A Brief History of Doom

by Richard Vague

  The speculation was “riotous” in early 1910 and had everyone in a frenzy. Soon enough, stocks crashed, causing a chain reaction of bankruptcies and failures of native banks: “Zhengyuan, Qianyu, and Zhaokang were the first three native banks to declare bankruptcy, with debts of 1.4 million tael. . . . Yuanfengrun Yinhao . . . close[d] its doors with debt of 20 million tael” (Ji, A History of Modern Shanghai Banking, 93). In the end, the Qing government would need to bail out the crisis by borrowing even more from foreign banks.

  The Xinhai Revolution, or the Revolution of 1911, would see the fall of the Qing dynasty, the demise of which would “plunge Chinese banking and finance into chaos.” The native banking system collapsed, the modern banking system was restructured, and the fearful public would make a run on the banks. The revolution also caused “a halt in commercial deposits and default on most loans,” which was part of the collapse of the native banks (Ji, A History of Modern Shanghai Banking, 94).

  Niv Horesh feels that the revolution itself was spurred on by the rubber crisis and issues with the manner in which railways were being renationalized, with the benefit given to the already wealthy, though does not specify any of these items as being directly blamable: “The stock exchange crash ramified into a national crisis that crippled nascent railway ventures, and was responsible in part for the provincial discontent that toppled the Qing” (Niv Horesh, Shanghai’s Bund and Beyond: British Banks, Banknote Issuance, and Monetary Policy in China, 1842–1937 [New Haven, CT: Yale University Press, 2009], 33).

  The 1920s saw banking crises, and once again rubber shares and political upheaval were culprits, though not at the level of 1910. There was also a drop in commodity prices, which adversely affected gold speculators, “many of whom were merchants with ch’ienchuang (qianzhuang) interests.” Foreseeing a run on banks, those who were currency note-issuing stocked up on dollars, which increased the tael-dollar exchange rate. All of this, along with the refusal of modern banks to renew chop loans, led to seven qianzhuang being unable to meet their obligations in August 1924; they were saved only by the two bankers’ guilds that took steps to prevent a panic (Andrea Lee McElderry, Shanghai Old-Style Banks [Ch’ien-Chuang] 1800–1935 [Ann Arbor: Center for Chinese Studies, University of Michigan, 1976], 146).

  The 1930s in China saw sovereign debt and currency crises; by the 1940s, this had extended to a prolonged inflation crisis that included warring factions continuing to print and use increasingly less valuable paper currency to pay and provision their armies. This inflation crisis was a factor in bringing the Communists to victory. Financial records are scarce in this period. In 1949, Mao’s Communist Party prevailed, and capitalism came to an end in China, only to return, haltingly at first, in 1978 under the rule of Deng Xiaoping.

  Chapter 6

  1. U.S. Bureau of Labor Statistics, “Civilian Unemployment Rate [UNRATE],” FRED, last modified November 2, 2018, https://fred.stlouisfed.org/series/UNRATE.

  2. Ibid.

  3. For profiles on some of these investors and how they made fortunes betting against runaway lending, see Michael Lewis, The Big Short: Inside the Doomsday Machine (New York: W. W. Norton, 2011).

  4. Board of Governors of the Federal Reserve System, “2.1, Table D.3, Debt Outstanding by Sector,” from Data Download Program, https://www.federalreserve.gov/datadownload/choose.aspx?rel=21.

  5. Securities Industry and Financial Markets Association (hereafter SIFMA), “Research & Data,” https://www.sifma.org/resources/archive/research.

  6. Organisation for Economic Co-Operation and Development (OECD), “Long-Term Iinterest Rates,” https://data.oecd.org/interest/long-term-interest-rates.htm.

  7. Ibid.

  8. S&P Dow Jones Indices LLC, “S&P/Case-Shiller 20-City Composite Home Price Index,” FRED, last modified October 30, 2018, https://fred.stlouisfed.org/series/SPCS20RSA.

  9. This data is the sum of two FRED series: U.S. Bureau of the Census and U.S. Department of Housing and Urban Development, “New One Family Houses Sold: United States [HSN1F],” retrieved on May 17, 2016, https://fred.stlouisfed.org/series/HSN1F; and National Association of Realtors, “Existing Home Sales [EXHOSLUSM4955],” retrieved on May 17, 2016, https://fred.stlouisfed.org/series/EXHOSLUSM4955.

  10. SIFMA, “Research & Data.”

  11. Joint Center for Housing Studies of Harvard University, “Table W-2: Ratio of Median House Price to Median Household Income by Metro Area: 1994–2005,” in the Appendix Tables for “The State of the Nation’s Housing 2006,” http://www.jchs.harvard.edu/research-areas/reports/state-nations-housing-2006.

  12. Board of Governors of the Federal Reserve System, “Z.1, Table L.217, Total Mortgages,” from Data Download Program, https://www.federalreserve.gov/datadownload/Choose.aspx?rel=Z.1.

  13. Daniel C. Vaughan, “The Credit Crisis in Commercial Lending and the Effect on Your Real Estate Practice,” Washington State Bar Association Quarterly (Summer 2008), 4.

  14. Tomoeh Murakami Tse, “Down Payments’ Downward Trend,” Washington Post, January 21, 2006.

  15. Bethany McLean and Joe Nocera, All the Devils Are Here: The Hidden History of the Financial Crisis (New York: Portfolio/Penguin, 2010), 20.

  16. Ibid., 23–28.

  17. “The Secret ‘Friends of Angelo,’ ” Wall Street Journal, June 25, 2009, https://www.wsj.com/articles/SB124588865553750813.

  18. SIFMA, “Research & Data.”

  19. McLean and Nocera, All the Devils, 251.

  20. In an attempt to prevent depositors from withdrawing funds, former president George W. Bush signed legislation raising the amount insured by the FDIC. See FDIC, “Emergency Economic Stabilization Act of 2008 Temporarily Increases Basic FDIC Insurance Coverage from $100,000 to $250,000 Per Depositor,” press release, October 7, 2008, https://www.fdic.gov/news/news/press/2008/pr08093.html.

  21. Despite the fact that mortgage-backed securities certainly became popular in the 1980s, there is some disagreement over how far back they go. Some scholars, for instance, trace the earliest MBSs to 1968. See Frank J. Fabozzi and Franco Modigliani, Mortgage and Mortgage-Backed Securities Markets (Cambridge, MA: Harvard University Press, 1992).

  22. Board of Governors of the Federal Reserve System, “2.1, Table L.218, Home Mortgages,” specifically line 18 plus line 19 divided by line 2, from Data Download Program, https://www.federalreserve.gov/datadownload/choose.aspx?rel=2.1.

  23. Vikas Bajaj, “Freddie Mac Tightens Standards,” New York Times, February 28, 2007.

  24. SIFMA, “US-Mortgage Related Securities Outstanding,” https://www.sifma.org/wp-content/uploads/2017/06/sf-us-mortgage-related-sifma.xls.

  25. Lewis, Big Short, 7.

  26. Ibid., 72.

  27. Bank for International Settlements (hereafter BIS), “Credit to the Non-Financial Sector” dataset, https://www.bis.org/statistics/totcredit/totcredit.xlsx.

  28. Ibid.

  29. Eurostat, People in the EU: Who Are We and How Do We Live? (Luxembourg: Publications Office of the European Union, 2015), 77.

  30. International Monetary Fund, Spain: Financial Sector Assessment Program: Technical Note: Housing Prices, Household Debt, and Financial Stability (Washington, DC: International Monetary Fund, 2006), 5.

  31. USA International Business Publications, Spain Country Study Guide Volume 1: Strategic Information and Developments (Washington, DC: International Business Publications, 2013), 194.

  32. Ben Bernanke, “The Great Moderation,” speech, meeting of the Eastern Economic Association, Washington, DC, February 20, 2004, https://www.federalreserve.gov/boarddocs/speeches/2004/20040220/.

  33. Charles P. Kindleberger and Robert T. Aliber, Manias, Crashes, and Panics: A History of Financial Crises, 5th ed. (Hoboken, NJ: John Wiley, 2005), 3.

  34. Maurice Obstfeld and Kenneth Rogoff maintain that “global imbalances” did not “cause the leverage and housing bubbles” but nonetheless insist such imbalances were “a critically important codeterminant.” See their report, “Global Imbalances a
nd the Financial Crisis: Products of Common Causes” (Federal Reserve Bank of San Francisco Asia Economic Policy Conference, October 18–20 2009, Santa Barbara, CA), 1, https://www.imf.org/external/np/res/seminars/2010/paris/pdf/obstfeld.pdf.

  35. Writers at Forbes described the global financial crisis in terms of contagion. While it makes sense that in panic, many chose to refer to the unfolding crisis as such, the rhetoric and discourse of contagion presumes that if one sector or country is contaminated, then the infection, if left unchecked, will spread globally. However, as I have made clear throughout the book, financial crises caused by runaway lending practices are years in the making. A crisis is not like an infection that latches onto a perfectly healthy and unsuspecting host. If we insist on using the language of illness—and I am not saying that we necessarily ought to—then we at least should think of financial crises as conditions born of habit, the consequences of which can be catastrophic in the long run. Human behavior was responsible for the crisis, not a pathogen found in nature. See Oxford Analytica, “U.S. Financial Crisis Goes Global,” Forbes, September 22, 2008, https://www.forbes.com/2008/09/19/banks-contagion-globalization-cx_0919oxford.html#559f5fc13ed9.

  36. Teri Buhl and John Carney, “Deutsche Bank Also ‘Victimized’ Goldman ‘Victim,’ ” Atlantic: Business, April 26, 2010, https://www.theatlantic.com/business/archive/2010/04/deutsche-bank-also-victimized-goldman-victim/39471/.

  37. It would be three years before Burry learned AIG was the insurance company selling CDSs on subprime mortgages. However, his certainty that such an insurer existed led him to jump on the opportunity early on. See Lewis, Big Short, 68.

  38. BIS, “OTC Derivatives Outstanding,” October 2018, https://www.bis.org/statistics/derstats.htm.

  39. Jenny Anderson, “Wall Street Winners Get Billion-Dollar Paydays,” New York Times, April 17, 2008, https://www.nytimes.com/2008/04/16/business/16wall.html?mtrref=www.google.com&gwh=F206AE32678C6EEEC340792CC473E22A&gwt=pay.

  40. Brooksley Born, “Testimony of Brooksley Born, Chairperson Commodity Futures Trading Comission Concerning the Over-the-Counter Derivatives Market: Before the U.S. House of Representatives Committee on Banking and Financial Services,” July 24, 1998, https://www.cftc.gov/sites/default/files/opa/speeches/opaborn-33.htm.

  41. Scott Horsley, “Huge Lender New Century Files for Bankruptcy,” National Public Radio, April 2, 2007, https://www.npr.org/templates/story/story.php?storyId=9293451.

  42. Emily Kaiser, “Subprime Losses Could Hit $100 Billion: Bernanke,” Reuters, July, 19, 2007, https://www.reuters.com/article/businesspro-usa-fed-bernanke-dc/subprime-losses-could-hit-100-billion-bernanke-idUSN1933365020070719.

  43. Alexandra Twinn, “Dow, S&P Break Records,” CNN, October, 9, 2007, https://money.cnn.com/2007/10/09/markets/markets_0500/index.htm?postversion=2007100917.

  44. Board of Governors of the Federal Reserve System, “Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks,” https://www.federalreserve.gov/releases/chargeoff/.

  45. Colliers International, “Manhattan Class A & Class B Price/SF” table, from “Manhattan Office Capital Markets Report 1Q 2014,” 2, http://www.colliers.com/-/media/Images/UnitedStates/MARKETS/New%20York%20City/1Q-2014-Manhattan-Office-Capital-Markets.

  46. Christopher Longinetti, “The Credit Crisis in Commercial Real Estate,” Center for Real Estate Quarterly 3 (2009), 28–29.

  47. Ben S. Bernanke, “Financial Markets, the Economic Outlook, and Monetary Policy,” speech, Women in Housing and Finance and Exchequer Club Joint Luncheon, Washington, DC, January 10, 2008, https://www.federalreserve.gov/newsevents/speech/bernanke20080110a.htm.

  48. David Ellis, “Countrywide Rescue: $4 Billion,” CNN Money, January, 11, 2008, https://money.cnn.com/2008/01/11/news/companies/boa_countrywide/.

  49. Edmund L. Andrews, “Fed Acts to Rescue Financial Markets,” New York Times, March 17, 2008, https://www.nytimes.com/2008/03/17/business/17fed.html?dlbk.

  50. “Bear Stearns Gets a Lifeline from Fed and JP Morgan,” New York Times, March 14, 2008, https://www.nytimes.com/2008/03/14/business/worldbusiness/14iht-bear.4.11107180.html.

  51. Scott Horsley, “Bear Stearns Collapse Costly to Many,” National Public Radio, March 17, 2008, https://www.npr.org/templates/story/story.php?storyId=88415073.

  52. Ibid. According to “Bear Stearns Gets a Lifeline,” officials at the Federal Reserve claimed the Fed “voted unanimously to lend the funds through JP Morgan because it would be operationally simpler than a direct loan to Bear Stearns.”

  53. Board of Governors of the Federal Reserve System, “Z.1, Table L.218, Home Mortgages,” Lines 18 (Government-sponsored enterprises; home mortgages; asset) and 19 (Agency-and GSE-backed mortgage pools; home mortgages; asset), from Data Download Program, https://www.federalreserve.gov/datadownload/Choose.aspx?rel=Z.1.

  54. Peter J. Wallison and Edward J. Pinto, “A Government-Mandated Housing Bubble,” Forbes, February 16, 2009, https://www.forbes.com/2009/02/13/housing-bubble-subprime-opinions-contributors_0216_peter_wallison_edward_pinto.html#2ef4bb46778b.

  55. James R. Hagerty, Ruth Simon, and Damian Paletta, “U.S. Seizes Mortgage Giants,” Wall Street Journal, September 8, 2008, https://www.wsj.com/articles/SB122079276849707821.

  56. Lehman Brothers Holdings Inc., 10-K Form, U.S. Securities and Exchange Commission, Washington, DC, 104, https://www.sec.gov/Archives/edgar/data/806085/000110465908005476/a08-3530_110k.htm.

  57. Nick K. Lioudis, “The Collapse of Lehman Brothers: A Case Study,” Investopedia.com, December 11, 2017, https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp.

  58. Ibid.

  59. Federal Reserve, “Federal Reserve Announces the Creation of the Term Asset-Backed Securities Loan Facility (TALF),” press release, November 25, 2008, https://www.federalreserve.gov/newsevents/pressreleases/monetary20081125a.htm.

  60. Edith Honan and Dan Wilchins, “Bernard Madoff Arrested over Alleged $50 Billion Fraud,” Reuters, December 11, 2008, https://www.reuters.com/article/us-madoff-arrest/bernard-madoff-arrested-over-alleged-50-billion-fraud-idUSTRE4BA7IK20081212.

  61. An oft-repeated and cited saying of his, Buffett sometimes includes this quote in his newsletters to investors at Berkshire Hathaway.

  62. Edmund L. Andrews and Jackie Calmes, “Fed Cuts Key Rate to a Record Low,” New York Times, December 16, 2008, https://www.nytimes.com/2008/12/17/business/economy/17fed.html.

  63. Jan Strupczewski, “Euro Zone Recession Confirmed,” Reuters, December 4, 2008, http://www.reuters.com/article/us-eurozone-economy-gdp-sb/euro-zone-recession-confirmed=idUKTRE4B32JK20081204.

  64. Edmund Conway, “Bank of England: 1.2 Million Face Negative Equity as Property Slumps,” The Telegraph, October 28, 2008, http://www.telegraph.co.uk/finance/financialcrisis/3270886/Bank-of-England-1.2million-face-negative-equity-as-property-slumps.html.

  65. Andrew Ross Sorkin and Mary Williams Walsh, “A.I.G. Reports Loss of $61.7 Billion as U.S. Gives More Aid,” New York Times, March, 2, 2009, https://www.nytimes.com/2009/03/03/business/03aig.html.

  66. Susanna Kim, “2010 Had Record 2.9 Million Foreclosures,” ABC News, January 13, 2011, https://abcnews.go.com/Business/2010-record-29-million-foreclosures/story?id=12602271.

  67. TED: The Economics Daily, “Unemployment Rate, March 2008–March 2011,” Bureau of Labor Statistics, April 6, 2011, https://www.bls.gov/opub/ted/2011/ted_20110406_data.htm.

  68. Hibah Yousuf, “Dow Closes at 5-Year High,” CNN Business, September 11, 2012, https://money.cnn.com/2012/09/11/investing/stocks-markets/index.html.

  69. The Dow Jones Industrial Average reached this level on August 2, 2013. See S&P Dow Jones Indices LLC, Dow Jones Industrial Average (DJIA), FRED, https://fred.stlouisfed.org/series/DJIA.

  70. See Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007).

  71. Bernanke, “Great Moderation.”

  72. Ben S. Bernanke, CNBC interview, July 1, 2005, q
uoted in David Leonhardt, “Bernanke, Pro and Con,” New York Times, December 3, 2009, https://economix.blogs.nytimes.com/2009/12/03/bernanke-pro-and-con/.

  73. Ben S. Bernanke, “The Economic Outlook,” testimony before the Joint Economic Committee, U.S. Congress, Washington, DC, October 20, 2005, 7, https://georgewbush-whitehouse.archives.gov/cea/econ-outlook20051020.html.

  74. Ben S. Bernanke, U.S. House of Representatives Hearing, Washington, DC, February 15, 2006, quoted in “Greenspan and Bernanke: Evolving Views,” New York Times, August 22, 2007, https://www.nytimes.com/2007/08/22/business/22leonsidebar-web.html.

  75. Bernanke, “Economic Outlook.”

  76. Bernanke, “Financial Markets.”

  ACKNOWLEDGMENTS

  Researching and writing this book was challenging, if for no other reason than the extraordinary amount of data that had to be retrieved, reconstructed, and assembled. But on top of that, the research led me to views that were often well outside the mainstream, which made the need to get data all the more acute and the challenge all the more daunting. However, I was aided by a group of full-time analysts and researchers who did exceptional work and whom I would now wager have as much or more expertise in reconstructing financial data from the past than anyone else. The team was led by the dedicated and dependable Dan McShane, with analysts Michael Grady and Menachem Hauser and researchers Nicole Amato and Gary Jarvis. The efforts of this group have been exceptional. We garnered additional help from a number of terrific individuals, including Don Steinberg, Talia Coutin, Eduard Saakashvili, Juan Gallardo, Anastasia Saverino, Grace Hylinski, and Francesca Robin. I was continually surprised and delighted by the discoveries they made.

  The director of Penn Press, Eric Halpern, and my chief editor, Damon Linker, guided me and made all of this possible. They also introduced me to the inimitable editor and writer Pamela Haag, who waded deep into the project; provided firm, steady-handed guidance; and never hesitated to tell it to me like it was. I opened her emails with trepidation because I knew they would contain new lists of tasks and revisions that would be right on target but would require me to up my game.