Financial Shock: A 360 Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis | 
| Author: Mark Zandi
Publisher: FT Press
List Price: $24.99
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Rating:  89 reviews
Sales Rank: 3819
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
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"In Financial Shock, Mr. Zandi provides a concise and lucid account of the economic, political and regulatory forces behind this binge." --The Wall Street Journal "Aggressive builders, greedy lenders, optimistic home buyers: Zandi succinctly dissects the mortgage mess from start to (one hopes) finish." --U.S. News and World Report "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." -- Larry 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." --Bernard 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 third--providing 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." --Barney 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 questions--systematically, 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 action--and 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: Read 84 more reviews...
 Easy to read expose of the Sub-Prime guilty parties September 5, 2008
Dale C. Maley (Fairbury, IL United States)
31 out of 33 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 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.
If you are done speculating in the housing market, these books on conventional stock and bond investing may help you slowly grow more wealthy:
Index Mutual Funds: How to Simplify Your Financial Life and Beat the Pro's
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
 A fair narrative September 14, 2008
Dr. Lee D. Carlson (Saint Louis, Missouri USA)
18 out of 24 found this review helpful
This book is one of many that have appeared this year that attempt to give the reasons for the "subprime mortgage crisis" and to study its effects on the economy. Targeted to the (ill-defined) "general audience" these books emphasize a narrative and not a quantitative point of view and thus should be viewed with strong skepticism. A true account of the events in the mortgage markets in the last two years would require years of effort pouring over financial documents and data, and conducting countless interviews with the personnel in the firms that participated in mortgage finance. If one is going to conduct such a study, one must be ready to reject the notion that the heads of these firms were primarily responsible for the debacle that some of them found themselves in. Conversely, one must always be open to the idea that these individuals were not the ones that were responsible for the financial success of some of these firms.
That holds even for books such as this one: one must put aside the notion that the author's title and status at Moody's gives him any special expertise or insight into the financial markets. This book, and others like it, must be evaluated only with respect to the arguments and content that they present. No consideration at all must be given to the place that their authors occupy in the managerial or intellectual hierarchy. This caution must be exercised due to the extreme biases that sometimes occur in individuals who are pushing a certain agenda with the books or articles they write. The author himself is aware of these biases and how they can get out of hand when he makes a disclaimer in the introduction to the book regarding his affiliation and the role of its credit ratings in the mortgage crisis.
The book is easy to read, and the anecdotal accounts that the author gives are even entertaining to a large degree. To readers who are approaching a study of mortgage markets for the first time, he spends a large portion of the book talking about the terminology behind mortgages and finance in general. There is actually a lot to learn here since the credit markets have undergone radical transformation in the last two decades, due mostly to new financial instruments and what has been christened as financial engineering. The author has called this "frenzied" innovation in the book, and it coupled with "globalization" resulted in a system of vast complexity, with risk being spread out to such a degree that everyone assumed everyone else knew what they were doing. Mortgage securitization in particular was on the minds of investors who wanted returns over and above what they were getting from ordinary Treasury products.
Such complexity, coupled with "laissez-faire" attitudes on the part of governmental regulators encouraged reckless lending and borrowing among financial institutions and homeowners, the author argues, and various events that are discussed in newspapers and financial trade publications are given to support his contentions. One cannot really counter any of the author's arguments since they are purely narrative descriptions. They do sound plausible, even though they are sometimes expressed in somewhat hyperactive language, supposedly to get the reader to accept the enormity of the current financial "crisis."
There are some sections of the book that are quite interesting, such as the discussions on bubbles and the overvaluation of mortgage and asset securities. He defines a bubble as occurring when an asset's price is "disconnected" from its "fundamental" value. For housing prices, this "disconnection" comes from a comparison with rental prices. This idea of valuation can and has been debated, but at least the author makes a stab at it, and sites a few historical examples of bubbles in the financial markets (the Internet stock bubble being one).
But mere descriptions of the subprime crisis is not the author's only goal, as he wants to look towards the future by offering some suggestions as to what could be done to mend the current situation and make future financial dealings more palatable for all. He makes the statement that the "worst of the crisis appears to be over" but as this book went into print, the Federal government of the United States took over Freddie Mac and Fannie Mae, and the financial firm Lehman Brothers appears to be headed to collapse. One of his recommendations is interesting, in that he wants to expand the data collection capabilities in the mortgage markets, correctly realizing that at the present time there is too much lag in the reporting of useful information. The Catch-22 here though is that many private firms make their living off mortgage data, Moody's Economy.com being one of these, and so any data transparency in the mortgage data collection business will probably not be forthcoming. The competition between these data collection firms is fierce, and they also face privacy concerns from interest groups that do not want them to have this kind of information.
The author's suggestion to improve our collective "financial literacy" is a good one, as part of this education should be to instill in everyone an appreciation of the extreme volatility of the financial markets. No doubt the notion of a free market unfettered by regulation will not find sympathetic ears from this day on, but maybe a society educated in the workings of financial markets will develop an awareness that government institutions do not have special competence in addressing the financial shocks that this reviewer believes will be a common occurrence in the twenty-first century.
Phenomenally Educational for Even the Most Financially Illerate August 31, 2008
Kathleen San Martino (New Jersey)
11 out of 12 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!
4.5 stars-Privatization and Deregulation lead to securitization,speculative bubbles,and recession July 25, 2008
Michael Emmett Brady (Bellflower, California ,United States)
9 out of 12 found this review helpful
Zandi's book is the latest in an explosion of well prepared and documented books which carefully dissect and examine the sub prime mortgage backed bonds fiasco that threatens the basic foundation of the American financial and banking system.Zandi does a very good job of explaining the interconnections between the mortgage lenders and brokers,ratings agencies(Moody's),underwriters,commercial banks(Bank of America),savings and loans(Washington Mutual),the Wall Street investment banks(Bear Stearns,Merrill Lynch,Lehman Brothers,etc.)and the spread of 6 trillion dollars worth of bonds that were both highly risky and uncertain in the sense that there was very little knowledge on how this particular application of banker securitization would perform over time.
The heart of Zandi's analysis is that "...hamstrung government regulators couldn't keep up with lenders who were constantly devising ways to elude oversight..."(p.18)."An even more important factor was a philosophical distaste for regulation that seemed to pervade the Federal Reserve...Without Fed leadership....the... Comptroller of the Currency,the Federal Deposit Insurance Corporation,and Office of Thrift Supervision were deterred from taking action." Zandi also mentions the abject failure of the Securities and Exchange Commission(SEC)to act.Zandi overlooks the fact that a competent regulatory board has not existed at the SEC since Bill Casey was at the healm of the SEC.None of this fiasco could have occurred under his watch.Unfortunately,the SEC has been run by pro Wall Street types who have worked overtime to undermine the regulatory powers of the SEC.This ,ofcourse,is the result of the deregulation and privatization wave pushed by Milton Friedman and his University of Chicago allies during the Reagan administration, based on their incorrect Subjectivist ,Bayesian belief that there is no such thing as uncertainty,only risk.There is only risk that can be calculated and insured against by using VAR models.Risk can always be represented by the standard deviation of a normal probabiltiy distribution even though no University of Chicago economist ever did a single goodness of fit test to chack and see if the time series data actually fit the normal distribution
Zandi also is correct in emphasizing the connections between speculative banker behavior and the constant attempt by the private profit maximizing banking industry to apply securitization to all types of debts(credit card debt ,car loans,etc.),and not just home mortgages.
I have deducted 1/2 of a star because Zandi does not provide the reader with a beginning chapter that provides a historical overview of what is in fact a constant and recurring problem in American and World history-speculative behavior by the private commercial banking system that systematically creates a series of bubbles that inevitably leads to manias,panics,and crashes that create inflationary,deflationary,or stagflationary problems that negatively impact hundreds of millions of people worldwide.Bernanke's decision to try and save the big Wall Street banks has led to a severe case of stagflation,collapse of the dollar,and bubbles in commodity prices and oil.These costs are borne by the consumer.
Adam Smith had already arrived at the solution in his the Wealth of Nations(WN) back in 1776.Smith carefully examined the commercial banking industry on pp.250-340 of the WN.His conclusion was that there had to be an independent central bank that would enforce a policy of credit restriction against the member banks.They would be required to maintain low fixed rates of interest in the long run and be prohibited from making loans to projectors(J M Keynes's speculators and rentiers),imprudent risk takers,and prodigals(see Smith,pp.339-340,Modern Library(Cannan) edition)
Another problem I have is Zandi's reference to "..what economists call the ' animal spirits' of investors and entrepreneurs"(2008,p.2,p.243).Actually,there is realy only one economist who has emphasized the problems of pessimism and optimism in the financial markets when using the term 'animal spirits' and that economist's name is J M Keynes.Keynes's use of the term occurs in chapter 12 of the GT(General Theory,1936)and is used to complement his analysis of the impact of uncertainty(Ellsberg's ambiguity)on stock market outcomes, as opposed to the risk concept overwhelmingly used by the economics profession.It would have been a good idea for Zandi to have made it clear to the reader exactly who, historically,is the individual who recognized and emphasized the importance of this variable,especialy when connected to the extremely important uncertainty versus risk conflict. I recommend that this book be purchased along with the much earlier exposition made by Warren Brussee on the sub prime loan mortgage fiasco in his 2004 book that is,unfortunately,mistitled.
Very interesting September 24, 2008
Alice in Wonderland
5 out of 5 found this review helpful
The present financial crisis seems to never stop echoing and reechoing through the American, and indeed world, economy. But, what really happened? In this book, author and economist Mark Zandi, takes an in-depth look at what happened, how and why.
Now, I did find this to be a very interesting book, one that really opened my eyes on what has been going on, and what is still going on. Admittedly, towards the middle, the book got a little too technical for me, but one cannot look at a problem as broad and deep as this without getting technical somewhere along the line.
If you want to understand how we got to where we are, and what steps we need to take, then you really must read this book. I do recommend it to everyone.
(Review of Financial Shock: A 360 Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis)
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