Roger Lowenstein’s book “The End of Wall Street” is a font of information regarding the recent financial crisis. Beautifully written in clear and simple language, it explores the environment that created the house price bubble and the impact on the mortgage market particularly with regard to subprime and Alt –A mortgages. Each chapter elaborates on the layers of riskiness added to financial systems, first by mortgage originators, then by investment banks, then by default insurers, and even by the inaction and then the seemingly ineffective action of the regulators; followed by the tipping of the scale and a reversal of fortunes for some of the biggest names on Wall Street.
It reveals the shamefulness of financial system excesses-poor underwriting, non-existent due diligence processes, excess risk taking in the form of risky asset purchases and inadequate reserving and pricing, inappropriate incentive/ compensation and bonus schemes; of the cocky and overconfident attitudes of those most at fault- severely undercapitalized and overleveraged entities that blindly followed inappropriate models that were not adequately stressed and with the arrogant belief that the market (or the government) would always be there to provide liquidity when needed.
The book makes for a thrilling read but is also a vault of knowledge into how the crisis progressed detailing how entities like Fannie Mae, Freddie Mac, Bear Stearns, Lehman, Merrill Lynch, AIG, Wachovia, Washington Mutual, JP Morgan, Morgan Stanley, Citigroup, etc each weathered and in some cases such as Lehman for example, succumbed to the storm; the steps taken (or lack thereof) by these entities to control and reign in their risk and by regulators to reverse and reduce the systemic trend.
The author highlights the importance of being adequately capitalized stating that “in a crisis only capital will ensure an institutions survival”. This is evidenced by the fact that despite the numerous and repeated efforts made by the regulators to increase liquidity in the financial markets during the crisis, customers and investors were not enticed to re-enter the market not until the regulators finally made capital injections into the banking system. By then the US economy had already entered into a deep recessionary period.
I recommend this book to anyone interested in knowing more about the recent financial crisis that have impacted lives worldwide. Like me before reading the book, we all have had some vague awareness of what transpired during those terrifying years but are unfamiliar with the actual chain of events. I would also suggest this book as a must-read for those involved in the highly responsible roles of evaluating risks in the financial sector. Valuable lessons were learned here, lessons we could all benefit from and errors which we would like to steer clear off.