The 2008 Financial Crisis: A History of US Financial Markets 2000-2012. 2021. Barrie A. Wigmore. Cambridge University Press.
Barrie Wigmore looks at an extremely complex subject, the 2008 financial crisis, with a wide-ranging and in-depth analysis. He brings a richly experienced point of view, based on working “in the trenches” as an investment banker for several cycles.
For Wigmore, the shocking levels of leverage sounded the main alarm about the growing crisis. This was most dramatically represented by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) which operated with leverage of 100 to 1. These government-sponsored companies were to make subprime loans and have a private residential mortgage. protected securities (RMBS) because the U.S. Department of Housing and Urban Development (HUD) had mandated that these institutions increase the number of low-income homeowners beginning with the Community Reinvestment Act in 1992.
In November 2004, HUD established additional low-income lending targets for Fannie Mae and Freddie Mac. Fannie Mae exceeded these aggressive targets in 2005 and again in 2006. At this point in the narrative, the author tells the story in such an exciting way that you can smell the credit danger lurking in the round the corner Not only do subprime borrowers represent a disturbingly high percentage of total borrowers, but Wigmore also presents startling data directly from Fannie Mae’s “loan book” cited in its 2006 10-K. The data suggested that both Fannie Mae and Freddie Mac was exposed, beyond HUD’s mandates, to the weaker credit sectors.
While this was happening, state and local government pension funds, insurance companies, and commercial and investment banking intermediaries that serviced Fannie Mae and Freddie Mac continued to fund them despite their information resources unlimited, their attention to the financial markets and their own shares in the result. There was also the parallel challenge of seeking higher investment returns in a declining interest rate environment, not only for retail investors but also for institutional investors, the so-called smart money. this stretch for performance is presented in Table 2.5, which summarizes in simple terms the $11 trillion apocalypse to come.
Wigmore forcefully presents the scene of the crisis. It started visibly in the second half of 2007, with housing prices leveling off after huge runs in places like Los Angeles, Phoenix and Las Vegas. The US Federal Reserve noted that the ability to service consumer debt was deteriorating from traditional levels, even with the low interest rates prevailing at the time. Consumer debt rose from 15% to 22% of net worth between 2000 and 2007, largely due to growth in residential mortgage debt. However, the Fed did not show any major concerns at the time, believing that consumer strength would support a further increase in consumer spending.
Subprime mortgages were starting to die at high rates. The value of asset-backed securities and private RMBS collapsed. Mortgage originators with heavy subprime exposure, such as New Century and Fremont General, lost their lenders. Countrywide Financial, IndyMac and Washington Mutual faced unprecedented disruptions. Their published balance sheets did not follow the rapid deterioration in the quality of their loans.
The institutional collapses that occurred had a common narrative: extreme leverage; complicated, if not inexplicable, balances in real time; and poor quality assets, in the case of investors, or liabilities, in the case of lenders. The author methodically explains the collapses, with numerous graphs to emphasize the severity of the strains, both individually and system-wide.
In the chapter titled “Epilogue 2012-2016,” Wigmore cites many instructive indicators of economic and market recovery. The recovery in security markets preceded the recovery in the economy, according to the expected recovery in earnings forecasts for the S&P 500. In 2012, equity valuations were stretched in a way never before view, as the S&P 500 dividend yield and the 10-year Treasury rate converged for the first time since 1957. Home prices and commercial real estate sales rebounded. Consumer confidence increased. Federal debt to GDP was still high; however, the Fed’s balance sheet was huge, interest rates were artificially low, and the status of Fannie Mae and Freddie Mac remained to be determined.
Upon reading this masterful book, I was initially impressed by its structure to address such a complex moment in history. It analyzes the market and the economic environment before the crisis, during the crisis and in the years after. The book delves into institutions and values. The author separates opinion from fact, based on extrapolation from actual reported numbers. I found it impressive that he used the analyst’s most reliable original sources, corporate 10-K and 10-Q. Well-rendered graphs and tables help the analytical narrative. Wigmore cites Federal Reserve (FRED) economic data frequently and appropriately.
The financial crisis of 2008 it is essential reading for leadership in banking, investment and insurance companies, but also for investors, analysts, economists and students of financial and investment history. It represents how widespread risk-taking at the enterprise level can turn into a near system-wide collapse and how the mantra of home ownership for all must be seen in the light of the associated financial risks and the undisciplined creation of asset-backed securities. The book is required reading for a generation.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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