Thursday, January 01, 2009

Financial Shock by Mark Zandi

Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis (Hardcover)

by Mark Zandi (Author)

If you are looking for a book that explains what happened in 2008 related to mortgage mess, this is the book to read.

Mark Zandi is someone you have probably listened on radio. His commentaries are heard on NPR financial programs. So, when I chanced upon a book written by him, I went ahead and read it. I was not disappointed.

Over last few months, we all have read different pieces about recent financial crisis in all sorts of news papers, magazines etc. Wouldn't it be nice if someone could piece all that information together and present a coherent view so that we can follow it more easily? That's exactly what this book does.

After reading this book, you may say 'oh, this was all that was there to this mess.'  Yes, that won't be a surprise at all. That's where the author really shines out. He makes things so simple that you will understand how this whole mess evolved. Simple story is this - there was a lot of free money (due to low interest rates). So, people had to put money somewhere. Tech bubble had just burst in year 2000. So, people were looking for some other place to park their money. Real estate is where they decided to gamble this time. So, money was lent to all those who everyone knew were not in a position to pay back. So, lenders devised interesting schemes. People who created the bubble, in my opinion, knew about the risks of defaults from many people very well. So, they did not want to hold those loans. So, they packaged those loans into pools which contained some good loans and some bad loans. They sold these packaged loans to others. They created packages of packages and sold to others and so on. So, it was like a hot potato that nobody wanted to hold for too long. It was fun as long as there were people who were willing to catch the hot potato. When the borrowers started to actually default on their loans, there were nobody to pass on the hot potato to. So, markets started declining.

Warren Buffet said it best -"it is only when the tide recedes, we will know who had no bathing suits." Borrowers starting to default was that moment and we caught several people with no bathing suits at all. These were the banks which we have had to bail out.

Great book.


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