The Financial Crisis of Our Time


In 2006 residential real estate prices peaked and started to fall, then threatened the world's financial institutions in 2007, and confronted the global economy with disaster in 2008. In the past few years, millions of people have lost very substantial portions of their wealth. And while the markets have rebounded considerably, they are still far from a full recovery. Now, professional economists, policy experts, public intellectuals, and the public at large are all struggling ...

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The Financial Crisis of Our Time

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In 2006 residential real estate prices peaked and started to fall, then threatened the world's financial institutions in 2007, and confronted the global economy with disaster in 2008. In the past few years, millions of people have lost very substantial portions of their wealth. And while the markets have rebounded considerably, they are still far from a full recovery. Now, professional economists, policy experts, public intellectuals, and the public at large are all struggling to understand the crisis that has engulfed us.

In The Financial Crisis of Our Time, Robert W. Kolb provides an essential, comprehensive review of the context within which these events unfolded, arguing that while the crisis had no single cause, housing finance played a central role, and that to understand what happened, one must comprehend the mechanism by which the housing industry came into crisis. Kolb offers a history of the housing finance system as it developed throughout the twentieth century, and especially in the period from 1990 to 2006, showing how the originate-to-distribute model of mortgage financing presented market participants with a "clockwork of perverse incentives." In this system, various participants-simply by pursuing their narrow personal interests-participated in an elaborate mechanism that led to disaster. The book then gives a narrative of the crisis as it developed and analyzes all of the participants in the housing market, from the home buyers to investors in collaterialized debt obligations (CDOs). At each step, the book explains in a nontechnical manner the essential relationships among the market participants and zeroes in on the incentives facing each party. The book also includes an extensive glossary and a detailed, authoritative timeline of the subprime financial crisis.

Offering a unique look at the participants and incentives within the housing finance industry and its role in the biggest financial catastrophe in recent history, Robert W. Kolb provides one of the most comprehensive and illuminating accounts of the events that will be studied for decades to come as the financial crisis of our time.

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Editorial Reviews

From the Publisher
"Robert Kolb's The Financial Crisis of Our Time is an exceptional and comprehensive academic contribution toward a definitive analysis and understanding of what happened to the financial world during the 2007-09 meltdown. It provides the answers to the underlying conditions, the causes, and the principal participants that combined to create the greatest disaster of our time. For any serious researcher, Kolb's analysis is indispensable."—Leo Melamed, Chairman Emeritus, CME Group
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Product Details

Meet the Author

Robert W. Kolb is Professor of Finance and Frank W. Considine Chair of Applied Ethics at Loyola University Chicago. He has been professor of finance at the University of Florida, Emory University, the University of Miami, and the University of Colorado, and has published more than 20 books, including Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future and Futures, Options, and Swaps.

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Table of Contents


1. Introduction: The Financial Crisis of Our Time
Before the Great Depression
From the Great Depression to Financial Deregulation
From Financial Deregulation to the Savings and Loan Crisis

2. From Securitization to Subprime
The Development of Securitization
The Process of Securitization: An Overview
Credit Enhancement
The Subprime Difference

3. Before the Deluge
Subprime Lending: To the Peak
The Height of Subprime Lending

4. From the Subprime Crisis to Financial Disaster: An Overview
The Housing Peak to Hints of Something Wrong
The Slide Accelerates
Mortgage-Backed Securities and Foreclosures
No Relief in 2008
The Climax?
Back From the Brink

5. Extinctions
Among the Ruins
From Countrywide to IndyMac
Washington Mutual
Bank Extinctions, Banking Consolidation, and Too-Big-to-Fail

6. The End of Investment Banking
Big Brains, Big Egos, and Big Pay
Bear Stearns
The Bankruptcy of Lehman Brothers
Merrill Lynch: The Herd Goes to the Abattoir
Goldman Sachs, Morgan Stanley and the Week that Remade Wall Street

7. When Zombies Walk The Earth
Fannie Mae and Freddie Mac
Citigroup: The Biggest Zombie of Them All
Zombies and the Future

8. Policy Responses and The Beginnings of Recovery
Unfurling the TARP
The Market Reacts
The TARP Evolves
Introduction of the TALF
Instituting More Programs: The Public-Private Investment Program
Support for the Auto Industry
Support for Homeowners
Green Shoots in the Financial Sector
Initial Cost Assessment

9. Causes of the Financial Crisis: Macroeconomic Developments and Federal Policy
The Basic Story
Major Asset Price Collapse
Concentrated Exposure to the Failing Asset Class
Lack of Transparency and Freezing of the Financial System
Macroeconomic Developments
Federal Stimulative Policy and Legislation
Attempts to Combat Mortgage Lending Discrimination and to Expand Home Ownership to Minorities
National Homeownership Strategy
The Causal Role of the GSEs

10. Causes of the Financial Crisis: The Failure of Prudential Regulation
Regulation of Depository Institutions
Regulation of Lines of Business
Capital Requirements
Interaction Between Capital Regulation and Credit Derivatives
Regulation of Size and Scope-"Too Big to Fail"
Restrictions on Concentration of Risk
Regulation of Securities Markets and Supporting Institutions
Capital Regulations
Off-Balance Sheet Corporate Entities
Credit-Rating Agencies
Mark-to-Market Accounting Rules
Complex Financial Derivatives
The Regulation of AIG
Poor Regulation of Mortgage Industry
Defects in Regulatory Architecture

11. Causes of the Financial Crisis: From Aspiring Homeowner to Mortgage Lender
The Borrower
The Lender
The Appraiser
The Mortgage Broker
The Mortgage Frenzy, the Originator, and Underwriting Standards

12. Causes of the Financial Crisis: From Securitizer to Ultimate Investor
Purchasing Mortgages
Creating Securities and Obtaining Ratings
To the Ultimate Investor
Incentives from Securitizer to Ultimate Investors

13. Causes of the Financial Crisis: Financial Innovation, Poor Risk Management, and Excessive Leverage
Financial Innovation and the Creation of Complex Instruments
Poor Risk Management
Excessive Leverage

14. Causes of the Financial Crisis: Executive Compensation and Poor Corporate Governance
Pay at Financial Firms
Risk-Taking and Executive Compensation in the Financial Crisis
Incentives, Risk-Taking and Compensation at Fannie Mae
Executive Compensation and Lehman Brothers
Incentive Conflicts
Corporate Governance in the Financial Crisis

15. Consequences of the Financial Crisis and the Future It Leaves Us
Measuring the Damage: A Warning
The Bailout and Its Costs
From 2006 to 2009: Our Economic World and How it Has Changed
Reduced Circumstances: Our Economic Future
Beyond the Merely Economic-American Recessional or American Renewal?
Perfecting the Fatally Flawed Regulatory Regimes of the Past
The Financial Crisis, the Great Recession, and Institutional Failures
Fundamental Reform?
Corporate Governance, Executive Compensation, and Firms' Risk-Taking
Conclusion: Dopes, Genius, Saints, Scoundrels, and Ordinary People

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