Bond Market: 2012 Annual Review

The 2012 bond market produced healthy returns across the major asset classes and marked the eighteenth year in a row of positive gains for investment grade bonds. The Fed’s ultra-low interest rate policy depressed yields and supported prices of short-term securities and government bonds. Because of the lower yields from the safer securities, investors actively sought out the higher yields investments of the market. In addition to ultra-low interest rates, the slow global growth boosted the bond market. Investors were confident that government central banks would not raise interest rates in the near future given the sluggish economic performance across all countries.

The U.S. Federal Reserve has maintained its stance that it will not raise interest rates until 2015. Therefore, the bond prices would continue to be supported and worth investing in. However, the economy in the U.S. grew just enough to support investor confidence in the financial health of corporate and high yield bond issuers. The Federal Funds rate remains at 0.25%.

Below are the 2012 returns on various asset classes:

• Investment-grade U.S. bonds: 4.22%
• Short-term U.S. Treasuries: 0.51%
• Intermediate-term U.S. Treasuries: 1.73%
• Long-term U.S. Treasuries: 3.78%
• Mortgage-backed securities: 2.426%
• Municipal bonds: 6.78%
• Investment Grade Corporate bonds: 9.82%
• Long-term Investment Grade corporate bonds: 12.41%
• High yield bonds: 14.71%
• International government bonds: 5.66%
• Emerging market bonds: 16.52%

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Brandon Nesfield

2012 Stock Performance Review

In a year characterized by volatility due to concerns over the impending fiscal cliff and questions about the debt ceiling, U.S. markets performed surprisingly well overall. Taking dividend payments into account, the NASDAQ returned 16%, the S&P 500 15%, and the Dow Jones Industrial Average 10%. This strong performance occurred in the midst of a worsening European debt crisis, stalling U.S. economic growth, and political gridlock in Washington. Over the first quarter of 2012, stocks posted strong gains, only to have them erased in the second quarter as the European crisis intensified and technical failures marred the third largest ever IPO in May as Facebook went public. In June, however, ECB president Mario Draghi worked with the EU to provide bailout loans to Spain’s embattled banks, which culled investors’ fears somewhat. With rumors abounding that the Fed would initiate a new round of quantitative easing in the third quarter, stocks began to get back on track. In September, Fed chairman Ben Bernanke announced QE 3 and the S&P reached a 5-year high of 1466. Investors remained bullish into the New Year, despite decreased corporate earnings across the board.

Financial stocks led the charge over the year, gaining 26% and reversing a freefalling trend. Banks continued to clean up their balance sheets and despite rogue trading mishaps and rate-fixing scandals, the sector performed very well overall. Looking ahead, volatility will likely come down as politicians come to a consensus over the debt ceiling, although a permanent fix does not seem imminent. Investors are fleeing bonds for equities, and many market prognosticators see 2013 as being a year of record highs for stocks.
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Scott Lamson

Quarter Review

With a strong performance from the S&P in the first quarter, one would expect increased mergers and acquisitions. However, the S&P was up for the quarter, 12 percent, which are the best results in fourteen years but M&A activity failed to follow suit. A recent article in the Wall Street Journal titled "Bankers Await Rebound in Mergers", Gina Chon writes, "Globally, the first quarter saw about $545.2 billion of announced deals, the slowest start to a year since the first quarter of 2003." Bankers and investors hope to see a surge in M&A activity in the upcoming quarter. We will have to see if M&A activity will correlate with the markets performance for the remainder of the year. Additionally, investors doubt the S&P will continue to perform at its current rate.
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Editorial Staff

European Debt Crisis Update

Uncertainty in Southern Europe continues to plague other euro-zone economies, despite the ECB’s pledge to buy an unlimited quantity of struggling countries’ government bonds. According to the European Commission, consumer confidence hit a 40-month low in September and most experts expect the euro-zone recession to worsen this year. The French PMI fell 4 points this month, marking one of the largest slides in recent history.

In Greece, the country is facing yet another budget shortfall. A report, to be released in October, will produce an estimate of this most recent Greek deficit. At that time, the ECB, IMF, and the euro-zone governments will have to determine how they will proceed with the Greek bailout plan and who will be forced to alleviate some of the Greek debt. Without greater concessions, Greece could go bankrupt as early as November and send the euro-zone into another possible crisis.

In Spain, the government is in talks with the ECB over a potential bailout and any conditions that would come along with said bailout. Additionally, the Spanish economy received a much-needed boost this past Thursday when it sold a significant amount of long-dated debt to foreign investors. This move has given Spain greater fiscal freedom to tackle some of its recent financial problems.
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Brandon Nesfield 

iPhone 5 Released Amidst Consumer Concerns

AAPL: Not all is well in Cupertino, CA. Apple Inc. recently released their infamous and highly anticipated iPhone 5. With all the great new features and increased processing speeds the new Apple Maps app is under great scrutiny. The major issues are that the app often displays shops and restaurants streets away from their true location, important sites including some train stations are missing, and the search function appears unable to understand simple requests—essentially the app is unreliable and inaccurate. Many workers close to the case think that Apple placed its rivalry with Google ahead of its focus on iPhone customers. Apple has reassured customers that the product is in its infancy and will continue to improve. The issue with this is theory of improving with consumer feedback goes against Apple’s confirmed identity of producing products that are extremely user friendly. Could this yield an identity crisis? Only time will tell.
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Zachary Zarnik 

Market Recap (Sep. 17)

The S&P 500 Index (.SPX) fell 0.35% from 1465.42 to 1460.15 over the course of last week amid concerns that turmoil in the euro zone will continue to negatively affect global economic growth. The CBOE Volatility Index (.VIX), which measures volatility in the stock market and is generally considered to be the most accurate indicator of investor fear, traded above 14. The FTSE Eurotop 300 Index traded as high as 1,121.35 and as low as 1105.66 before finishing relatively flat at 1119.32 for a loss of 0.08%. The down trading over the week came as Mario Draghi and the ECB's bond buying plan failed to lift German business confidence and sentiment dropped for a fifth straight month. Spanish Prime Minister Mariano Rajoy's administration will present its budget to parliament this Thursday and bank audit results on Friday. Additionally, Moody's will be issuing a new credit rating on Spanish debt in the coming days that could affect investor sentiment even further.

The currency markets experienced volatility this week as the euro lost more against the dollar than during any other period over the last two months. Although the Federal Reserve's plans to expand the money supply and the ECB's bond buying program has seen the euro recover to heights of ~$1.31 against the dollar over the past few days, EUR/USD was trading back in the $1.28-$1.29 range by Monday, September 24.

Commodities news was dominated by oil prices plummeting. In a three day stretch last week, crude oil prices fell by more than 7%. A large sell order placed by a market mover on Monday triggered stop-losses and prices subsequently continued to decline. Winter months typically cause oil prices to become bearish and hibernate, but depending on how certain diplomatic tensions between key oil producers in the Middle East work out over the coming months, we could see a supply squeeze and a rebound of oil prices.
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Nicholas Hurst

Apple Releases iPhone 5; Stocks Soar

Apple’s stock continues to soar days after the release of the iPhone 5 specifications, reaching an all time high of $696.98 on Friday, raising the formidable stock three percent in two trading days. The technology giant will begin selling the iphone in stores on September 21 in nine countries and 22 more on September 28. Apple plans to build on the iPhone hype as it gears to launch the newest iPad next early next month. The iPhone 5 sports a 4-inch retina display, 4G LTE, a metal rather than glass back, and is 20 percent lighter than its predecessor. The company started taking orders for the iPhone at midnight pacific time and sold out of all pre-orders in an hour. Bloomberg has forecasted the sales of nearly 48.2 million units by the end of December with other analysts hovering around 42-46 million and have calculated a target price of $775 for Apple. Though some grant the rise in Apple’s stock with the demand for the iPhone 5, analysts contribute part of the rise of Apple’s stock price to Bernanke’s Federal Reserve package.
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Editorial Staff

Strong Moves by Fed Spur Stock Surge

Stocks surged this week following the announcement Thursday that the Federal Reserve would undertake its third round of quantitative easing, QE3. The program will consist of the Fed purchasing approximately $40 Billion in mortgage-backed-securities per month until significant improvements are seen in the labor market. The open-endedness of the program came as especially good news to investors who were expecting action from the Fed, but were pleasantly surprised by the forcefulness of the announced program and its potential longevity. By purchasing mortgage-backed-securities, the Fed hopes to boost a still-slumping housing market to growth in the overall economy and eventually an increase in employment.

Similar good news came to investors across the pond in Europe when a German Constitutional Court ruled that Germany could participate in the previously announced program by the European Central Bank to buy up short-term debt from the turmoil-ridden economies of countries in the EU. This affirmation of strong monetary policy from the ECB (which sparked last week’s equity market gains) coupled with the strong action taken by the Fed here at home pushed the Dow Jones up 286.73 (+2.15%) for the week to close at 13,593.37, within 5% of its October-2007 record high. Similarly, the S&P moved up 27.85 to close at 1465.77 (+1.94%) and the NASDAQ docked up 47.53 (+1.52%) to close at 3183.95. Despite this week’s rally, significant economic concerns still linger. Fears of looming inflation and a still week job market continue to worry investors. Only time will tell whether the Fed’s bold moves this week will lead to a sustained rally in the US equity market.
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Editorial Staff

Carlyle Buys Controlling Stake in Brazilian Specialty Furniture Retailer

The Carlyle Group announced a deal to purchase a 60 percent stake in Brazil’s largest furniture retailer by sales (~$495 million in 2011), Tok&Stok, for a reported $347 million on Thursday. The agreement marks growing confidence in the 200 million consumer market as government tax cuts have seen recent marked growth in consumer spending. Only two weeks ago, the firm struck a deal to purchase a 25 percent stake in the Brazilian equipment rental company Grupo Orguel. Both announcements add to Carlyle’s Brazilian portfolio, which includes CVC (a tourism company), Qualicorp (a health plan broker), Scalina (a lingerie manufacturer) and Ri Happy (Brazil’s largest chain of toy stores).
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Editorial Staff

Whistle-Blower Awarded Handsomely; Sometimes Crime Pays

After spending two years in prison, Bradley Birkenfeld, a former banker at UBS, was rewarded $104 million for information he told the IRS. Birkenfeld explained how the bank helped thousands of Americans evade taxes, and therefore received an unprecedented federal payout. Wealthy Americans had been using UBS and other Swiss banks to cheat the IRS. The most important part of Birkenfeld’s confession is that he effectively shut down other bank’s illegal offshore accounts. Twelve offshore banks, 50 American taxpayers, and lawyers and advisers have all been charged with crimes. Birkenfeld stated that he delivered and documented this entire scandal, the largest in U.S. history, and is now the most famous whistle-blower in the history of the world because he did the right thing. Although he claims his motivation was to put an end to crime, one cannot help but think greed ultimately led Birkenfeld to get his former company in trouble. This case should effectively end illegal offshore accounts, as people will become increasingly distrustful of their bankers. -- Editorial Staff

Blackstone Invests $2 Billion Towards Natural Gas

Blackstone, the private equity group, invested $2 billion into Cheniere Energy Partners. The investment will help Cheniere Energy build a facility in Louisiana; which will help process natural gas that will be shiped to Europe, Asia and other markets. This move by Blackstone will help make shipping natural gas easier and can be seen as an investment towards natural gas. El Paso Corporations sells units to Apollo group for $7.15 Billion El Paso Corpoartions sold its exploration and production business for $7.15 billion -- one of the biggest leveraged buyouts since the end of the recent financial crisis. This deal marks another takeover in the oil and natural gas industry. This transaction also represents the impact of fracking and the influx of deals surrounding this type of natural gas drilling.
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Editorial Staff

Wynn vs. Okada

The battle between Wynn Resorts and Kazuo Okada continues to grow as the two sides continue to but heads over ownership of the company and newly contested bribery allegations. According to the NY Times Dealbook, the pending legal battle over violations of foreign bribery laws by Mr. Okada is just another step along the way in this long corporate battle for control over the profitable casino empire. This new investigation has opened up Wynn Resorts to a federal investigation by the State Department and the SEC; where they will now comb over the resorts books and look for any possible discrepancies. After ousting Okada from his position as a major shareholder; former business partner and friend Steven Wynn is, as it now appears, on the offensive in removing Okada from his formerly influential position. However; what strikes at the heart of this story is the dissolution of such an influential business partnership and the nasty fallout that often follows this type of proceedings. So often in big business does this type of breakupend with a large legal battle and harsh words exchanged by the two sides. While this conflict is still young, it will be interesting to see how such a pivotal brand in Casinos is affected by this recent turmoil.
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Editorial Staff

Apple Plans Buyback and Dividend

Apple announced on Monday that the company plans to pay quarterly stock dividend of $2.65 a share beginning in July. The company’s board plans a $10 billion share buyback. Apple also said that it direct $45 billion of its domestic cash towards the stock buyback and dividends. Apple’s chief executive promised that in moving cash towards dividends, it would not alter the shape or direction of the company.
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Editorial Staff

M&A Activity Review

Michaels Stores Files for I.P.O.
Michael Stores looks to raise about $500 million with the company’s initial public offering. Michael Stores is an arts and crafts chain and the company will trade under the ticker MIK. The company looks to pay down debt through the IPO and expand in the future. The Blackstone Group and Bain capital owned Michaels for about 6 years in a previous $6 billion deal.  

K.K.R. buys Shale Assets from WPX for $306 Million
Kohlberg Kravis Roberts purchased natural gas shale assets from WPX Energy for $306 million. K.K.R. is a private equity firm now owns 27,000 acres in the Barnett Shale region and 66,000 acres in the Arkoma Basin. This transaction is another move by K.K.R. in the energy business.

DBS to Buy Bank Danamon 
The DBS Bank, the largest bank in Singapore, and the DBS group holdings bought Bank Danamon on Indonesia for $7.2 billion. DBS looks to grow and expand in Indonesia-- one of Asia’s rapidly expanding economies. RIM, Research in Motion, continues to struggle. RIM announced a $125 million loss and continues to post declining sales. With continuing losses, RIM may look to partner up or consider other ventures. RIM’s current market value is $7.3 billion which is significantly down from the $29.4 billion that it was worth one year ago. RIM may look to be acquired if it continues to struggle.
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Editorial Staff

Payout on Greek Credit Swaps

One of the instruments in the European debt crisis was decided on Monday. The payout for the credit default swaps was structured was held at an auction on Monday in London. The investors who bought protection with the credit default swaps will receive a payout equal to 78.5 percent of the original value of the Greek bonds. The estimated total payout amounts to about $2.5 billion. The Greek debt situation and bonds have been crucial in undermining the Greek and Europe economies.
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Editorial Staff

Culture Shock at Goldman Sachs

On Early Wednesday morning, Greg Smith, a 33-year-old midlevel executive at Goldman Sachs resigned, citing concerns that the company’s culture has gone haywire. About 15 minutes after his resignation, an op-ed article that he had written explicating his criticism was published in the New York Times. The article - containing statements such as, “it makes me ill how callously people still talk about ripping off clients", reignited the debate about corporate greed on Wall Street that had largely begun to to subside after the industry’s behavior in the financial crisis in 2008. CEO LLoyd Blankfein expressed his frustration with the article, saying that there were many outlets within the firm - such as its detailed and intensive employee feedback methods, and independent, public surveys - through which Smith could have made his concerns known. The release of the op-ed article attracted negative attention from the media worldwide, and Goldman shares fell by 3.4 percent. Evidently, the public nature of Smith’s discontent has produced a ripple effect for the firm.
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Editorial Staff

Arcapita Files for Bankruptcy

Arcapita, a Bahraini Investment Firm once worth $7.4 billion, filed for bankruptcy protection on Monday. Arcapita failed to extend $1.1 billion in credit that would have expired on Wednesday. Arcapita owns the Viridian Group, Pods, and J. Jill. After filing chapter 11, Arcapita seeks to restructure its debt and improve the future of the company.
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Editorial Staff

M&A Activity Review

Carl Icahn bids $2.6 Billion for CVR 
Icahn bids $2.6 billion for CVR, an oil refinery corporation, only two days after publically stating that the company should sell itself. The current offer would pay $30 a share wich is an 8.7 percent of the prior day’s closing. Icahn’s attempt to takeover the company may turn hostile. Icahn wants to avoid another failed acquisition as he was unsuccessful after making many attempts to buy Clorox last year.

Kellogg to Buy Procter & Gamble’s Pringles Group 
Kellogg announced on Wednesday that it will buy Procter & Gamble’s Pringles. The recent deal is valued at $2.695 billion after a recent transaction with Diamond Foods failed to take place. Kellogg looks to gain an edge with the snack brand that had $1.5 billion in annual sales. Kellogg will also be adding $2 billion in debt through the deal which already has $5 billion in long-term debt.
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Editorial Staff

Market Recap (Feb. 24)

In a holiday-shortened trading week, the Dow Jones Industrial Average (DJIA) ended up 0.26% for the week at 12982.95. The index constantly flirted with the symbolically significant 13000 mark, even going over it a few times in day trading, but did not close once above it. The NASDAQ Composite and the S&P 500 both continued to rise as well, finishing up 0.41% and 0.33% respectively for the week.

On February 21st, Eurogroup officials delivered a long term refinancing option for Greece that included a large haircut of 53.5% for private bondholders and the option for creditors to swap into new bonds with a maturity of 30 years. Investors responded positively towards this new LTRO which, pending bondholder cooperation, should reduce Greece's debt by 107 billion euros and avoid a massive default when 14.4 billion euros worth of Greek bonds come due on March 20th.

Crude oil futures finished the week at $109.87 per barrel, indicating that gas prices will soon eclipse the dangerous $4 per gallon benchmark. Several commodities analysts reported on the possibility of crude reaching $130 per barrel by this August, near the record highs of Summer 2008.

Investors were heartened by the Labor Departments latest report that initial jobless benefit claims for the week were unchanged at 351,000 (the lowest since March 2008) and the four week average fell to 359,000, the lowest in four years.

In terms of fourth quarter earnings reports, Hewlett-Packards woes continued as they announced a 44% year over year drop in profits to $1.5 billion. Retail stocks performed relatively well this week with Target leading the pack on the back of better than expected 4Q earnings. AIG reported earnings of 82 cents per share that far outpaced analyst estimates of 62 cents per share, sending its stock price up. The company enjoyed a $17.7 billion gain due to the release of the allowance of deferred tax asset valuation.
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Editorial Staff

M&A Activity Review

TNT Express Rejects Bid by U.P.S. 
TNT announced on Friday that the company turned down a bid from UPS that valued the company at $6.4 billion. However, U.P.S., United Parcel Service, is continuing talks with TNT. The U.P.S. offer valued TNT at 9 euros a share which is about a 46 percent premium to the closing price. This potential deal would represent the largest merger in U.P.S. history. As a result of the talks about a deal, shares of TNT rose 2.6 percent on Friday.

Advent and Goldman Agree to Buy TransUnion for $3 Billion 
Transunion accepted an offer to sell the company to Advent International and GS Capital Partners, two private equity firms. GS Capital Partners, a branch of Goldman Sachs, and Advent bought the company from Madison Dearborn Partners and the Pritzker family. The buyout is the largest private equity deal of the year.

Mitsubishi Buys 40% Stake in Encana Shale Gas Assets 
Mitsubishi invested $2.9 billion in Encana’s holdings in British Columbia. Encana, a Canadian natural gas producer, owns about 409,000 acres in British Columbia. The $2.9 billion investment was made in exchange for 40% of the company. This deal represents another investment made for shale gas assets. Shale formations and fracking, a method of extracting natural gas and oil from sedimentary rock, have prompted new and increased investments.
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Editorial Staff

Market Recap (Feb. 15)

The Dow Jones Industrial Average (DJIA) continued its remarkably strong rally this week to finish just shy of 13,000 at 12,949.87. The S&P 500 market index ended the week up 1.38% at 1,361.23 thanks in part to large gains in the energy sector. The CBOE volatility index finished the week just below 18, indicating that investors are starting to regain confidence in the stability of global markets.

Hedge fund managers across the globe have been turning significantly more bullish on bets in equities and the international credit market. Many of these investors are basing their strategies on the belief that the European Central Banks long-term refinancing operations which commenced in December and are continuing this month will be successful in propping up struggling European banks.

Oil and gas, chemicals, and basic resources were the biggest gainers this week in terms of market sectors. Gigantic deals such as the recently announced merger between Xstrata (XTA) and Glencore (GLEN), two of the worlds leaders in natural resources, have been steadily driving stock prices skyward. Gasoline prices are now approaching record levels for the season as crude oil futures for March delivery climbed to finish the week at over $104.

European shares ended the week on a good note on the back of speculation that Greeces leaders would reach an agreement on a second bailout by today in order to avoid a disorderly default. Unfortunately, Angela Merkel sustained an embarrassing blow a midst the forced resignation of German president Christian Wulff over a political favors scandal. Merkel, along with French president Nicholas Sarkozy, are widely perceived by investors to be the most important political players in keeping the euro zone solvent. The markets ultimately ended up in part because of the traditional investor optimism that accompanies three-day holiday weekends. Stock markets were closed today in the US in observance of Presidents Day.
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Editorial Staff

Book Review: The Big Short

The Big Short 
By Michael Lewis 

The world of finance is one of losers and winners. When the sub-prime mortgage crisis hit the market in 2007, the big Wall Street firms with huge pile of sub-prime mortgage bonds lost while a few wise men betting against these bonds won. In Michael Lewis’ Book The Big Short, Lewis recounts the story of how a handful of Wall Street misfits anticipated the doom of the sub-prime mortgage bonds and made a fortune betting against the home-price inflation in mid-2000s. Lewis successfully tells the story with humor and clarity, considering the complexity of the sub-prime mortgage bond market before the crisis. However, his account of the financial crisis in 2007 is biased in that it exaggerates the effects of the public feature of investment banks, ignores factors such as government’s policies that lowered borrowing standards and neglects home owners’ speculative behavior.

Lewis overstates the effects of the public nature of the major investment banks. Lewis points out, toward the end of his book, that what lied at heart of the crisis was that all the major investment banks went public rather than functioned as partnerships. (Lewis traced the crisis back to a decision John Gutfreund had made- when he’d turned Salomon Brothers from a private partnership into Wall Street’s first public corporation.) Here is his logic: if a major investment bank were organized like partnership, each partner would have been more careful with their decisions and taken fewer risks. Now that these banks were public and the bankers were operating with shareholders’ money, they had few incentives to scrutinize their decisions or products because they could transfer risks to their shareholders; that was what led these firms to use high leverage and buy a great amount of sub-prime mortgages bonds without even knowing what were underlying these assets. (Lewis, 257) Lewis states that the incentives on these public Wall Street firms are entirely wrong because the bankers can get rich [even] when they are making dumb decisions. (Lewis, 256) In short, Lewis is saying that people within the investment banks took excessive risks because they had nothing to lose. This statement is not sound. First, the bankers did have many things to lose. Many individuals most responsible for the massive money loss during 2005-07 were the largest shareholders in their companies. These individuals lost money when their firms suffered.

In other words, they did not transfer much risk to the companies’ shareholders. Even though Howie Hubler, a former trader at Morgan Stanley, got away with large bonuses, the majority of the Wall Street professionals responsible for the crisis suffered from the crisis. Jimmy Cayne (CEO of Bear Stern)’s stock declined from 1 billion to 50 million. Richard Fuld (Lehman’s chairman) lost 550 million of his Lehman stocks when Lehman Brothers went under. The bankers had a great deal of interest within these firms. These individuals did want their firms to perform well. Even though the bankers are employees in a public company, they are effectively like partners in a partnership company because of their large stock holdings. Therefore, the employees engaged in careless behaviors not because they were in a public firm, but rather, because of some other factors. Second, we can refute the author’s contra-positive statement: if an investment bank were not public, bankers would not have been as careless. To refute this, just imagine that an investment bank were actually a partnership. In this case, a banker would still have bought those mortgage bonds because they were led to believe that they could make profits in these bonds. The only difference would be that the bank would not have had the ability to raise funds in the stock market. In this case, these partnership firms would just have found other creative ways to raise enough capital to buy the mortgage bonds, which would eventually lead to the 2007 crisis. To conclude, the mere fact that the major investment banks were public is not important in causing the crisis.

Moreover, the book is biased in that it gives all the blame to investment banks and ignores the government’s policies’ effects on the crisis. If the government did not lower the borrowing standards and encouraged lending at Fannie Mae and Freddie Mac, the crisis might never have had happened. Here is what happened: at first, the banks were making money with bundling mortgages backed securities backed with good credit and down payment and selling them to investors. Then they became greedy and wanted to make more money by making more loans. When there were not enough people with good credit, the banks invented credit default swaps. (In the book, a trader named Mike Edman within Morgan Stanley came up with this idea). With these swaps, a bank could give out loans to people with low credit score and little down payment. However, a loan could be granted only if it fulfilled the underwriting standards designed by the government. Therefore, the banks had to persuade the politicians to ease the underwriting standards. The investment banks then spent huge amount of money to get the government ease the standards. Then Barney Frank was saying that everyone deserves to own a home and Bush was saying that everyone deserves to live the American Dream. Clearly, if the government had not relaxed lending standards, the investment banks would have never got the chance to create the CDOs, which eventually led to massive defaults of people who should not have owned houses at first place. True, the investment banks were greedy. However, without the help of the government, they would have never been able to unleash their greed. The book also ignored that homeowner speculation also contributed to the crisis. In the book, the homeowners who got sub-prime loans were depicted as poor people who were told by the mortgage sellers to tell lies and who got deceived by the teaser rate and was later ripped off by the real rate. (Lewis, 19) These customers were truly the victims of the entire housing market scheme.

However, we had another crowd of customers who had more than one house, to whom we should not be as sympathetic. They were buying houses as speculative investments. During 2006, 22% of homes purchased were for investment purpose, with an additional 14% purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. The widespread speculation pushed house prices up dramatically. Housing prices nearly doubled between 2000 and 2006. Many homes were purchased even when they were still under construction and then sold for a profit without the sellers ever having lived in them. The housing bubble was so big that Warren Buffett stated that it was the greatest bubble he has ever seen in his life. The question is how did the broad speculation contribute to the crisis? The rising housing price gave mortgage sellers excuses to give out sub-prime mortgages, whose defaults eventually led to the crash. The inflating house prices also gave credit to the CDOs that investment banks created and encouraged large trading volume of CDOs, which increased the magnitude of the crash. As a reader, it is hard not to wonder how could Lewis know every time in advance that a crash was coming and went about documenting it, as what he did when he wrote Liar’s Poker and this book. It must be that the crash had shown its signs in times of prosperity and Lewis captured these signs.

We should learn to be as forward-seeing as Lewis is. We are just four years away from when the crash happened and our economy is still not fully recovered. As we gradually pull ourselves out of recession, let’s remember the lessons learned in the past and walk with great care. And here, we refer not only to investment banks, but also the government and every average American citizen.
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Editorial Staff