Business Books: Losing trust in credit markets

STANFORDVILLE, N.Y., March 12 (Reuters) - "Indeed, your CDOs are nothing but a massive Ponzi scheme."

So says the villain of "Lost Trust" (BookSurge, $15.99), a fictional account of the global financial crisis written by a man who found himself disturbingly close to the most toxic of securities.

Collateralized debt obligations (CDOs), which repackaged risky mortgage bonds into more complex assets, were a specialty of the book's author, Lang Gibson, when he took a research position at Merrill Lynch in March 2004.

From this front row seat, Gibson witnessed the headiest years of CDOs, as banks used them aggressively to make money out of the expanding U.S. mortgage market.

Like the villain of his book, Gibson maintains that CDOs evolved into a Ponzi scheme in which new securities were created to buy back other ones, forcing prices higher. What separates them from the actions of accused fraudster Bernard Madoff, he said, is that CDOs are legal.

Sensing an end to his bonuses, and probably employment, Gibson left Merrill as the market declined early last year, setting himself the task of presenting the story to lawmakers and regulators.

The result was "Lost Trust," a financial thriller self-published by Gibson using BookSurge, a unit of Amazon.com Inc.

"I wanted to have some impact, to influence decisions (and) show both sides of the story," he said in an interview at his home in Stanfordville, New York. "I felt I almost had a duty to do it, because I knew what was going on."

Gibson, 41, sent a copy to members of Congress in May 2008, highlighting in a letter the book's assertion that vast sums of taxpayer dollars would be required to bail out the companies embroiled in the subprime mortgage bubble.

Since then, the government has pledged $200 billion to housing finance giants Fannie Mae and Freddie Mac and launched a $700 billion program to shore up banks saddled with CDOs and other bad assets. Investment bank Lehman Brothers Holdings Inc. filed for bankruptcy protection and Merrill Lynch -- the No. 1 CDO issuer -- fell into a rushed sale to Bank of America Corp.

"Lost Trust" follows Macklowe Ross, the head of CDOs at a fictional bank, from Virginia to Jamaica to the French Riviera. Ross is targeted as a corporate fall guy but yearns to clean up the mess.

Deciding a work of fiction would appeal to a broader audience, Gibson embellishes the tale with financial corruption, sexual tension and a voodoo priest paid to blind policymakers to the gravity of the crisis.

Another character, Aiden Morley, is a research analyst who raised alarms about the impending catastrophe.

Despite this autobiographical touch, Gibson doesn't completely absolve himself of promoting CDOs, saying he penned positive comments on CDOs backed by subprime mortgages as late as the spring of 2005.

"I felt some responsibility," he said.

But -- like Morley -- his research since September 2005 warned of the growing risks of CDOs, especially those backed by subprime mortgages. Home prices had begun to soften by then, which would likely lead to losses, he wrote at the time.

Like real life, the book leaves some issues unresolved.

Even after government bailouts, the mortgage crisis still festers, and broken trust is choking credit to an economy mired in recession. And yet, the market needs the participation of private investments through instruments like CDOs, Gibson says.

"You still need securitizations," Gibson said. "You need that buyer base. You can't go back to the Stone Ages." (Reporting by Al Yoon; Editing by Eddie Evans)