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Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis | 
 enlarge | Author: Mark Zandi
Publisher: FT Press
Category: Book
List Price: $24.99
Buy New: $2.98
You Save: $22.01 (88%)
New (54) Used (48) from $2.40
Rating:  107 reviews
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
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
 An Incomplete Narrative June 10, 2010
M. A. Ramos (Florida USA)
As of the writing of this review the book is already out of date and a new edition has been published. I have not seen the revised edition but if the author leaves the credit rating agencies very important role in the run up to the crisis out the book will once again be incomplete. Having once worked on Wall Street I found the book easy to read but would not call it the definitive view of the cause of the finical crisis. Too much is left out in this small primer even discounting its early publication date.
Leaving the omission of assigning the responsibility due too the credit rating agencies, the author works for one, Dr. Zandi tries to write this in an objective tone tracing the beginning of this particular crisis to 1995 with the Clinton's Administration mandate that regulators require lenders to loan to people who could not afford the loans, This is what started this problem! Greed took over from there. And the author shares his opinions on the mistakes in judgment made by Greenspan's Federal Reserve.
Dr. Zandi leaves off on any narrative of the credit rating agencies because he works for one and implies he can not be objective in this area. Which means this book after the initial political decisions which forced lenders to start to make unqualified loans was made will not tell you how it was these very credit agencies that perpetuated and allowed the problem to grow as global large as it did. It is these very credit agencies who have contact with all the financial players and give the ratings to investment vehicles that is a major factor in investors decisions on whether or not to invest. Basically giving the sub-prime product bundles their higher than warranted ratings.
With the large and ever booming false market their needed to be a way for originating lenders to lay off what they knew were risky loans. And some investment bankers like Bear Stearns were glad to step up and make complex vehicles backed by highly overvalued asset backed securities and disseminate them throughout the world. After all it is what Wall Street is good at and the credit agencies where giving many of these products Aaa rating. With a Aaa rating and high returns who could not look at investing in this often complicated products. But once again the book lacks the understanding of those in the investment banking business and can only briefly touch on the subject and its role in this financial crisis.
Naively the author thinks that this kind of crisis can be avoided again by more regulation of the mortgage industry, to bring transparency and accountability to transactions, to invest in financial education in primary schools, and a discussion of the regulation requiring institutions to mark-to-market should be modified. On the last point he has solid ground even though he does not go into any substantial detail. By the time you finish reading this book you would have forgot what we started with and that is it was the regulators pushed by politicians that required lenders to loan to people who could not afford the loans that is at the heart of the problem.
 Barney Frank endorsed this. Hmm... October 20, 2009
Whittaker Holmes (Salt Lake City, UT USA)
3 out of 5 found this review helpful
You have to be very suspicious of any review of the subprime financial collapse that is endorsed by Barney Frank.
Subprime expose October 15, 2009
Terry Sanders (NYC, NY USA)
A reasonably clear explanation of the subprime meltdown. No great revelations but provides a working knowledge of the successive stupidity & blind greed leading up to the inevitable disaster. Not exactly fast-paced, a little heavy on the jargon.
 Tells a lot of things. September 25, 2009
Chen Chi Yen (Taipei, Taiwan Taiwan)
As most of the people who want to read about the topics suspect, there are multiple levels of players in the event on so many stages of this turmoil - start from realestate builder constrction plan, to the other end of someone in the EU or even Asia buying the securites.
This books brings you to each level of the chain, points to statistics telling you what results happened, and what are the indicator numbers make the author think which is the major cause of it and how that is builded up over time before and during the crisis. Solid number from statics is better convincing to me than just directly pointing to some businesses and start to blame their greedy or fraud.
The author's answer might not be truly complete and what are the main causes may be subjective, but the best part of this book is - it gives you more facts in statistics, sequentially in each stage and aspect of the trade flow, so you can make your own judgement.
The best reference so far on the subprime financial crisis. July 9, 2009
Gaetan Lion
1 out of 1 found this review helpful
I read excellent books on the subject including: The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, The World Is Curved: Hidden Dangers to the Global Economy, and Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics) and OK ones: The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It and The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy (Vintage). Among those books, Zandi's is near the top. He supports his analysis well with data and related tables and graphs. This renders his arguments convincing and easy to follow.
Zandi elegantly ignores his conflict of interest with his employer Moody's. He states on page 7: "In 2005, the company I co-founded was purchased by Moody's... To avoid any appearance of a conflict of interest, I have no choice but to leave discussion of this facet [rating agencies giving CDOs securities AAA ratings] of the subprime shock to others." But, he ignores this statement on page 19, and states bluntly "the rating agencies badly misjudged the risks... [their] models were not up to the task they were asked to perform."
Zandi explains well complicated concepts such as the structure of MBS and also CDOs that were created out of MBS tranches. Thus, no one could value CDOs since their value depended on the performance of tranches of other securities; And, this contributed to the meltdown of the financial system. Zandi also explains well the structure of Special Investment Vehicles (SIVs) and how their demise was associated with the collapse of the commercial paper market.
Zandi discloses that toxic assets (jumbo ARM, Alt-A, and Subprime loans) had grown from $750 billion to $2.5 trillion between 2003 and 2007. Private label securitization and foreigners purchase of U.S. securities grew in tandem during this period. Thus the risk of toxic CDOs rapidly spread worldwide.
Zandi does not really suggests monetary policy was responsible for the housing bubble. He mentions Greenspan kept Fed Funds rates low through 2003. But, Greenspan increased Fed Funds rates by 350 bp between early 2004 and early 2006. Yet, during this time housing prices ballooned. So, monetary policy is not the culprit.
Zandi uncovers the truer culprit of the housing crisis: deteriorating underwriting standards. The combination of 0% down, 1% teaser rates, and no income verification replaced prudent mortgage underwriting within the unregulated lending channels. This is where mortgage bankers originated loans, and Wall Street readily funded and securitized them into MBS and CDOs. Thanks to Moody's AAA ratings, Wall Street sold those CDOs worldwide. When home prices dropped, subprime borrowers who were already the most indebted could not refinance, foreclosures exploded, CDOs defaulted, and financial institutions worldwide needed bail outs.
Mortgage underwriting, mainly through the unregulated private channels, became a fast race to the bottom were the mortgage broker offering the lowest rate and most lenient terms won. Similarly, bad lenders drove good lenders out. Sound credit risk management was thrown out the window as it would result in loss of market share. Zandi made an excellent map of the traditional banking system (portfolio lending) vs the shadow banking system (securitization) on page 121. This demarcation is also between the good regulated lender vs the bad unregulated ones.
Zandi criticizes Greenspan for not endorsing regulation to curb subprime lending. Greenspan did not think any private party would have incentive to make bad loans. But, as Zandi states: "Securitization undermined this incentive for responsibility. No one had enough financial skin in the performance of any single loan to care whether it was good or not." Yet, securitization was strongly supported by bank regulators worldwide as they perceived that it allowed to transfer credit risk from banks onto private investors. The Basel Accord even assessed very favorable risk weighting for MBS and CDOs. So, banks had an incentive to sell their mortgage and buy them back in the form of such securities. But, world regulators underestimated the counterparty and systemic risk associated with those securities (MBS, CDOs).
After Greenspan left office, Bernanke and other regulators implemented regulations to curtail subprime lending in June 2007. But, they were five years behind the time. Subprime lending had already done its damage, and had imploded as the housing bubble burst in 2006. The financial system already suffered losses in excess of $1 trillion from their booked business (banks $475 billion, insurance & pension funds $275 billion, hedge funds $200 billion). Those huge losses were due to mark-to-market write downs on MBS and CDOs. Zandi describes how mark-to-market valuation broke down in the absence of any active markets (no trading).
The magnitude of the subprime financial shock was only second to the Great Depression. As a result, Wall Street as we knew it entirely disappeared (Bear Stearns, Lehman, Merrill are gone; Morgan Stanley and Goldman Sachs converted to commercial bank charters). The stock market will lose half its value. Homes will lose over 30% of theirs. Credit risk premium rose dramatically during 2008, and rose higher than during 9/11, Y2K, the [...] crash, and the failure of Long Term Capital Management. Financing sources for investment banks (liquidity) dried up causing their rapid demise mentioned above.
Zandi gives good grades to related Government policies. He is impressed by the Fed's unprecedented response, creating huge credit facilities available to all financial intermediaries, to fend off the credit market freeze. He also approves of the Bush Administration $168 billion fiscal stimulus in February 2008 and $700 billion fiscal stimulus in September 2008. In the last chapters Zandi makes recommendations to update financial regulations and shore up the financial system and preempt any upcoming bubbles. Those are in line with the proposals instigated by Tim Geithner, Secretary of the Treasury.
All around this is the most thorough and consistent book I have read so far on the current financial crisis.
Showing reviews 1-5 of 107
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