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| The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash | 
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Avg. Customer Rating:  (based on 44 reviews)
Sales Rank: 572
Category: Book
Author: Charles R. Morris
Publisher: PublicAffairs
Studio: PublicAffairs
Manufacturer: PublicAffairs
Label: PublicAffairs
Media: Hardcover
Number Of Items: 1
Pages: 224
Shipping Weight (lbs): 0.8
Dimensions (in): 8.3 x 5.5 x 0.8
ISBN: 1586485636
Dewey Decimal Number: 332.04150973
EAN: 9781586485634
ASIN: 1586485636
Publication Date: March 3, 2008
Availability: Usually ships in 1-2 business days
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Product Description
We are living in the most reckless financial environment in recent history. Arcane credit derivative bets are now well into the tens of trillions. According to Charles R. Morris, the astronomical leverage at investment banks and their hedge fund and private equity clients virtually guarantees massive disruption in global markets. The crash, when it comes, will have no firebreaks. A quarter century of free-market zealotry that extolled asset stripping, abusive lending, and hedge fund secrecy will come crashing down with it. The Trillion Dollar Meltdown explains how we got here, and what is about to happen. After the crash our priorities will be quite different. But things are likely to get worse before they better. Whether you are an active investor, a homeowner, or a contributor to your 401(k) plan, The Trillion Dollar Meltdown will be indispensable to understanding the gross excess that has put the world economy on the brink—and what the new landscape will look like.
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| Customer Reviews: Read 39 more reviews...
 Excellent analysis of the current situation July 8, 2008
This is the best book on global finance I have ever read. At first, the title of the book turned me off as it seemed like a marketing driven exaggeration. But, the author defines this potential $1 trillion meltdown in well supported details. On page 130, a table outlines where this estimated trillion dollar loss comes from. About $450 billion will come from the Subprime crisis that has monopolized the headlines. But, he anticipates another $345 billion will come from corporate debt (junk bonds and leveraged loans). The remainder will come from commercial real estate MBS and credit cards securitization. He estimates only 1/3 of the meltdown will come from direct credit losses (defaults). The other 2/3 will come from drop in market values of securities because of rising credit spreads as the credit risk will have materialized in the same asset category.
The author explains with clarity the cryptic language of modern finance including its incomprehensible acronyms (in addition to CMOs, I am thinking of SIVs, ABCPs, SVs, etc...). Not only has he defined all those terms; but, he explains the purpose of those instruments and their risk ramification.
He outlines the circular cash flows of global finance. The U.S. off-shores manufacturing to China. As a result, the U.S. runs large trade deficits. China's central bank accumulates over $1.2 trillion in dollar reserves. Similar trading and $ reserve accumulation patterns occur in Japan, Russia, and Saudi Arabia. In the past, those exporting countries were happy to reinvest their $ reserves into US Treasuries. That's the savings glut that allowed the US economy to keep trucking thanks to low long term rates. But, the author thinks this party is over because those exporting nations are tired of investing their dollars in US Treasuries that steadily depreciate due to the decline of the dollar. Now, those countries are diverting their dollar reserves to Sovereign Funds that are diversifying investments into US equities including large positions in major American banks, investment banks, and private equity funds. This has material implication for the dollar, the future path of long term interest rates, US GDP growth, and the control the US financial sector. But, the author may have overlooked some positive implications as those Sovereign Fund investments should lower the cost of equity capital and boost the equity cushion within our financial system to withstand greater default losses associated with the $1 trillion meltdown.
The author explains why the whole financial system is vulnerable. He talks of an inverted pyramid when considering that total financial instruments outstanding stand now at 4 times global GDP (vs only 1 x just a few decades ago). Additionally, derivatives stand at 10 x GDP. He looks at those multiple as a form of leveraging our world economy with interconnected financial claims. The financial system relies on its ability to create tranches of securities with unprecedented level of risk (like the equity tranches in MBS that absorb most of the default). The Hedge Funds are the main buyers of those maximum risk tranches. The author explains that such tranches in essence leverage the risk sometimes up to 20 times what the risk on an overall portfolio would be. But, the hedge fund itself is leveraged 5 times resulting on a risk leverage of 100 to 1 on those tranches. In other words, he states that many hedge funds could be wiped out if an MBS portfolio could incur defaults of just 1%. And, the same is true with similar financially engineered structures with commercial real estate, corporate debt, and credit card securitization.
I hope the author has overlooked the discount or hair cut hedge funds take on their risky investments. He mentions in the book that those discounts are as high as 40%. If that is the case, the hedge funds could withstand losses of up to 3% of the overall portfolio instead of just 1%. That's a big difference. The author does mention that hedge funds do not build reserves on their balance sheet; but, hopefully he would have overlooked their potentially netting out the discount as reserves on the asset side of the balance sheet while the author was just looking at the right side where equity is. But, if the author is right (and I am wrong), we are in big trouble.
The author recalls that when Long Term Capital Management (LTCM) failed in 1998, it was resolved by its creditors. This was a $100 billion fund with a value at risk of $10 billion. The author mentions that today's value at risk within the system is 100 times that (his notorious $1 trillion meltdown), and no group of institutions is large enough to resolve such a large risk. If you want to study the related LTCM situation, I recommend the excellent When Genius Failed: The Rise and Fall of Long-Term Capital Management.
The author offers a few interesting recommendations. We should boost regulation of the financial sector. That would entail regulating hedge funds, mortgage brokers and other financial intermediaries that currently escape any safety and soundness capital requirements. He also suggests reforming health care. He does not offer a specific solution; but, he simply states that our payroll funded health care is unsustainable as it represents such a competitive disadvantage in a globalized marketplace. If you want to study similar issues but from a political science perspective, I strongly recommend The Post-American World.
Good read for a novice in the financial industry July 8, 2008
Though it took me a while to understand some of the math in this book, I found it quite intriguing and for the most part, quite readable. Morris indentifies various factors that will lead to the collapse of the financial markets but mainly he suggests that all these scams that are out there used by hedge funds, banks, and other equity firms are simply asking for trouble. He indentifies the derivatives markets, siv's, lax credit practices, and loose regulation as the main culprits in the pending disaster. Though he expects about 1 trillion dollar loss in the asset market, this number is being very very conservative. Morris places blame on the Chicago School of thought, which advocates no government regulation for all the dubious financial instruments in the market today. However, we come to a point in our country's history where we will have to return to a system of regulation due to consequences that will shortly follow.
I agree with his suggestion but I am more of a limited government involvement type person. Though we have slight differences in ideology, I found it to be a good read. If you are a novice like me, you will have to go over the math a few times to understand how he came about his conclusions especially as it pertains to leverage ratio. Recommended.
Keen Insight June 27, 2008
This book is the financial layman's primer for the credit crisis. It is clear, concise, and offers a mature and historically-grounded view of the credit bubble, past, present, and harrowing future. A great read.
Outstanding Book! June 24, 2008
1 out of 1 found this review helpful
If you want to understand what and why are US (and international) banks suddenly covering every corner of the world to raise capital - this book has the answers!
Morris has an incredible foresight. While the book was written before the Banking Crisis hit the US, you feel as if you were reading the morning's newspaper.
A must for any business person!
Sketchy but informative June 14, 2008
4 out of 4 found this review helpful
The author paints a very broad picture in leading us into the main focus of the book, which is the credit crunch resulting largely from the subprime mortgage mess. The sketches of previous bubbles leading up to this bubble give helpful background and strengthen the notion that this debacle is part of an ongoing trend dating back to the 80s. There is precedent for the current troubles in the 1987 market crash, the LTCM hedge fund failure, and the demise of GE's Kidder Peabody in 1994.
A number of ingredients have gone into the mix of these ever arising bubbles. Since the advent of computer trading, investment banks and hedge funds have been able to develop more and more complex financial instruments that have made them more and more enthusiastic about taking on risk. They are aided by the fact that they can essentially work in dark corners behind the scenes with no regulators poking around. Success leads to the prospect that even fatter returns are within reach if they keep leveraging their positions. The fuel that keeps the fires burning is easy money and burgeoning asset values; and it all works well until home prices stop going up or the Fed decides to raise interest rates. Then we have a crash.
The book gives the reader a glimpse into what goes on in the dealmaking recesses of the investment banking world. We learn, for instance, that a Credit Default Swap is a credit derivative that is supposed to hedge against mortgage defaulting and that synthetic CDOs are arrays of Credit Default Swaps with different tranches divided according to risk; and that SIVs are a means the banks use to hide the stuff from their books.
The macroeconomic viewpoint of this book is far too sketchy to enable anything but a scattershot casting of blame. The author would have done better to have maintained more of a focus on the excesses of unregulated finance and the problems of remedy. The recent fallout, which has so far included the government rescue of Bear Stearns - an abandonment of free market principles, leads to the obvious conclusion that sensible regulation is necessary. Nevertheless, there seem to be many in influential positions who prefer to look the other way and parrot that any regulation is bad regulation.
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