Tuesday, October 5, 2010

Page 40: The Big Short

The Big Short: Inside the Doomsday Machine by Michael Lewis is one of those books you need to read if you want to find out what really happened two years ago when the big Wall Street banking houses fell like dominoes and the government had to bail them out to prevent a depression. A few very smart people saw it coming, told Wall Street it was going to happen, and were ignored.  Happily for them, they made a ton of money shorting sub prime mortgage debt instruments, but didn't feel much joy when the entire economy nearly collapsed on itself.

Some of the characters in the book involved in shorting the debt instruments and the banks include Steve Eisman, Michael Burry, Greg Lippmann, Vincent Daniel, Gene Park and Howie Hubler.  Never heard of these guys?  Don't feel bad.  Unless you were a Wall Street insider you would not be expected.  The big names you have heard: Paulson, Geitner, and Bernanke.  They were involved in saving a sinking ship, the other guys were betting heavily that it would sink even before the leaks appeared and the ship's hull ruptured completely.

I don't know about most of you, but I have always been fascinated by our financial system.  This is probably because I don't understand it, but continue to try.  Michael Lewis, as he has in his other books, gives us a very well written story that is compelling and hard to break off from reading.  In this case I should say listening to since I "read" the Audible version.  Jesse Boggs was the narrator and he does an excellent job.

Why don't some of us understand Wall Street, especially the whole subject of how mortgages were sliced and diced and ended up as AA rated bonds purchased by the major banks, retirement funds, and other big boys?  What is so difficult to understand about collatoralized debt obligations (CDOs), AA rated tranches of CDOs, mezzanine level bonds, and credit default swaps (CDSs)? The answer is simple.  We aren't supposed to understand.  We are just supposed to get screwed so the bond people could make millions on selling the debt instruments created from the mortgages.  Apparently giving mortgages to people who could not afford them, and would eventually lose their homes was all right as long as somebody made money on the process.  Just hearing an explanation of how mortgages of average home owners in this country were magically transformed into sub prime mortgage bonds that became CDOs is mind boggling.  To make this even more interesting, mortgages of different ratings were combined together in CDOs and, 'presto', came out to have an overall rating of AA.  No investor questioned a AA rating by Moody's or Standard and Poors.  Yes, the ratings agencies were involved up to their necks in the insanity.

In spite of the subject matter, the book has great characters, humor, and some very high paid yet clueless people who should have known better.  If you still have any faith in our bond markets, it will definitely be shaken after reading this book, but read it you should.  We all need to know what really happened to Wall Street that caused it to implode on itself.  After all, they have been bailed out with our money and still used it to pay their big fat bonuses after the meltdown. When is the last time any of us were paid a bonus for screwing up?

Here are a couple reviews of the book:

From Publisher's Weekly

"Although Lewis is perhaps best known for his sports-related nonfiction (including The Blind Side), his first book was the autobiographical Liar's Poker, in which he chronicled his disillusionment as a young gun on Wall Street in the greed is good 1980s. He returns to his financial roots to excavate the crisis of 2007–2008, employing his trademark technique of casting a microcosmic lens on the personal histories of several Wall Street outsiders who were betting against the grain—to shed light on the macrocosmic tale of greed and fear. Although Lewis reads the book's introduction, narration duties are assumed by Jesse Boggs, a veteran narrator of business titles (including Lewis's own 2008 book Panic!). Boggs's rich baritone is well suited to the task and trips lightly through a maze of financial jargon (CDOs, derivatives, mid-prime lending) and a dizzying cast of characters. Lewis returns on the final disc for a 10-minute interview about the crisis's aftermath, including a savvy assessment of the wisdom of the financial bailout and where-are-they-now updates on the book's various heroes and villains." A Norton hardcover. (Mar.) 
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved. --This text refers to the Audio CD edition.

From Bookmarks Magazine

"Michael Lewis has written from the perspective of a financial insider for more than 20 years. His first book, Liar's Poker, was a warts-and-all account of Wall Street culture in the 1980s, when Lewis worked at the investment bank Salomon Brothers. Everything Lewis has touched since has turned to gold, and The Big Short seems to be another of those books, combining an incendiary, timely topic with the author's solid, insightful, and witty investigative reporting. Only the Pittsburgh Post-Gazette criticized what it felt was a rush job of writing and a failure to integrate the individual stories. Few readers will care for the message here (despite laugh-out-loud moments of absurdity), but Lewis is a capable guide into the world of CDOs, subprime mortgages, head-in-the-sand investments, inflated egos--and the big short. However, as Entertainment Weekly points at, if you're only going to read one book on the topic, perhaps this should not be the one."

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