerate person can understand. I would have rated this book TEN STARS if that option were available. "Financial Shock" is an outstanding text!
Absolutely the best book on the sub-prime crisis February 8, 2009
Richard Gibson (Woodland Hills, CA)
4 out of 4 found this review helpful
I have been reading a number of books on the sub-prime crisis. Some of them are quite good. The Trillion-Dollar Meltdown, for example, is an excellent introduction to the high-level hocus-pocus that Wall Street was engaging in to bring on the crisis. Chain of Blame gives a good journalistic description of the history of the major players in the sub-prime industry. Greenpan's Bubbles gives an excellent summation of the prosecution's opening argument in People v. Alan Greenspan, making the case that it was all the fault of the Fed.
This book, however, is absolutely, unequivocally the best book on the subject. It is everything that you want such a book to be. First, and foremost, Zandi knows the subject. He has in-depth knowledge of both economic theory and of the details of what actually happened in the market. His depth of knowledge is astonishing
Second, he covers every aspect of the subject. Most of the books written on this subject cover only part of it. Zandi covers the waterfront. He understands the issues, in detail, from the policy decisions of the Federal Reserve Board to the cyclic nature of the housing industry. In a relatively short book, he covers literally every aspect of the subject.
Finally, he makes balanced judgments without being judgmental or moralzing. His tone is very detached. He actually wants to understand what happened, not find the bad guys to pillory. On the Fed, for example, he gives a very clear explanation of what Greenspan was thinking, what he was trying to do, how it worked in some ways and was a disaster in other ways.
He has the expected final chapter on how to fix things. It was short, but very good. I thought some of his ideas were kind of screwy -- why would it help to have national uniformity in foreclosure laws, for example? -- but, by and large, his ideas were practical and judicious. I think that every sane observer of the situation agrees that better regulation of the out of control mortgage and mortage-backed security industry is needed, and Zandi gives a good idea of how to do that, without overdoing it.
An economic review of the current mortgage crisis September 15, 2008
Rama Rao (Annandale, VA, USA)
3 out of 3 found this review helpful
This is an excellent review of the current economic mortgage crisis that led to financial disaster. The author lays out all facts leading to this fiasco in an easy to understand language. No information is ignored in this fact finding mission; unscrupulous lenders, irresponsible borrowers, greedy speculators, developers, real estate agents, investment bankers/investors and last but not least the inept regulatory agencies destroyed the economic order and passed on the burden to unsuspecting tax payers.
Subprime mortgage is a loan made on the basis of a weak or troubled credit history. Historically it was a peripheral financial phenomenon; a marginal market with few borrowers and lenders, but that changed in 1990s. Mortgage lending companies were not setup as traditional depositories or brokers, but as real estate investment trusts (REITs). It is a corporate form for developers to avoid corporate income taxes. REIT pays out the earnings to shareholders who pay personal income taxes on them. Since they are publicly traded, it avoids regulators. But it comes under SEC which focuses mainly on insider trading, and corporate transparency, and not on mortgage lending. This helped REITs financial mismanagement streak through regulatory cracks. By the time subprime financial shock hit, 35% of the after-tax income was spent on debt obligation (Fig 13.5). The financial benefits of outsized asset price gains have gone almost entirely to higher income households (Table 13.1).
The ripple effect is observed all over economy: The government sold U.S. Treasury bonds to raise cash for the economic stimulus package but the consumers spent the entire check on raising gasoline costs. Saudi Arabia which bought most of these bonds essentially financed the purchase of their own oil! A sharp drop in dollar value in the international market did more damage than good, because this downfall helped the surge in oil prices, and consequently raised food and other commodity prices. Given the higher dollar value of Euro and Yen, Europeans and Asians were consuming more throwing the demand and supply curves off balance.
This book is very well researched, and organized with useful economic data, and this is not for the investors who are looking for juicy financial secrets: Highly recommended.
1. Investing in REITs: Real Estate Investment Trusts: Third Edition
2. Real Estate Investment Trusts: Structure, Analysis and Strategy
3. REITs: Building Profits with Real Estate Investment Trusts
4. Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis
5. Subprime Meltdown: From U.S. Liquidity Crisis to Global Recession
6. The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It
7. The impact of the 2001 financial crisis and the economic policy responses on the Argentine mortgage market [An article from: Journal of Housing Economics]
8. Getting a Mortgage in the Subprime Crisis
9. The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means
10. Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism
Excellent - Well worth the time to read & re-read TODAY September 19, 2008
javajunki
3 out of 3 found this review helpful
As a landlord, part-time/small-time real estate investor and someone that writes frequently for real estate/investment related concerns I almost passed by this book thinking it would add little to a timely albeit tired topic. Fortunately, this came up as an option in my Vine account so I decided to give it a chance...glad I did!
First, the book is exceptionally "readable" without becoming insulting or overly simplistic. Newbies to the situation will appreciate the included background explanations while those more familiar with the situation will be stunned by the supporting documentation and research. There is plenty of meat to sink your teeth into {my apologies to the Vegan readers}. This is NOT a re-hash of the same old story broadcast on the media every night but rather a systematic explanation of the entire process from a variety of angles.
Another factor I appreciated was the realistic "tone". The author avoids hysteria as well as an ovely analytic position and simply presents the case as it stands. It's refreshingly to the point and void of "fluff" - the author makes a strong point page after page and has a true book worth the time to read rather than an extended "report" that was filled with opinions or other filler to create enough pages for a book...this book takes longer to read simply because it contains real content worth reading!
Finally, what sets this book apart from the rest is the structure and "weaving" together of many distinct points into one unified whole. For those who are familiar with the current crisis, much of the information will be something you are familiar with or have encountered in bits and pieces elsewhere - but pulled together it becomes a well documented story unto itself.
For those seeking greater insight into the current financial fiasco and economic loss of confidence in the financial markets, take time to read this book and draw your own conclusions as to how far, how fast and how long this (and the next) financial crisis is likely to continue.
With each passing day, this book becomes more timely and is well worth the time to read...and even read. Kudos to the author - a well executed book, well written, enjoyable and informative.
Showing reviews 1-5 of 107
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