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| The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash | 
 enlarge | Author: Charles R. Morris
Publisher: PublicAffairs
Category: Book
List Price: $22.95
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Avg. Customer Rating:  72 reviews
Sales Rank: 573
Media: Hardcover
Number Of Items: 1
Pages: 224
Shipping Weight (lbs): 0.8
Dimensions (in): 8.3 x 5.8 x 0.9
ISBN: 1586485636
Dewey Decimal Number: 332.04150973
EAN: 9781586485634
ASIN: 1586485636
Publication Date: March 3, 2008
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| Customer Reviews:
 Lucid explanation of the subprime mortgage crisis April 18, 2008
18 out of 19 found this review helpful
In this excellent, highly readable book, Charles R. Morris combines legal and financial experience with literary craft. No ideologue, no partisan and certainly no salesman, Morris traces the roots of the 2007-2008 mortgage securities crisis to its distant origins in the 1970s. He argues that policy missteps under the Nixon, Ford and Carter administrations, when Arthur Burns chaired the Federal Reserve, led to dollar debasement. He contends that the decline of America's currency and its business sector at that time led in turn to the Reagan administration's zeal for deregulation and Chicago-school economics. He details his belief that Alan Greenspan's policies took America from a relatively healthy financial status to a position perhaps as dire as in the late 1970s. Morris also reveals the privileges enjoyed by an out-of-control financial services system. getAbstract found this to be a trenchant and provocative read.
 Funny, the author used to think quite differently.... March 25, 2008
17 out of 47 found this review helpful
In one of his previous books, "The Coming Global Boom," Mr. Morris led the "everybody's gonna get rich" charge. That charge led to the stampede of people lining their pockets and has brought us directly to the crisis he discusses here. I'm simplifying, of course, but really, Mr. Morris: don't say "I told you so" when you were saying "c'mon, everybody!" not too long ago.
The Perils of Unregulated Finance May 6, 2008
17 out of 18 found this review helpful
As a lawyer and former investment banker, Charles Morris can appreciate the power of free-market capitalism to drive economic growth and financial innovation. Now, however, he believes the era of market fundamentalism has come to an end, just as Keynesian interventionism came to an end in the 1970s. He estimates conservatively that the recent writedowns and defaults of residential mortgages, corporate debt, credit card debt, and bonds will be about $1 trillion. But this book was written before even more recent revelations such as the Bear Sterns insolvency. It is now estimated that the bill could be 3 or 4 times as high.
Morris gives a brief but excellent history of events that led up to the current credit crunch that is paralyzing global financial markets. Disasters have many fathers, but Morris lays much of the blame on bond rating agencies, financial insurance companies and the Federal Reserve under Alan Greenspan. After 9/11 the Federal Reserve lowered the interest rates below the rate of inflation, essentially giving banks free money. Banks then lent money for fees up front and then repackaged the loans - turned them into securitized debt - and sold them to investors. It was basically cost free and risk free, so they lent money as if there was no tomorrow.
These securitized debts or CDOs (collaterilized debt obligations) were sold and resold throughout the global financial system and no longer did anyone know how to measure their value or their risk.
Add to this the fact that homeowners were using the rising equity of their homes as atms and pumping another $4 trillion into the economy.
Also add to the mix $700 billion annual trade deficit that indicates that much more consumption over production. The party was really in full swing.
But the party couldn't last forever. The bubble started to deflate last summer when housing prices began to fall and homeowners began to default on their mortgages. The government initially thought it was just a typical market adjustment, but with the imminent collapse of Bear Stearns they finally took decisive action. Bear Stearns was holding $46 billion worth of securitized mortgages with an estimated value of 30 cents on the dollar.
As the crisis has been unfolding, it has been estimated that the federal government has authorized about $1 trillion in new lending through agencies such as Fannie Mae, Freddie Mac, Federal Housing Finance Board, and the Federal Reserve. This was done solely to keep the economy afloat. But no one knows yet where this will end. Massive infusions of money will lead to a weaker dollar, as we have already seen. A weaker dollar against the background of rising oil and food prices tells us the crisis is far from over.
Morris does not tell us exactly how we will get out of this mess, but he is sure that in the end a new system of financial regulation will be in place.
CDS, SIVs , HF , $5 - $10 trillion swings in the derivatives market , Hard landings September 1, 2008
16 out of 20 found this review helpful
1. In June 2007, Two Bear Stearns hedge funds that invested primary in mortgage backed bonds announce they were in trouble meeting margin calls. The real estate bust was in progress and the high leverage funds were in trouble, value dropping from indices of 100 to 90. American sub-prime was global and blue chip financial companies admit big losses: Nomura, Royal Bank of Scottland, Lehman Bros, Credit Suise, Deutschebank, France BNP Paribas, IKB, and Caliber and Bank of England had to bail out North Rock..
2. In addition to the Consolidated Debt Obligations there existed a Structured Investment Vehicles (SIVs) financial structure, run within, but separated from the major money center banks. SIVs aer typically Cayman Island limited partnerships that collect bundles of bank loans or other securities. They are convenient for moving assets off bank's balance sheet and apparently have substantial holdings of commercial and residential mortgages and mortgage back securities. Banks chose to finance SIVs with inexpensive ABCP short-term maturities (money market fund) rather than maturity debt. Total asset backed commercial paper outstandings was about $1.2 trillion.
3. November 2007, SIV approached a state of chaos. Outstanding interbank commercial paper balances had dropped below $900 billion, with most of the fallout due to refusal to refinance SIVs, leaving banks potentially on the hook to supply more than $300 billion of risky and unexpected financing. At Citi, the lending to its own SIV was more than three times higher than its net new global consumer lending. Citi and other American banks with cooperation of the Treasury are working to organize a super-SIV to take $75 to $100 billion in SIV loans off their books.
4. Citigroup revealed it managed $400 billion in off-balance entries called long term SIVs loans. Almost all the SIV loads were financed by short-term paper. When the London money markets realized what the banks were doing, commercial paper sales came to a grinding halt. Bank shareholders discovered that SIVs weren't really off-balance sheet, since the banks had usually promised to take them back if they couldn't raise short-term financing.
5. October 2007, big banks and investment banks reported $20 billion in losses, $11 billion of it at Citi and Merrill, primarily in subprime-based CDOs with revised to $45 billion in losses. Citi received a $7.5 capital infusion from Abu Dhabi in the form of a convertible bond, a 11 percent interest coupon.
6. Derivatives are futures, forwards, options, and swaps. Derivatives reduce risk for one party. Derivatives hedge against the future, invest small now for the option to buying later. Derivatives are contracts based on or derived from some underlying asset, reference rate (interest rates or exchange rates), or indexes
7. Derivatives can be based on assets such as commodities, bonds, interest rates, exchange rates, stock market index, and consumer price index. Derivatives allow investors to make massive money by leveraging on small movements in price. In derivatives someone losses money while someone gains money, a supposed zero sum game.
8. One very popular derivate was the Credit Default Swap (CDS). If I am a fund manager with a risky subprime mortgage portfolio that I'd like to get off my books. I could try to sell it, but it would be easier to enter into a credit default swap (CDS) on the ABX. In Oct 2007, a midcredit "A" swap was trading at 60, down from a par of 100, down 40 cents on the dollar. What does it cost? I pay the counterparty $4 million to take the risk for the $10 million CDO portfolio. The result is I've crystallized my worries into a single payment, taken a $4 million hit, and no longer have subprime exposure.
9. Hedge fund raise cash by selling equity in the form of partnership shares. For every $1 invested from its partnership equity, HF invest $4 borrowed from its banks, equity investments are leverage 5:1. HF buys $100 million in first-loss bonds, underpinning a $2 billion CDO, 20:1 leveraging. The $100 million is financed with $20 million in equity and $80 billion from the bank. HF partners are leveraged 5X20=100:1. A loss of 1 percent on the CDO wipes out all HF partner equity. A potential loss of $20 million per percent drop.
9. Portfolios covered by default credit default swaps contracts ballooned from about $1 trillion in 2001 to about $45 million in mid-2007. CDS are private deals arranged for a fee by broker-dealer banks.
10. Banks are on the hook to make good losses on some $18.2 trillion of portfolios, while credit hedge funds have guaranteed some $14.5 trillion. Most funds can not survive even a 1 percent to 2 percent payoff demand on their default swap guarantees. Banks and investment banks carry large swathes of risky loans and investments because they have default insurance. Poor design, these companies do not carry bad debt reserves against the possibility of failure.
11. Additionally, at risk was the larger $43 trillion CDS insurance market for which Bear Stearn insured $13.4 trillion and the $150 trillion bond market and the $500 trillion derivatives market.
12. A hard landing predicted in 2009. $350 billion in subprime and other risky residential mortgages will be reset, many at punishing rates. Defaults will rise sharply. Two million people could loss their homes. House prices will continue to fall, 10 - 30 percent. Many consumers will be stuck in upside-down mortgages. The $9 trillions in home equity withdrawn is no long sustainable. Dollar decline will make commodity prices higher. US oil exports will rise and pass through dollar decline. A decline in credit availability will feed into the downward momentum.
13. Hardlanding started in 2008 and economic losses are expected to continue with more defaults and writedowns. The writedowns are a measure of the yield for holding such risky instruments. The billions in writedowns will negatively impact the economy. The Super-SIV structure floated by Citgroup and the Treasury looks like a blatant attempt to defer writedowns. Widespread collateral damage in hedge funds will trigger forced selling from margin accounts. Rolling bond downgrades will require divestures by pension funds and insurance companies that find themselves in violation of rules holding investment grade paper.
14. With notional derivative values in the $500 trillion range, rapid swings of $5 trillion to $10 trillion in derivative values are altogether plausible and could inflict enormous damage.
Less than expected May 4, 2008
14 out of 20 found this review helpful
If you have been following the press reports on the subprime crisis, and want to gain indepth knowledge on how it happened, you are probably not going to feel very satisfied after reading the book. It does highlight several major causes of the subprime crisis, such as the emergence of serious agency problems when the mortgage industry started to divide up into specialty businesses, so that the one who signed the mortgage contract with the home buyer is not the one who will own the mortgage and so on. It does provide some details on the financial instruments that were used to magnify the potential gains and actual losses of the subprime mortgages, such as an explanation of how Collaterized Mortgage Obligations were built and used (Chapter 4), and why hedge funds traded in credit default swaps. But that's about it. The book spent nearly half of its pages on historical events going back to the 1970s to describe the present and past macroeconomic environment, and then the last pages to propose policy measures to improve the national health care system.
I did not get to read about how attractive the business of securitizing and selling off mortgages was to commercial banks (e.g. was it like, since the capital is locked up for only one years instead of 20 years, the commercial banks were happy to securitize and sell off mortgages as long as the profit from each transaction is more than 1/20 of the profit from simple mortgage business?)Nor did I find out how investment banks could make profit from selling the CDO bonds to investors, when the creation of CDO bonds was said to have saved home buyers million dollars in mortgage interests, and when investment banks had to buy some of the toxic portions of a CDO. In other words, I was expecting to get a lot of details, but the book only delivered some.
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