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By Xin Lu This week a government committee is investigating the cause of the financial crisis by interrogating bank titans what exactly went wrong. Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable by Mark Gilbert is exactly what these government officials need to read to learn what went on in the last few years to cause the debacle. Here are some of what I learned from the book.
The book described the myriad of derivative investments that bankers essentially created out of thin air. As long as these derivatives were selling, the bankers were pocketing huge bonuses and their bosses did not care how they made the profit. It was also a strange period where all investments including stocks, commodities, and real estate were going up. As long as everything went up and money rolled in no one seemed to inquire how it was possible.
While this was happening regulators did not really do much to stop anything. In fact, the Glass-Steagall laws established during the Great Depression which separated investment banking and commercial banking was dismantled during the Clinton era. This allowed commercial banks that takes deposits to take much larger risks than they could previously. Bankers took on too much risk with too little capital, and this was described by the author as an "inverted pyramid". Basically the real assets backing all the derivative products was much too small, and just a small portion of the real investments going bad caused many more multiples of that money to evaporate.
This book basically reads like many news reports from the last few years put into chapters and categories. If you want to understand why a small fraction of bad mortgages could have caused so much damage, then you should read this book. The last chapter of the book offers some advice and prescriptions on how to avoid this in the future. I think my favorite part from that chapter is where the author suggested that more women should be hired as banking executives to perhaps soften the risk hungry "macho culture" in finance.
In conclusion, I think this book is a great objective view of what went on in the financial industry and government that caused the crisis to be so devastating. If you are a news junkie or a history buff then you would love this book.
Disclosure: I received a free advanced reading copy of this book and this post contains an affiliate link to the book.Permalink | Comments | Xin Lu's blog | Channel: Consumer AffairsSimilar entries:

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This article is from Wise Bread.