Product Description

Product Details

• Amazon Sales Rank: #1431 in Books
• Published on: 2008-03-03
• Original language: English
• Number of items: 1
• Binding: Hardcover
• 224 pages

Review
"[The Trillion Dollar Meltdown] is an absolutely excellent narrative of the horror that we have in the credit markets right now.... It's a wonderful explanation of how it happened and why it's so rotten, and why it will take a long time to unwind."—Paul Steiger, former Mng Editor, Wall Street Journal

"However up to date it may seem, this book is no rush job. Morris deftly joins the dots between the Keynesian liberalism of the 1960s, the crippling stagflation of the 1970s and the free-market experimentation of the 1980s and 1990s, before entering the world of ultra-cheap money and financial innovation gone mad... [Morris's] provocative book is...a well-aimed opening shot in a debate that will only grow louder in coming months."—Economist, March 6, 2008

"Will provide some important background that will help decipher the meaning behind today's gloomy financial headlines. For those who wonder "Why?", here's a place to get some answers!"—Watsonville (CA) Register-Pajaronian, March 13, 2008

"Charles Morris, author of The Trillion Dollar Meltdown, isn't one for sugarcoating. His analysis is dour and grim, but certainly not dull. And when read against a backdrop of an ever-weaker economy, increasingly anxious economists and a stream of gloomy predictions, it can be downright scary....Morris serves up a sharp, thought-provoking historical wrap-up of the U.S. economy and its markets, along with clear scrutiny of today's economic woes."—USA Today, March 31, 2008

"[A] shrewd primer... [Morris] writes with tight clarity and blistering pace."—James Pressley, Bloomberg News

"Morris offers a persuasive diagnosis of the long-building credit crash.... An especially graceful writer, Mr. Morris accessibly explains Wall Street's arcane instruments.... This is a smart layperson's guide."—The New York Times, April 6, 2008

“In his brief but brilliant book, Morris describes how we got into the mess we are in…. Few writers are as good as Morris at making financial arcana understandable and even fascinating.”—New York Times Book Review, April 20, 2008

“The Trillion Dollar Meltdown' by Charles R. Morris and ``Bad Money' by Kevin Phillips avoid the wild predictions of mass economic destruction, instead giving thoughtful, if alarming, histories and analyses of how we got into the mess we're in today.”—Bloomberg News

About the Author
Charles R. Morris has written ten books, including The Cost of Good Intentions, one of the New York Times' Best Books of 1980, The Coming Global Boom, a New York Times Notable Book of 1990, and The Tycoons, a Barrons' Best Book of 2005. A lawyer and former banker, Mr. Morris's articles and reviews have appeared in many publications including The Atlantic Monthly, the New York Times, and the Wall Street Journal.

Customer Reviews

The Trillion Dollar Meltdown


The beginning was very informative but then becomes bogged down with financial verbage. Hard read for the amature.

Manias, Panics, and Crashes
Excellent book outlining the ebb and flow of financial crises. Lots of historical examples and very good summaries.

CDS, SIVs , HF , $5 - $10 trillion swings in the derivatives market , Hard landings
1. In June 2007, Two Bear Stearns hedge funds that invested primary in mortgage backed bonds announce they were in trouble meeting margin calls. The real estate bust was in progress and the high leverage funds were in trouble, value dropping from indices of 100 to 90. American sub-prime was global and blue chip financial companies admit big losses: Nomura, Royal Bank of Scottland, Lehman Bros, Credit Suise, Deutschebank, France BNP Paribas, IKB, and Caliber and Bank of England had to bail out North Rock..

2. In addition to the Consolidated Debt Obligations there existed a Structured Investment Vehicles (SIVs) financial structure, run within, but separated from the major money center banks. SIVs aer typically Cayman Island limited partnerships that collect bundles of bank loans or other securities. They are convenient for moving assets off bank's balance sheet and apparently have substantial holdings of commercial and residential mortgages and mortgage back securities. Banks chose to finance SIVs with inexpensive ABCP short-term maturities (money market fund) rather than maturity debt. Total asset backed commercial paper outstandings was about $1.2 trillion.

3. November 2007, SIV approached a state of chaos. Outstanding interbank commercial paper balances had dropped below $900 billion, with most of the fallout due to refusal to refinance SIVs, leaving banks potentially on the hook to supply more than $300 billion of risky and unexpected financing. At Citi, the lending to its own SIV was more than three times higher than its net new global consumer lending. Citi and other American banks with cooperation of the Treasury are working to organize a super-SIV to take $75 to $100 billion in SIV loans off their books.

4. Citigroup revealed it managed $400 billion in off-balance entries called long term SIVs loans. Almost all the SIV loads were financed by short-term paper. When the London money markets realized what the banks were doing, commercial paper sales came to a grinding halt. Bank shareholders discovered that SIVs weren't really off-balance sheet, since the banks had usually promised to take them back if they couldn't raise short-term financing.

5. October 2007, big banks and investment banks reported $20 billion in losses, $11 billion of it at Citi and Merrill, primarily in subprime-based CDOs with revised to $45 billion in losses. Citi received a $7.5 capital infusion from Abu Dhabi in the form of a convertible bond, a 11 percent interest coupon.

6. Derivatives are futures, forwards, options, and swaps. Derivatives reduce risk for one party. Derivatives hedge against the future, invest small now for the option to buying later. Derivatives are contracts based on or derived from some underlying asset, reference rate (interest rates or exchange rates), or indexes

7. Derivatives can be based on assets such as commodities, bonds, interest rates, exchange rates, stock market index, and consumer price index. Derivatives allow investors to make massive money by leveraging on small movements in price. In derivatives someone losses money while someone gains money, a supposed zero sum game.

8. One very popular derivate was the Credit Default Swap (CDS). If I am a fund manager with a risky subprime mortgage portfolio that I'd like to get off my books. I could try to sell it, but it would be easier to enter into a credit default swap (CDS) on the ABX. In Oct 2007, a midcredit "A" swap was trading at 60, down from a par of 100, down 40 cents on the dollar. What does it cost? I pay the counterparty $4 million to take the risk for the $10 million CDO portfolio. The result is I've crystallized my worries into a single payment, taken a $4 million hit, and no longer have subprime exposure.

9. Hedge fund raise cash by selling equity in the form of partnership shares. For every $1 invested from its partnership equity, HF invest $4 borrowed from its banks, equity investments are leverage 5:1. HF buys $100 million in first-loss bonds, underpinning a $2 billion CDO, 20:1 leveraging. The $100 million is financed with $20 million in equity and $80 billion from the bank. HF partners are leveraged 5X20=100:1. A loss of 1 percent on the CDO wipes out all HF partner equity. A potential loss of $20 million per percent drop.

9. Portfolios covered by default credit default swaps contracts ballooned from about $1 trillion in 2001 to about $45 million in mid-2007. CDS are private deals arranged for a fee by broker-dealer banks.

10. Banks are on the hook to make good losses on some $18.2 trillion of portfolios, while credit hedge funds have guaranteed some $14.5 trillion. Most funds can not survive even a 1 percent to 2 percent payoff demand on their default swap guarantees. Banks and investment banks carry large swathes of risky loans and investments because they have default insurance. Poor design, these companies do not carry bad debt reserves against the possibility of failure.

11. Additionally, at risk was the larger $43 trillion CDS insurance market for which Bear Stearn insured $13.4 trillion and the $150 trillion bond market and the $500 trillion derivatives market.

12. A hard landing predicted in 2009. $350 billion in subprime and other risky residential mortgages will be reset, many at punishing rates. Defaults will rise sharply. Two million people could loss their homes. House prices will continue to fall, 10 - 30 percent. Many consumers will be stuck in upside-down mortgages. The $9 trillions in home equity withdrawn is no long sustainable. Dollar decline will make commodity prices higher. US oil exports will rise and pass through dollar decline. A decline in credit availability will feed into the downward momentum.

13. Hardlanding started in 2008 and economic losses are expected to continue with more defaults and writedowns. The writedowns are a measure of the yield for holding such risky instruments. The billions in writedowns will negatively impact the economy. The Super-SIV structure floated by Citgroup and the Treasury looks like a blatant attempt to defer writedowns. Widespread collateral damage in hedge funds will trigger forced selling from margin accounts. Rolling bond downgrades will require divestures by pension funds and insurance companies that find themselves in violation of rules holding investment grade paper.

14. With notional derivative values in the $500 trillion range, rapid swings of $5 trillion to $10 trillion in derivative values are altogether plausible and could inflict enormous damage.