CNBC commentator David Faber is out with a new business book that’s also an entertaining read, called “And Then the Roof Caved In“. I am a big fan of CNBC and have enjoyed watching Faber (known on air as The Brain) over the years. So it was with excitement that I purchased the Kindle version of his book for my iPod Touch and read it on vacation.
“And Then the Roof Caved In” is about the events leading up to and during the financial crisis that Wall Street and the country faced in 2008 into 2009. If you want to understand what happened to bring about the financial collapse, written in a way that’s easy for non-Wall Streeters to follow, then this book is a must-read.
The book chronicles the rise in subprime mortgages from 2003 - 2007, and ties them step by step to Wall Street’s deep troubles starting in 2007 (trouble that was coming to a head before most of the American public became aware there was a problem). Faber takes you through the eventual global financial meltdown starting in late summer/fall of 2008. He leads you all the way up to early 2009 when the book went to print.
If you haven’t been following the subprime mess and the credit crisis closely, at first the two may seem like an unlikely combination. Mortgages being made across America — and the global credit crisis? Yet they are integrally connected.
Faber explains in everyday language how subprime mortgage loans originated in places like Orange County, California, were packaged up by Wall Street firms to create investment securities. Subprime mortgages are loans made to borrowers who have low credit ratings where there is extra risk of repayment on the mortgage. The mortgages (along with the payments that homeowners should have been paying) were the collateral for mortgage-backed securities.
But mortgage-backed securities are only the tip of the iceberg. They were the jumping-off point leading to the creation of other, more exotic, securities — with names such as Credit Default Obligations (CDOs) and Credit Default Swaps (CDSs). The securities were sold as investments across the globe. AIG insured these securities, and the ratings firms — Moody’s and S&P — issued investment ratings that other firms relied upon.
Faber does a good job demystifying all the terms and acronyms, using graphics to help explain the concepts. One of the beauties of this book is that you will walk away understanding a lot more about these investment instruments that you may have heard in passing in the news. And you’ll learn it pretty painlessly. The book is easy to read.
And once you understand most of the terms, you will be stunned at how gullible many were in the Wall Street investment banks and at companies like AIG. Greed and a bubble mentality took the place of good business sense.
Best Parts of the Book
There’s a lot to recommend this book. But two parts of this book were especially memorable:
(1) First there’s the revelation about Merrill Lynch. Supposedly an investment bank, it was so seduced by subprime mortgages that it vertically integrated. It ended up buying mortgage origination and mortgage servicing companies. In the end, before being sold to Bank of America, it was in effect a mortgage company, not an investment bank. Even its shareholders probably didn’t understand what business it was really in.
It demonstrated the old adage about getting into a business you don’t understand. While some people at Merrill Lynch may have been smart about some things, they were not mortgage bankers. They got into a business that is more than just mathematical calculations on interest rates and projected default percentages. When you enter mortgage banking you step into … a world of fraudulent loan applications and property values that plummet, leading to large losses for those who don’t know what they are doing.
(2) The other especially memorable part of the book was about executive compensation. The book dares to highlight what average Americans have been shaking their heads over. Top Wall Street executives have been poster children for take-your-breath-away compensation, with Boards of Directors giving a rubber stamp. According to Faber, the phenomenon of inflated pay ran rampant throughout all levels of Wall Street firms, not just the top. Faber writes:
“You no longer needed to be a star to become rich. Now, almost everyone, even the most junior of professionals, was deserving of at least half a million dollars a year. And if you avoided any major pitfalls, after a few years, your compensation could easily be in the seven figures.”
Try getting sympathy for that kind of pay from someone making $40,000 a year in Kansas.
What Could Have Been Done Better
Overall the book was quite good and I enjoyed it. However, there was one area I would like to have seen treated differently.
I felt Faber let some of the culprits off the hook too easily. He is rather merciless at holding Wall Street accountable. But he almost gives a pass to (1) the mortgage brokers who made the subprime loans with little or no documentation, and (2) the homeowners who lied on their loan applications and/or jumped feet first into loans they knew they could not afford because they were speculating in the housing market.
Both groups deserve harsher treatment than he gave them.
The book seems to imply that it’s perfectly understandable for mortgage brokers to give a wink and a nod to loan origination practices they knew were suspect or fraudulent, because Wall Street kept buying up subprime mortgages insatiably. Sure, that may explain what happened. But it doesn’t make it acceptable behavior.
And then you have the borrowers, many of whom are not as innocent as they would like the rest of us to believe. Take, for instance, one aspiring entrepreneur profiled in the book, a Mexican immigrant who purchased a $584,000 home which by his own admission he KNEW he couldn’t afford, with no money down. Despite making $3,600 a month, on his loan documents he stated he earned $16,000 a month — but naturally, he claims he didn’t understand what he signed. He was speculating, hoping the home price would go up and that he’d have a financial stake in a year’s time that he could use to start a small business.
Sad to say, but I don’t think he would have made a successful business owner anyway. He doesn’t seem to appreciate the concept of delayed gratification — something most successful entrepreneurs live by. As for his claim to not understand the documents he signed, that puzzles me. How would he understand the many legal documents he’d need to navigate as a business owner? Sorry, no sympathy here.
Read The Book
Despite this, overall it’s a good book. You’ll learn about what really led to the financial crisis. You’ll glean a few key points to shape your opinions on what can be done to prevent such a financial mess ever happening again in the future.
I recommend reading “And Then the Roof Caved In.” You can find out more about the book at the CNBC site.