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UFPPC ( Digging Deeper XLVII: May 12, 2008, 7:00 p.m.

Charles R. Morris, The Trillion Dollar Meltdown: Easy Money, High Rollers, and
the Great Credit Crash (New York: PublicAffairs, [March] 2008).

Foreword. Subprime credit problems attacked budget deficits and set the
first appeared in mid-June 2007. In stage for the tech (or dot-com) bubble
August, the problems extended “beyond (31-34).
the subprime market” (x). In November,
the CFO of Citigroup admitted that the Ch. 3: Bubble Land: Practice Runs.
company “did not know how to value its Mortgages were first turned into
holdings” (xi, emphasis in original). But securities by Larry Fink & First Boston
“subprime is just the first big boulder in with collateralized mortgage obligations
an avalanche of asset writedowns that [CMOs] in 1983, but this market
will rattle on through much of 2008” (xii). collapsed in 1994 (37-43). The 1987
This is not a market bubble, but a “credit stock market crashed due to general
bubble” (xii). Morris estimates adoption of an idea of “staggering
“writedowns and defaults” at “about $1 fatuity” (48), portfolio insurance
trillion,” based on “quite moderate facilitated with “the Black Scholes
assumptions” (xiii; see ch. 6). Outline of formula, the most famous equation in the
book (xiv-xv). The challenge is to restore history of finance” (45; 43-48). The Fed
“[t]he transparency and integrity of forced a takeover of Long-Term Capital
American financial markets” (xv). Japan Management (LTCM) in September 1998
shows what will happen otherwise (xvi). (49-53). This successfully obscured was
This is “not a quickie book,” but is based “the real scandal: that at the very
on research from the late 1990s that led epicenter of American finance, a tiny
Morris to understand the scope of the group of people were able to borrow
crisis (xvi-xviii). hundreds of billions of dollars from
banks, and that neither the banks, nor
Ch. 1: The Death of Liberalism. the banks’ regulators, had any idea of
“1970s disasters had at least three how much they had borrowed or what
primary roots—the loss of business they were doing with it” (53). Revealed
vision, demographic shifts, and gross by these precursors of the present crisis:
economic mismanagement” (2; 1-14). that deregulation placed entire
(NOTE: Morris’s views tend toward economies at risk, that rogue agents
socioeconomic Darwinism [3, 21], anti- accentuate the problem, and that finance
intellectualism [12, 16-17, 49], and anti- is dominated by “mathematical
liberalism [7-8, 13, 173]). The U.S. constructs” that can fail in “times of
“debased its currency” in the 1970s (10- stress” (54-58).
11). Milton Friedman’s monetarism
prevailed, given the bankruptcy of Ch. 4: A Wall of Money. Securitization
technocratic “Keynesian liberalism” (17- and derivatives (59-62). The “Greenspan
18). Put” involved guaranteeing that cheap
money was available and ignoring asset
Ch. 2: Wall Street Finds Religion. inflation (63-65). The financier-produced
Success of markets in early 1980s (19- 2000-2005 real estate bubble, acc. to
23). Fed chairman Paul Volcker “broke” Robert Schiller “the greatest in history”
inflation, 1979-82 (23-27). But the boom (66; 65-72). Many other forms of
in leveraged buyouts (LBOs) and the collateralized debt obligations
savings-and-loan debacle showed the [essentially, bets that borrowers will
limitations of markets (27-31). Clinton make payments that are turned into
financial instruments] were developed subprime paper alone (112-17).
(73-74). With credit default swaps Corporate debt (bonds) has also
[essentially, insurance against loan deteriorated in credit quality and now
portfolio losses], synthetic CDOs or displays many of the features of
“credit derivatives” were devised subprimes (117-21). Credit card debt is
—“[v]ery big, very complex, very opaque securitized and rising (121-22).
structures built on extremely rickety Commercial Mortgage-Backed Securities
foundations” (79; 75-79). Fall 2007 (CMBS) stalled in Q3 of 2007 (122-23).
crises show “how deeply American The credit ratings granted to monoline
subprime paper had infiltrated global insurers, which insure purchasers against
finance” (80-81). Structured investment principal losses on securities and are
vehicles (SIVs) [bank-run off-balance- often used when municipal bonds are
sheet investment funds] in crisis (82-84). issued, are “absurd” (123-24). Credit
default swaps (CDOs) often depend on
Ch. 5: A Tsunami of Dollars. The U.S. hedge funds that are vulnerable to a
current-account deficit “tilt[ed] into free liquidity crisis (124-26). An economic
fall about 1999 . . . The accumulated downturn is inevitable (126-28). But
deficit for 2000 to 2006 is about $4 something worse, a “credit meltdown,” is
trillion, financed by foreign borrowers possible, given an estimated $1.01
(89; 88-91). Morris regards the “Bretton trillion in potential defaults and
Woods 2” (BW2) hypothesis, according to writedowns ($450bn in residential
which the dollar is able to maintain its mortgages, $345bn in corporate debt,
position because of the world’s need to $215bn in CMBS & credit card debt—and
lend, as refuted by the dollar’s decline Morris is unable to estimate monoline
(92-95). Diversification of currency downgrades and CDO defaults and
baskets by oil exporters increases writedowns, but calls them “potentially
pressure on the dollar (96-99). Oil-rich very large”) (129-32). “The stage is set
nations are creating sovereign wealth for a true shock-and-awe surge of asset
funds (SWFs), which are becoming major writedowns through most of 2008,”
economic players involved in raising the prospect that “the global
international investment (99-104). The financial system will be in catastrophe”
significance of these developments is (133). Morris argues that in terms of
that they mean the Fed is no longer Hyman Minsky’s theory of the stages of
capable of resolving crises that emerge financial crises, the credit cycle has
(105). reached the “Ponzi stage,” in which the
latest arrivals “must borrow to meet all
Ch. 6: The Great Unwinding. Hedge their interest payments, so their debt
funds (“unregulated investment vehicles burden continuously increases” until “a
that cater to institutions and wealthy disruptive event occurs” (134; 133-36).
individuals” [109]) are the entities that “In effect, [a relatively small number of
have been investing most in the new institutions, basically the global banks,
debt-based securities (107-09). Morris investment banks, and credit hedge
explains how hedge funds take risky funds] have built a huge Yertle the Turtle-
investments off their books not by selling like unstable tower of debt by selling it
them, but by devising a credit default back and forth among themselves,
swap, a debt-based security, that is booking profits all along the way. That is
accepted by another entity, probably a the definition of a Ponzi game” (135-36;
hedge fund, in return for cash (110-11). emphasis in original).
The exposure of hedge funds, often
highly leveraged and not accurately Ch. 7: Winners and Losers. The
valuing their assets, goes far beyond “widening disparity of wealth and
income” in American society (139; 137- Manhattan), and was for fifteen years
42). Wealth is increasingly going to “the managing director of a consulting firm
highest-order intellectual tasks” (145; specializing in financial services and
142-45 [this section is based on David high-tech that had Merrill Lynch, Apple,
Autor, Lawrence Katz, and Melissa and Xerox as clients. He has published in
Kearney, “Trends in U.S. Wage Inequality: the Atlantic Monthly, the New York Times,
Revising the Revisionists,” NBER, March and the Wall Street Journal. Morris is
2007 (182)]. The outcome is not a Catholic and was raised in Philadelphia.
conspiracy, but “the inevitable outcome He has also been the secretary of health
of our current money-driven political and human services for Washington
system combined with ‘the disposition to State. He is the author of The Cost of
admire, and almost to worship, the rich Good Intentions: New York City and the
and powerful,’ which Adam Smith Liberal Experiment, 1960-1975 (1980);
fingered as ‘the great and most universal Iron Destinies, Lost Opportunities: The
cause of the corruption of our moral Post-War Arms Race (1988); The Coming
sentiments’” (147). The U.S. is unique in Global Boom: How to Benefit Now from
financing higher education by creating Tomorrow’s Dynamic World Economy
debt (147-50). Bush’s privatization of (1990); Computer Wars: The Post IBM
Social Security plan aimed to direct World (1993, with Charles H. Ferguson);
money to Wall Street (151-52). Financial American Catholic: The Saints and
services “don’t really compete in free Sinners Who Built America's Most
markets” (153; 152-55). The U.S. may Powerful Church (1997); Money, Greed,
now be “in thrall to a burgeoning new and Risk: Why Financial Crises and
class of financial speculators,” like those Crashes Happen (1999); The Tycoons:
of the 19th century described by Anthony How Andrew Carnegie, John D.
Trollope in The Way We Live Now (156). Rockefeller, Jay Gould, and J. P. Morgan
Or we may be in “the final days of Invented the American Supereconomy
another quarter-century (2005); Apart at the Seams: The Collapse
political/ideological cycle” (156; 156-58). of Private Pension and Health Care
Protections (2006); The Surgeons: Life
Ch. 8: Recovering Balance. Restoring and Death in a Top Heart Center (2007).
“effective oversight over the finance Reviews: Paul Steiger said in the Wall
industry” must be a national priority Street Journal called The Trillion Dollar
(159-62). Bank reform should come first Meltdown “an absolutely excellent
(162-63). An updated version of Glass- narrative of the horror that we have in
Steagall, separating commercial and the credit markets right now.... It's a
investment banking, should be wonderful explanation of how it
considered (163). Health care reform is happened and why it's so rotten.” Floyd
essential, and government must be Norris, the chief financial correspondent
involved (163-66). Market of the New York Times, called it “brief but
fundamentalism of the Chicago School brilliant.” Update: In March, Morris told
should be abandoned (167-79). Newsweek that “Home prices will
probably fall another 15 to 20 percent”
Notes. 14 pp., by chapter. and offered this advice to consumers:
“Plan to survive the recession. Ratchet
Index. 10 pp. back spending. Your job is at risk.
Unemployment is going to go up. Wages
[About the Author. Charles R. Morris will be flat. Start saving.”]
has been a lawyer and a banker (Chase