(1) "Good question, Ma'am" | The Financial Times | 14 Nov 2008
Alan Beattie explains the financial crisis to Her Majesty, The Queen of England, who apparently asked, “If these things were so large, how come everyone missed them?”
One of the best outline sketches of the forces affecting meltdown ...
House buyers took the view that as long as someone was prepared to lend them money, things would be OK. The mortgage lenders reckoned that as long as they could package up the mortgages as newfangled financial derivatives (it’s a long story, Ma’am) and sell them on, that would be fine. The financial institutions surmised that as long as the credit ratings agencies were giving the derivatives their seal of approval, everything would be dandy. The credit ratings agencies thought – actually, it is pretty hard to work out what in God’s name the credit ratings agencies were thinking, except that as long as their rivals were giving these assets the thumbs-up, they had better do so as well.
Two Books ...
(2) Panic: The Story of Modern Financial Insanity | by Michael Lewis | WW Norton
Michael presents Panic as the bookend to his maiden voyage, Liar's Poker, an inside job from his vantage at Solomon Brothers about hubris on Wall Street in the late 1980s'. Panic is among the clearest and most successful journalistic pieces in explaining what the CDO & CDS market participants -- the people -- have been doing, their intentions, their objectives & their attitudes.
As a side-note, read Micheal's funny piece in Conde Nast Portfolio, about the Americans' propensity to take on too much house.
And his other funny piece in the same venue about lunch with Gutfreund ... the man whose career Micheal ended when he published Liar's Poker ... "The End" | Micheal Lewis | Dec 2008
(3) Mr Market Miscalculates: The Bubble Years & Beyond | by James Grant | Axios Press
James Grant is Da Man at Grant's Interest Rate Observer, the wonderfully entertaining and insightful brief on the financial markets.
Review of Mr Market in the FT by John Authers | 23 Nov 2008
Of most interest will be the chapters entitled “Mr Market Buys a House” and “Mortgage Science Projects”. His prescience is alarming. In August 2001, when many were preoccupied by the fall-out from the tech boom and the risk of deflation, he devoted a column warning that US house prices were up 8.8 per cent from a year earlier. “What could explain a bull market in a non-earning asset in a non-inflationary era?” he asked. “Ample credit is the first answer, low interest rates the second. An overly narrow definition of ‘inflation’ is the third.”
He also warned that Fannie Mae and Freddie Mac had extended their lending by more than 12 per cent over the preceding year and that Americans owed 45 per cent of the value of their homes, up from 14 per cent after the war. To end the column, he disparaged comments by Alan Greenspan, then the chairman of the Fed, that rising house prices were “a very important contributor to the American economy”, warned against the “day trading of houses” and said that “the American house market can be described as speculative”. This is exactly what we should have been worrying about in the summer of 2001.