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The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash

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April 01, 2008 – Comments (6) | RELATED TICKERS: C , JPM , BSC.DL

NPR INTERVIEW

 The credit crisis has inspired a new version of the old question: What did you know and when did you know it? Specifically, can we hold the government and Wall Street responsible for not preparing for what clearly was coming. Or was the financial market crisis entirely unforeseeable?

Banker and economic historian Charles Morris says he saw it all coming. He makes his case in The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash. The book, published earlier in March, lays out, in precise detail, what went wrong over the past few months in the global financial system.

Morris describes exactly what brought down Bear Stearns, why the U.S. may be headed for recession and why investors around the world are terrified.

But here's the thing: He wrote much of the book last spring — months before the first hint of any problem. Back when leading government and finance people were touting the rosiest of financial futures.

The book's life began with an e-mail Morris sent, in early 2007, to Peter Osnos, the founder of Public Affairs books, which said: "I think we're heading for the mother of all crashes, it will happen in summer of 2008, I think."

Right at the same time as that e-mail, February and March of 2007, Federal Reserve Board Chairman Ben Bernanke was telling Congress that the U.S. has a Goldilocks economy: just perfect, the right amount of inflation and growth and employment.

Financial journalist Larry Kudlow, like many others, talked about the glories of a U.S.-led period of prosperity capitalism.

You get the picture: The leading voices in Washington and on Wall Street agreed that the economy was going great and would only improve. So, why did this guy, Morris, see things so differently?

Sounding the Alarm

He was in the perfect position. He's not just a writer; he ran a company that created the software investment banks and hedge funds use to build these new, exotic credit instruments. And he saw how they used his software, and thought, "This is crazy," he says. "I was sure that people weren't keeping track of the trends so they had proper margins and collateral and so forth."

Morris said by 2007 he had warned every financial professional he knew. Nobody listened then, but we now know that Morris was right.

Hedge funds, investment banks and many other big financial institutions had invested countless billions in brand new forms of debt — things with weird names like synthetic collateralized debt obligation. You don't know what that is? Well, the banks hardly know. Morris says they didn't have any way of actually assessing the riskiness of all these new instruments.

"Because you couldn't possibly do it," he says. "The volume of trading was so huge."

Morris was certainly not the only person to see the credit crisis coming. Some economists and leading investors predicted all of this. But Morris had something they lacked.

"It's not enough to be right. You also have to be readable," says Osnos.

That was the key: Morris was writing not for the professionals but for the rest of us.

And some might say that even though his book came out so quickly, it's still coming too late.

6 Comments – Post Your Own

#1) On April 02, 2008 at 11:55 AM, abitare (31.66) wrote:

Great post. The NPR interview is a must hear.

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#2) On April 02, 2008 at 12:16 PM, cubanstockpicker (20.63) wrote:

"All things considered" has to be deepest analysis on the world, the markets, etc. How else would I know that soybeans are the demand for corn ethanol here is destroying the rainforest. You can feed one person for a year with the corn needed to make ethanol to fill up an SUV. I usually get those WAY bigger stories than just a daily feed and make some picks based on those LONG term trends. At one point, the US will have to concede and start using corn for food, fix the derivatives market which is creating a bigger problem and shore up this massive debt load. Do it now, before the US becomes so gloated we have no option but to ask countries to forgive our debt or start selling military secrets.

Then again it is a public radio system and usually comes in unflitered. Nobody screaming or trying to sell something or some idealogy.

I know some of my friends find it boring and think I am a total geek for listening to them, but they blow me away with their stories. 

 

thanks abitas, fool on 

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#3) On April 02, 2008 at 1:22 PM, TDRH (99.65) wrote:

Guess he was chicken little.   Had to be frustrating to have the vision but not be able to get the word out.  

My question is, when did the leaders of these companies know?   They were cashing some pretty big bonus checks/stock options.  Don't imagine they will find the "smoking gun", but again these are "The Smartest Guys In the Room", why didn't they know?

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#4) On April 02, 2008 at 2:41 PM, cubanstockpicker (20.63) wrote:

In one word: GREED. If you start reading his book, the first two pages read make you feel like picking up the phone and calling someone to get something done quick. Now you can imagine that he tried contacting Greenspan, Bernanke, Paulson, Kudlow and the owners of the major financials warning them not to use his software to calculate these "fake" equities like a synthetic CDO. Purchased at a dollar, now your forced to sell at .10.

I was going to suggest headlines in the future that we might have if we keep ignoring problems, but didnt want to make light of something I consider pretty sobering. But hey, Ididnt help create this problem so here it goes.

"Scientists today have successfully cloned the last polar bear in hopes of bringing the animal back. With one twist, they have genetically modified its cute to be darker since there is no more ice in the caps and now a grizzly surrogate mother will have twin polar cubs"

"The price of biodiesel today has reached an all time high today in interday trading after Iowa militia factions have taken control of the region"

"Spring Breakers flood the beaches of Orlando, Fl this month"

"IMAX presents: The rainforest that was" 

'And last but not least:

"DUBAI/CHINA Stock Exchange has just executed the purchase of Banking Institution GOLDMORSTEARNSLEHMAN.

This institution was conglomerated back over 35 years ago in 2010 to shore up problems due to our second great depression or what was known as the great liquidity crisis of the turn of the century."

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#5) On April 02, 2008 at 6:28 PM, ATWDLimited (< 20) wrote:

banks are over leveraged, filled with debt, along with the US government, and consumer, time for reality check. Visit TheOfficial Dollar Report For more on the bleak future. 

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#6) On April 11, 2008 at 10:15 PM, dwot (42.85) wrote:

Good post...

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