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CASTLE ARCH 
REAL ESTATE INVESTMENT COMPANY 
Anatomy of aMeltdown
 How the events of the sub-primemortgage crisis created the perfect  storm for a market meltdown
What caused the game-changingcrashes of 2008?
 
COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED
 
TABLE OF CONTENTS
Anatomy of a Meltdown
1. Introduction2. Irrational Exuberance3. Follow the Money . . .4. The Mortgage Broker Industry5. Wall Street Enters Real Estate6. Irrational Overreaction7. Leverage and the Credit Crunch8. Conclusion: Safety in the Long Term View 11347101416
 
COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED
 
1. Introduction
Although some factors inuencingthe modern nancial crisis have
tendrils that reach way back intohistory, to the Carter administrationand beyond, this article focuses on theimmediate events which precipitatedthe current situation, particularlythose that have transpired over the lastdozen years.
 2. Irrational Exuberance
As we entered the late nineties,
the Internet bubble was inating full
force and Internet-based companiesexperienced unprecedented growth.It seemed like you could not swinga cat without hitting an Internetmillionaire. At the close of the 20thcentury the stock market was thecontemporary equivalent of the 1849gold rush. Entire industries had sprungup in only a few short years (one of which was the stock “day trader”). Incontrast to the burgeoning market,veterans of the market cycles werestarting to get nervous.On December 5, 1996, FederalReserve Chairman Alan Greenspan(Figure 1) gave a speech at the annualdinner and lecture of the AmericanEnterprise Institute for Public PolicyResearch, in which he said, “…how do we know when
irrational exuberance
has unduly escalatedasset values which then becomesubject to unexpected and prolongedcontractions…”
1
The quote was obscure. Themarket acknowledged Greenspan’sdoubts with only a small slip,
2
ahiccough amidst the dot.com surge.But, the point was made to those whowere listening. Greenspan and otherswere intimating that they believed themarket was overvalued.For the next two and a half years,the bubble continued its recklessexpansion. People were talking abouta new economy where assets were passé and the historical measures for valuing companies like price/earningsratio, price to revenue ratio, etc., were being replaced by Internet valuations
Figure 1
of 00

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