I just finished The Sellout, a present from my brother. A while back my brother gave me a William F. Buckley book entitled “Brothers No More,” which has to be the funniest gift one brother could give another. (I hope) this title wasn’t directed at me, even though I’d have a hard time defending myself entirely from the title, but I digress…
I have to admit I never really understood the mortgage crisis in any detail or what really happened. The Sellout is long but incredibly well written, and it boils down what happened from the initial expansion of risk taking on Wall Street 30 years ago. I’ll provide a miserable summary to prove that I actually read the book, and to remind myself of how this complete cluster-cuss occurred.
- Investment banks have fled from from customer service to making market bets because of massive bonus potential on the upside, and little downside on losses.
- A financial crisis surrounding high risk mortgage investment, just at a smaller scale, but with basically the same root causes, occurred twice in the last 30 years.
- The fundamental belief that housing prices never decrease served as the basis for risk models for mortgage investment
- More and more complex schemes around mortgage investment (read the book) allowed investors to “bet” on whether people would pay their mortgage
- HUD, in a desire to open housing to those who couldn’t really qualify and afford it, encouraged Fannie and Freddie to guarantee more and more high risk mortgages
- The rating agencies were Wall Street whores who gave AAA ratings to anything and everything, and the bond insurers (AIG, etc) did near-zero due diligence to really understand what they were backing.
- The SEC completely failed to show concern or take action on the massive amount of leverage
- The Fed kept interest rates low which drove investors to borrow more to make bigger and riskier bets
- Graham-Leach-Bliley was passed, allowing a bank to be a commercial and investment back, allowing banks to wager their own customer’s deposits to purchase high risk mortgages.
- Eventually, the housing market dipped, and the house of cards began to collapse, putting every bank at risk because they held so much bad debt, and the system began to tumble.
- The bailout was necessary (or at least very likely) or we might have seen a collapse of systemic proportions, thanks to the hubris and greed of the investment banking leadership on Wall Street.
I enjoyed this book enough that I think I’m going to finally read all those financial non-fiction classics that I avoided like Liar’s Poker and Barbarians at the Gate.