How We Were Ruined & What We Can Do

How We Were Ruined & What We Can Do
By Jeff Madrick
(article in the NY Review of Books)

The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash
by Charles R. Morris
PublicAffairs, 194 pp., $22.95

Financial Shock: A 360° Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis
by Mark Zandi
FT Press, 270 pp., $24.99

The Reckoning
a series of articles by Gretchen Morgenson et al.
The New York Times, September 28–December 28, 2008

This long review article gives me the clearest picture I've had yet of the cause of the financial meltdown. The essential part, according to Madrick, is the rise of CDOs. Investment banks and even commercial banks were packaging not only residential mortgages but also equipment loans, commercial mortgages, credit card debt, and even student loans—known in general as collateralized debt obligations (CDOs). Madrick notes that, "Morris writes that 80 percent of all lending by 2006 occurred in unregulated sectors of the economy, compared to only 25 percent in the mid-1980s." The CDOs produced high profits and high risk, and were unregulated. Banks were purchasing them with huge loans from Cayman Island banks, sometimes 30 - 40x their own capital. When the CDOs went bad, the big banks didn't have the capital to cover them.