THE CRUNCH: How greed and incompetence sparked the credit crisis

Author: Alex Brummer
Published by rh Business Books

Reviewed by Graham Terry, Senior Executive: Strategy and Thought Leadership, SAICA  

If this book was a thriller, it would be an exciting read leaving you tired but exhilarated at the end. Unfortunately it is not. It is in fact what has actually happened in the financial markets over the past decade.

When I put the book down, I felt depressed and disillusioned, because these events should never have happened. They should never have been allowed to happen. So many people have lost their life savings because of a group of bankers and financiers, who decided to set up a scheme that must rank as the biggest fraud of all time.

The sub-prime crisis in itself is a great enough problem. In essence, this involved banks in the US making housing loans to people that had no hope whatsoever of repaying the loans. It is estimated that up to 40% of these loans were commonly referred to as ‘liar loans', because the applicants lied about their personal circumstances or that the circumstances were not supported by documentation. The tragedy is that banks parcelled these loans up with other instruments into tradeable securities, which were then sold into the market. The securities were stamped with a triple A rating by the rating agencies, although, if the rating agencies had done their homework, they would have known that they were nothing more than ‘junk bonds'.

Alex Brummer is an award-winning journalist based in the UK. He traces the roller coaster ride from the early days of sub-prime lending through to the present day financial crisis. US banks were not the only delinquents. In the UK, for example, Northern Rock and other home lenders, caught up in the frenzy of making huge profits, committed the cardinal banking error of borrowing short and lending long. As credit became more freely available, house prices escalated rapidly, and contributing to the euphoria were the huge bonuses that drove executive behaviour.

Brummer describes how the banks and authorities tried to deal with the problems, leading eventually to ‘bale outs' and nationalisation. When liquidity tightened, property prices dropped and banks collapsed.

I would like to say it is fascinating but, in reality, it is tragic. However, it is a very good read and it opens one's eyes to human nature.