Saturday, February 20, 2010

Book Review: The Sellout

The Sellout Charles Gasparino's account of the credit crisis.

Gasparino begins with the origins of the crisis and neatly chronicles the unfolding of events through to the collapse of Bear Sterns, Lehman Brothers, Fannie Mae, Freddie Mac and AIG and the near collapse of Merrill Lynch and others. Along the way he identifies the causes of the problem:

1. political policies designed to encourage home ownership with no real thought given as to the consequences of those policies

2. inept regulators who either didn't know what they were doing or who made some seriously bad judgement calls (or both)

3. bankers driven by short term profits, with no regard for either the risks being taken or even how to sensibly measure those risks

4. credit rating agencies who were essentially paid to certify that sub-prime mortgages where as good as Treasureies

5. mortgage originators who neither knew nor cared whether people could actually afford the debt they were taking on

6. borrowers who took on more debt than they could realistically afford

Very few of the main characters appearing in the story emerge with much credit. Of the institutional CEOs, Jamie Dimon and Leon Fink are possibly the only exceptions.

Perhaps the most damming indictment of the whole process was all the CEOs who thought that leveraging their equity 30 times using mostly short term financing to invest in long term illiquid instruments concentrated in one sector of the economy was anything other than moronic. Even without the recent example of LTCM (and other examples before that), it does not take a rocket scientist to figure out that it is only a matter of time before they get into serious trouble.

Very well written and well worth a read.

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