The End of Wall Street | Roger Lowenstein

Summary of: The End of Wall Street
By: Roger Lowenstein

Introduction

Step into the tumultuous world of Wall Street and its cataclysmic fall in Roger Lowenstein’s ‘The End of Wall Street’. This book delves deep into the root causes and consequences of the 2008 financial crisis that reverberated around the globe. Witness how the blind faith in self-regulating markets and gradual deregulation of the banking industry set the stage for a financial disaster of epic proportions. Explore the factors that led to Lehman Brothers’ bankruptcy, which triggered a chain reaction of events threatening the entire financial system. Learn about the crucial role of government-sponsored enterprises Fannie Mae and Freddie Mac in the mortgage market, the rise of subprime lenders, and the ingenious yet dangerous financial instruments developed in the name of progress.

The Fall of Markets

The book explores the events leading to the 2008 financial crisis and how it was a result of a misplaced belief in free markets. Wall Street bankers became the stars of the economy, developing complex instruments to reduce risk while overleveraging at the same time. The Federal Reserve had the same blind faith in the markets, believing that booms and busts were a thing of the past. However, the bankruptcy of Lehman Brothers marked the beginning of the crisis, leading to the downfall of many financial markets, banks and governments shoveling billions at the problem.

Selling Bonds Before the Crash

Mutual fund manager Rodriguez had a premonition of the 2008 financial crisis and sold all his firm’s bonds in Fannie Mae and Freddie Mac, the government-sponsored enterprises, before the crash. He saw red flags before the crisis even began, including the fact that the twin companies had not issued audited financial statements in over a year. Rodriguez knew that the country was on a debt spree, with household indebtedness a third higher than household income. He predicted that all these debts would eventually catch up with financial firms, even if the government was involved. His foresight proved to be right, and many investors lost millions during the financial crisis. However, Rodriguez and his firm emerged from the crisis unscathed, thanks to his risky but wise decision to sell all his firm’s bonds in Fannie Mae and Freddie Mac. The book details how Rodriguez’s premonition and decision-making skills allowed him to navigate through the tough times and come out on top.

The Rise and Fall of Subprime Lending

In the 1960s, Beneficial Loan Society found a way of providing housing to low-income earners with only a 20% down payment. However, lending to unqualified borrowers always ends in default, causing subprime lenders to come and go. Homeownership became the cornerstone of the country, and as a result, Countrywide and New Century emerged as the leading lenders. Mozilo, the founder of Countrywide, popularized adjustable-rate mortgages(ARMs), and appealed to the American populism of equal access to capital. He introduced the pay-option ARM, which saw borrowers accumulatively end up in more debt. Banks began to sell their loans to investment banks, which packaged single mortgage loans into securities known as collateralized mortgage obligations (CMOs). Rating agencies bought the bankers’ assurances that the loans were diversified by borrowers and geography, and affixed their highest ratings to tranches of these securities. Demand for CMOs and CDOs grew, and lenders had to dig deeper to find borrowers, leading to the “no-income, no-asset” loan instrument. Banks had loosened lending standards so much by 2006 that most lenders lost sleep over the quality of the loans they were providing. As investors became concerned about a cessation of credit, panic loomed, and many lenders disappeared from the market.

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