Financial Shock: A 360 Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis: A 360 Degree Look at the Subprime Mortgage ... and How to Avoid the Next Financial Crisis

283 Pages·2008·1.87 MB·English

by  Mark Zandi

F I N A N C I A L
SHOCK
This page intentionally left blank
F I N A N C I A L
SHOCK
A 360º Look at the Subprime Mortgage Implosion,
and How to Avoid the Next Financial Crisis
MARK ZANDI
Vice President, Publisher: Tim Moore
Associate Publisher and Director of Marketing: Amy Neidlinger
Executive Editor: Jim Boyd
Editorial Assistant: Heather Luciano
Development Editor: Russ Hall
Digital Marketing Manager: Julie Phifer
Publicity Manager: Laura Czaja
Assistant Marketing Manager: Megan Colvin
Marketing Assistant: Brandon Smith
Cover Designer: Chuti Prasertsith
Operations Manager: Gina Kanouse
Managing Editor: Kristy Hart
Project Editor: Chelsey Marti
Copy Editor: Krista Hansing Editorial Services
Proofreader: Water Crest Publishing, Inc.
Indexer: Lisa Stumpf
Compositor: Jake McFarland
Manufacturing Buyer: Dan Uhrig
©2009 by Pearson Education, Inc.
Publishing as FT Press
Upper Saddle River, New Jersey 07458
FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases
or special sales. For more information, please contact U.S. Corporate and Government Sales,
1-800-382-3419, [email protected]. For sales outside the U.S., please contact
International Sales at [email protected].
Company and product names mentioned herein are the trademarks or registered trademarks
of their respective owners.
All rights reserved. No part of this book may be reproduced, in any form or by any means,
without permission in writing from the publisher.
Printed in the United States of America
First Printing July 2008
ISBN-10: 0-13-714290-0
ISBN-13: 978-0-13-714290-3
Pearson Education LTD.
Pearson Education Australia PTY, Limited.
Pearson Education Singapore, Pte. Ltd.
Pearson Education North Asia, Ltd.
Pearson Education Canada, Ltd.
Pearson Educatión de Mexico, S.A. de C.V.
Pearson Education—Japan
Pearson Education Malaysia, Pte. Ltd.
Library of Congress Cataloging-in-Publication Data
Zandi, Mark M.
Financial shock : a 360°look at the subprime mortgage implosion, and how to avoid the next
financial crisis / Mark Zandi.
p. cm.
ISBN 0-13-714290-0 (hardback : alk. paper) 1. Mortgage loans—United States. 2. Hous-
ing—United States—Finance. I. Title.
HG2040.5.U5Z36 2009
332.7’220973—dc22
2008024348
For Ava, Bill, Anna, and Lily
This page intentionally left blank
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . .1
Chapter 1: Subprime Précis . . . . . . . . . . . . . . . . . . . . . .9
Chapter 2: Sizing Up Subprime . . . . . . . . . . . . . . . . . .29
Chapter 3: Everyone Should Own a Home . . . . . . . . .45
Chapter 4: Chairman Greenspan Counts on
Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Chapter 5: Global Money Men Want a Piece . . . . . . . .79
Chapter 6: Bad Lenders Drive Out the Good . . . . . . .95
Chapter 7: Financial Engineers and
Their Creations . . . . . . . . . . . . . . . . . . . . .111
Chapter 8: Home Builders Run Aground . . . . . . . . . .129
Chapter 9: As the Regulatory Cycle Turns . . . . . . . . .143
Chapter 10: Boom, Bubble, Bust, and Crash . . . . . . . .159
Chapter 11: Credit Crunch . . . . . . . . . . . . . . . . . . . . . .173
Chapter 12: Timid Policymakers Turn Bold . . . . . . . . .191
Chapter 13: Economic Fallout . . . . . . . . . . . . . . . . . . .213
Chapter 14: Back to the Future . . . . . . . . . . . . . . . . . .229
Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . .245
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . .259
Acknowledgments
This book would not have been possible without the support and
help of a number of people.
Paul Getman, my friend, business partner, and sounding board
for a quarter century, has been instrumental in guiding me through
the tricky parts of putting this work together. He taught me the basics
of banking back in the 1980s when it wasn’t taught in graduate school.
His insights have been key to guiding my thinking on the topics
addressed in this book.
Andy Cassel also deserves a substantial amount of credit for his
tireless efforts turning my prosaic prose into something hopefully
worth reading.
I had invaluable help from Zoltan Pozsar who culled through
endless reports and documents and hunted down the most arcane of
information. His enthusiasm and interest in the topic made my job
much more interesting.
I would also like to thank Jim Boyd, my editor, who gave me very
kind encouragement throughout the entire process. His cool
demeanor was important to keeping my cool.
To my father, and my brothers and sister, Richard, Karl, Peter,
and Meriam. My father has been the proverbial, loving pain in the
side, cajoling me to write a book; I surely wouldn’t have done it other-
wise. I haven’t lived with my brothers and sisters for almost thirty
years, but I think of them every day, and their influence is enduring.
Finally, I must acknowledge my dear wife and children. Their
love and patience is key to anything I’m able to accomplish.
About the Author
Mark Zandi is Chief Economist and co-founder of Moody’s
Economy.com, Inc., where he directs the firm’s research and consult-
ing activities. Moody’s Economy.com is an independent subsidiary of
the Moody’s Corporation and provides economic research and con-
sulting services to global businesses, governments and other institu-
tions. His research interests include macroeconomic and financial
economics, and his recent areas of research include an assessment of
the economic impacts of various tax and government spending poli-
cies, the incorporation of economic information into credit risk analy-
sis, and an assessment of the appropriate policy response to real
estate and stock market bubbles. He received his PhD from the Uni-
versity of Pennsylvania, where he did his PhD research with Gerard
Adams and Nobel Laureate Lawrence Klein, and his BS degree from
the Wharton School at the University of Pennsylvania.