Understanding the events that led to what might have become the greatest financial crisis in history.
Most of us won’t soon forget the financial crisis of 2008. Just like those who lived through the depression, we can still feel the shock of it and will live the rest of our lives with the fear that it might happen again.
Up through the beginning of that year, things were moving along so nicely — housing prices had climbed steadily since the 1990’s, so our real estate alone was making us richer. The Dow had hit a peak of 14,164 in October, 2007, up almost 85% from the March, 2003 close of 7,674. The money was just rolling in and it felt like there was no end in sight.
But then things turned very badly. Housing prices collapsed, fueling a steady decline in the Dow that finally reached bottom at 6,507 in March, 2009. For those in the stock market, more than half of their investments had been wiped out. For the first time in 26 years and only the second time since the Depression, unemployment was above 10%, and not would it fall below 5% until 2016.
Common wisdom tends to reduce things down to a few basic concepts. So the crisis has been over-simplified as having resulted from the repeal of Glass-Steagall banking regulations, Wall Street greed, and the practices of unscrupulous mortgage companies. This is all true. But so many more events were taking place, involving a much broader range of characters, that were just as critical — e.g., the housing policies under Clinton and Bush, Allen Greenspan’s policies, the pressure to create high-yield investment products regardless of quality, changes in the bond ratings practices of Moody’s and Standard and Poor’s, the role of Congress, and the greed on the part of consumers, who viewed buying real estate with no money as a good way to get rich quick.
We found our way out of this mess, due in no small part to the emergence of a couple of heroes — Hank Paulson, Ben Bernanke, Tim Geithner, among others. They understood we were on the verge of a world-wide collapse of the economic system, and had to come up with the solutions on the fly. Presidents Bush and Obama, who kept their heads and knew enough to keep out of the way.
It’s a good idea to know the details of what really went on because of having prior knowledge of potential dangers gives one a tactical advantage, or, as they say, forewarned is forearmed.
So, to arm yourself against future crises, here’s a number of books that are great reads on the subject. I’ve read them all, and while it’s scary to find out the actual path we were on in 2008, they do provide clarity and insight.
And they make you aware that it can happen again.
Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System — and Themselves. by Andrew Ross Sorkin
Sorkin’s story focuses only on the event itself, beginning with the Lehman Brothers debacle and ending with the distribution of TARP payments to the major financial institutions. He provides an in-depth behind-the-scenes look at the crisis as it was unfolding, moment by moment. Through his interviews, he reveals the motivations — the fear, the greed, and the self-preservation — of the most powerful people in finance and politics. The book reads like a thriller, which is probably why HBO thought it would be a great idea for a film.
On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Henry M. Paulson, Jr.
Hank Paulson served as the Secretary of the Treasury at the time, and was at the very center of the crashing financial markets. He provides a first-hand account of what was really happening, gives you a real sense of the impending doom that was felt, and the pressure they were under to come up with solutions. It’s an astounding story that covers the economic problems that had to be addressed while at the same time having to deal with the politics and the politicians who were involved.
The Courage to Act: A Memoir of a Crisis and Its Aftermath by Ben S. Bernanke
Ben Bernanke served as chair of the Federal Reserve from 2006 to 2014, and like Paulson, provides an insider’s account of the crisis. Bernanke’s writing is from the perspective of his office, and recounts the efforts of the Fed, working side by side with the Treasury Department, to come up with innovative programs and policies to save and ultimately revive the U.S. economy, all while dealing with a public outraged at Wall Street and a contentious Congress.
Stress Test: Reflections on Financial Crises by Timothy F. Geithner
Tim Geithner provides another insider’s perspective, serving as the Secretary of the Treasury from 2008 after Hank Paulson. However, Geithner’s account is different. He was one of the few who had a history of public service, and so could discuss 2008 within the context of his experiences with crises in the 1990’s while at the New York Fed. His writing style is also more brutally honest, and he does not pull any punches in explaining the terrifying conditions they had to face, and describing the policy makers they had to deal with.
A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation by Scott Nations
Scott Nations is a longtime trader, financial engineer, and CNBC contributor. In his book, he recounts, with a good amount of drama, the conditions and events that were behind the five significant stock market crashes that occurred since the beginning of the 20th century. Nations is able to identify specific situations linked to each crash and shows how crashes are linked to each other. Ultimately, the painful lessons they’ve provided have made us stronger, by giving us direction as to how to avoid making these mistakes in the future.
The Lost Bank: The Story of Washington Mutual — The Biggest Bank Failure in American History by Kirsten Grind
Kistren Grind tells the story of how Washington Mutual, a onetime smallish bank based in Seattle, managed to build itself up to a major financial institution with billions in assets, only to lose it all during the housing crisis because of unscrupulous mortgage practices. She gives a gripping account of the events through this tragedy’s primary players: the bankers, the home buyers and the lenders, the accountants and lawyers, and the shareholders. As a result of her reporting on this story from the beginning, Grind was named a finalist for the Pulitzer Prize and the Gerald Loeb Award. This is the one book where you walk away with feelings of sympathy for the people who were involved.