. 2021. Barrie A. Wigmore. Cambridge University Press.
Barrie Wigmore analyzes a particularly complex topic, the 2008 financial crisis, with wide-ranging and in-depth evaluation. He expresses a highly experienced viewpoint based on working “in the trenches” as an investment banker over multiple cycles.
For Wigmore, the shocking levels of debt were the essential alarm of the deepening crisis. This was most clearly 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 corporations needed to make subprime loans and hold private residential mortgages. collateralized securities (RMBS) since the U.S. Department of Housing and Urban Development (HUD) had required these institutions to extend the variety of low-income homeowners because the Community Reinvestment Act in 1992.
In November 2004, HUD set additional low-income lending targets for Fannie Mae and Freddie Mac. Fannie Mae exceeded these ambitious goals in 2005 and again in 2006. At this point within the narrative, the creator tells the story in such a compelling way that one can sense the credit threat lurking across the corner. Not only do subprime borrowers make up a disturbingly high percentage of all borrowers, but Wigmore also presents astonishing data straight from Fannie Mae’s “loan book” cited in its 2006 10-K. The data suggests that each Fannie Mae and Freddie Mac were exposed to the weakest lending sectors beyond HUD’s mandates.
While this was happening, state and native pension funds, insurance firms, and the industrial and investment banking intermediaries that served Fannie Mae and Freddie Mac continued to finance them, despite their unlimited information resources, their attention to financial markets, and their very own stake within the end result. At the identical time, there was also the challenge of achieving higher investment returns in an environment of falling rates of interest – not only for personal investors, but additionally for institutional investors, the so-called smart money. This is shown in Table 2.5, which summarizes in easy terms the upcoming $11 trillion apocalypse.
Wigmore convincingly presents the circumstances of the crisis. It clearly began within the second half of 2007, when real estate prices stabilized after sharp increases in places like Los Angeles, Phoenix and Las Vegas. The Federal Reserve noted that customers’ ability to service their debt was deteriorating compared to standard levels, despite rates of interest being low on the time. Consumer liabilities increased from 15% to 22% of net assets between 2000 and 2007, driven primarily by the expansion of residential mortgage debt. However, the Fed didn’t express major concerns at this point, anticipating that consumer strength would support further increases in consumer spending.
Subprime mortgages began defaulting with high rates of interest. The value of asset-backed securities and personal RMBS fell. Mortgage lenders with large subprime exposures, resembling New Century and Fremont General, lost their lenders. Countrywide Financial, IndyMac and Washington Mutual faced unprecedented disruption. Their published balance sheets have did not sustain with the rapid deterioration in the standard of their loans.
The institutional collapses that occurred had a typical narrative: extreme leverage; complicated, if not inexplicable, real-time balance sheets; and low-quality assets within the case of investors or liabilities within the case of lenders. The creator explains the breakdowns methodically and using quite a few diagrams that illustrate the severity of the stresses each individually and system-wide.
In the chapter entitled “Epilogue 2012-2016,” Wigmore identifies many insightful indicators of market and economic recovery. The recovery in securities markets preceded the recovery within the economy, based on the expected recovery in earnings forecasts for the S&P 500 Index. In 2012, stock valuations rose in unprecedented ways because the S&P 500 dividend yield and the 10-year Treasury rate converged for the primary time since 1957. Real estate prices and industrial property sales recovered. Consumer confidence rose. Federal debt to GDP was still high; However, the Fed’s balance sheet was huge, rates of interest were artificially low, and the status of Fannie Mae and Freddie Mac had yet to be resolved.
When I read this masterful book, I used to be initially struck by the structure with which it deals with such a fancy time in history. It analyzes the market and economic environment before the crisis, in the course of the crisis and for several years afterwards. The book delves deeply into institutions and securities. The creator distinguishes between opinion and fact, counting on extrapolation from actual reported numbers. I discovered it impressive that he uses the analyst’s most trusted original sources, the corporate’s 10-Ks and 10-Qs. Cleanly rendered graphics and tables support the analytical narrative. Wigmore steadily and aptly cites the Federal Reserve Economic Data (FRED).
is important reading for the management of banking, investment and insurance firms, but additionally for investors, analysts, economists and students of monetary and investment history. It shows how widespread risk-taking at the company level can result in a system-wide near-collapse and the way the mantra of home ownership for all have to be considered within the face of the associated financial risks and the undisciplined creation of asset-backed securities. The book is required reading for a generation.
If you enjoyed this post, do not forget to subscribe.
