In this book, the author focuses on the activities of a small group of people, in many ways eccentric amateurs, and initially totally unknown figures to the ‘big beasts’ in the rarified world of investment banking, who foretold the crash of the US mortgage bond market that was the start of world-wide financial turmoil in 2008, and in so doing profited greatly. By a huge amount of tedious work, reading boring, jargon-heavy literature put out by the banks and other financial institutions, they realized that there was a massive fraud being perpetrated on investors in this bond market, an area that had rapidly come to hugely outstrip the traditional equity market. The first part of the conspiracy was to lend billions of dollars to house buyers who clearly did not have the means to meet the payments in the long term. These were the notorious ‘subprime mortgages’. The banks were then packaging these mortgages into financial instruments called ‘collateral debt obligations’ (CDOs) and persuading the rating agencies to give 80% of them a triple-A rating on the basis that the CDO contained a few low-risk loans. They could then be sold to eager buyers worldwide and earn the bank substantial fees.
But it didn’t end there. Those that failed to get the desired rating were simply repackaged, so that all these dubious products were eventually classed as ‘risk free’. This was the second part of the conspiracy and a huge failure by the rating agencies (who were paid by the banks). They failed to examine in detail the structure of a given CDO, but simply accepted the bank’s assessment. The situation rapidly spiraled out of control. A CDO-A might contain some of the mortgages in CDO-B that in turn might contain some of the mortgages in CDO-C, and the latter might even contain some mortgages that were in CDO-A. This was an Alice in Wonderland world where it was impossible to give a true value of any CDO, and its worth was what the bank said it was worth. Even the senior staff at the banks that were selling the CDOs didn’t have a full understanding of what was happening.
This is where the outsiders entered. First they realized that the original loans were often being made to people without asking for proof of income (‘liars’ loans’) and that the home owner was offered a low interest rate (the ‘teaser’ rate) initially, typically for the first two or three years. They argued that after this period expired there would be a high probability that the owner would default and, crucially, that this would happen to the vast majority of loans within any given CDO, because they would all be unable to pay for the same social reasons. The banks, however, had risk models that only considered a worse case scenario of just a few percent failures. If they could take out insurance, via what were called ‘credit default swaps’ (CDSs), against a failure of a CDO, they argued that they would only have to wait a couple of years or so before the low-rate period expired and the insurance would have to pay out. Throughout they remained worried that they had missed something, because the logic seemed so obvious, they couldn’t understand why the banks themselves had not seen it. Eventually they did of course, and much later started to cynically (even corruptly?) bet that the very bonds that they had issued would fail.
Initially, the outsiders had hurdles to overcome. They had difficulty finding any bank that would sell CDSs to them because they were mere minnows with only small funds. However, these hurdles were overcome and to some amusement of the banks they started to accumulate substantial positions in ‘bets’ that the CDOs would fail, and at only a small cost in premiums. It was a nail-biting time because the price of CDOs continued to be stable, even sometimes rise, despite the increasing rate of defaults on the underlying loans. But the end, when it came, was very rapid, just as the outsiders had predicted. Indeed the losses were so great that they feared the big banks would themselves fail and so be unable to pay out on the CDSs. In great haste in the last stages of the collapse they scrambled to offload them and managed to get out before the final collapse.
The rest is history: several major bank collapsed; hundreds of billions of dollars were pumped into the system to keep others afloat; Congress stepped in and bought subprime mortgage assets for up to 2% of the US GDP; and senior bankers who had lost billions in the debacle were allowed to walk away with ‘bonuses’ of tens of millions of dollars. But the householders who had defaulted on their loans received nothing and were dispossessed.
What this sad story revealed was widespread cynicism in the financial industry, banks, rating agencies and regulatory bodies, bordering on corruption, and a remarkable lack of understanding of the fundamentals at the highest level in the banks. There have been many books about the causes of the financial crash of 2008, but few can match this one in the detailed knowledge of its author and the clarity of his presentation. There is some repetition in explaining technicalities, but this is acceptable. If the reader understands it first time these can easily be skipped over without loss of continuity. Overall it is an excellent book.
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Granskad i Storbritannien den 21 maj 2016Verifierat köp