Tomorrow, as everyone has been ceaselessly reminded all this past week, is the tenth anniversary of the market bottom that ended the greatest equity market decline since the 1930s.
During the intervening decade, we have been treated to numberless books purporting to explain what happened. They run the gamut from Andrew Ross Sorkin’s minute-by-minute hardcover comic book Too Big to Fail to Gretchen Morgenson’s turgid plea for (heaven help us) massively increased government regulation, Reckless Endangerment. In between, there have been the self-exculpatory memoirs of the principal actors in the opera buffa: the Messrs. Bernanke, Paulson and Geithner.
There is, however, one peerless and quite definitive book on the subject, without which no understanding of the crisis is possible, and that every financial advisor desperately needs to read. It is John A. Allison’s The Financial Crisis and the Free Market Cure.
Mr. Allison began his career with BB&T Bank in 1971 as a $600-a-month farm loan officer. Forty years later, when he wrote this book in 2011, he had already been the longest-serving CEO of a top-25 financial institution in America, and his principled leadership was the key reason that BB&T never suffered a quarterly loss throughout the financial crisis.
His book sets out, in vivid and even remorseless detail, his contention that the uncaused cause of the financial crisis was the government’s mandate that homeownership should be brought within reach of everyone – including and especially people with neither the character nor the means to pay a mortgage, month in and month out, year in and year out.
So-called “subprime” mortgages thus went from being a fringe sector of the mortgage market to mainstream and then to dominance. And why not? Home prices could only go up. And the originators of those mortgages no longer had any incentive to insure the creditworthiness of the borrowers, as the loans were immediately packaged up and sold – in increasingly opaque tranches – to yield-starved “investors.” It helped that the fiction of a AAA rating was readily available from rating agencies who were simply prostituting themselves to maintain market share. (No one, of course, is blameless in the chaos that followed, least of all Wall Street and the banking community.)
Every financial crisis prompts some boneheaded government “fix” that sets up the next cataclysm. And Mr. Allison’s is the only account that properly explains the malignant role of fair value (mark-to-market) accounting – a creature of the then-recent Sarbanes-Oxley legislation – in the conflagration. (Indeed, as First Trust’s Brian Wesbury pointed out that very day, it was FASB’s March 9, 2009 hint that it was backing away from mark-to-market accounting that turned the stock market.) Mr. Allison’s chapter on this phenomenon is alone worth the price of the book.
In the end, Mr. Allison concludes, government policy was the primary cause of the Great Recession – as it is of all financial crises, because without government interference, markets are always self-correcting. There isn’t a whole lot a financial advisor can do about this – except to not let her clients get surprised by it.
© 2019 Nick Murray. All rights reserved. Reprinted by permission.