Trading Book Reviews

Book Review: Financial Shock, by Mark Zandi

A look back at the causes and drivers of the financial crisis

[easyazon-link asin=”0137142900″][/easyazon-link]Over the last couple of weeks I read Mark Zandi’s new book, [easyazon-link asin=”0137142900″]Financial Shock A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis[/easyazon-link]. It’s one I was offered the opportunity to get my hands on for free and the subject interested me, so I grabbed it. Overall, I have to say it was a good choice.

Financial Shock is a look back at the things which put us in the market and economic situation we’re in right now vis-a-vis the mortgage and credit markets. Unlike the media, political voices, or the general public - most of which seems to be placing the blame almost exclusively on Wall Street and/or the Bush administration - the author, economist Mark Zandi (you may have seen him on CNBC and/or other business news outlets), does a good job of showing how a many different elements played their part. They include regulators at all levels, home builders, investors, home buyers, the Federal Reserve, the government, financial institutions, and others. To put it simply, the book does an excellent job of showing how large and complex an issue the development of the mortgage crisis really was.

Actually, Zandi does leave one group out of the discussion. It’s the rating agencies, which have been reviled for their role in developments. While this means that a large cog in the machine is missing from examination, there’s a reason why they were excluded. Zandi is in the employ of one of those agencies – Moody’s. While it would have been a better text were the agencies included, it’s hard to argue against the author taking on that subject. It was a no-win situation for him.

Breadth of coverage aside, I found the book very well written. It does an excellent job of explaining the many complex elements of the story, things like the array of alphabet soup derivative instruments and regulatory agencies involved. As you are probably aware, I work in the financial markets, so I know from what I speak here. There are plenty of statistics and graphs for readers who get into the data, but I wouldn’t call it a challenging quantitative read by any means. The subject Zandi tackles here is a big, heavily intertwined one and he did a very good job of showing how things all came together to create the so-called housing bubble and how it burst.

Here’s where the book runs into trouble, though.

It was written too early. Things have not run their course and been resolved as yet. The author put the book together some time not too long after Bear Stearns was taken over by JP Morgan. As we all know, a great deal has happened since then. That means Zandi has only told part of the story.

He also basically made a prognostication in the book that the crisis was at an end. It’s not going to help his credibility to readers that he obviously got that one wrong. Clearly, he and his publisher were trying to be the first to market with a book on the subject, but they’re getting a bit burned by rushing it.

The other thing I think diminishes the over all value of the book is that in the end Zandi makes suggestions for things that could/should be done. In other words, he moves from history to policy adviser. I think he would have been better off just sticking with the history – at least in this particular product. He’s presented an excellent discussion of how we got here. I have no problem with some commentary on how things could have been handled differently, but I’d rather see the forward looking stuff handled separately.

Overall, however, I found [easyazon-link asin=”0137142900″]Financial Shock[/easyazon-link] a very worthwhile read, and would recommend it for anyone with an interest in the subject.

By John

Author of The Essentials of Trading

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