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The Big Short: Inside the Doomsday Machine
The #1 New York Times bestseller: "It is the work of our greatest financial journalist, at the top of his game. And it's essential reading."—Graydon Carter, Vanity Fair
The real story of the crash began in bizarre feeder markets where the sun doesn't shine and the SEC doesn't dare, or bother, to tread: the bond and real estate derivative markets where geeks invent impenetrable securities to profit from the misery of lower- and middle-class Americans who can't pay their debts. The smart people who understood what was or might be happening were paralyzed by hope and fear; in any case, they weren't talking.Michael Lewis creates a fresh, character-driven narrative brimming with indignation and dark humor, a fitting sequel to his #1 bestseller Liar's Poker. Out of a handful of unlikely-really unlikely-heroes, Lewis fashions a story as compelling and unusual as any of his earlier bestsellers, proving yet again that he is the finest and funniest chronicler of our time.
291 pages, Paperback
First published March 15, 2010
About the author
Michael Lewis
40 books13.5k followersMichael Monroe Lewis is an American author and financial journalist. He has also been a contributing editor to Vanity Fair since 2009, writing mostly on business, finance, and economics. He is known for his nonfiction work, particularly his coverage of financial crises and behavioral finance.
Lewis was born in New Orleans and attended Princeton University, from which he graduated with a degree in art history. After attending the London School of Economics, he began a career on Wall Street during the 1980s as a bond salesman at Salomon Brothers. The experience prompted him to write his first book, Liar's Poker (1989). Fourteen years later, Lewis wrote Moneyball: The Art of Winning an Unfair Game (2003), in which he investigated the success of Billy Beane and the Oakland Athletics. His 2006 book The Blind Side: Evolution of a Game was his first to be adapted into a film, The Blind Side (2009). In 2010, he released The Big Short: Inside the Doomsday Machine. The film adaptation of Moneyball was released in 2011, followed by The Big Short in 2015.
Lewis's books have won two Los Angeles Times Book Prizes and several have reached number one on the New York Times Bestsellers Lists, including his most recent book, Going Infinite (2023).
Lewis was born in New Orleans and attended Princeton University, from which he graduated with a degree in art history. After attending the London School of Economics, he began a career on Wall Street during the 1980s as a bond salesman at Salomon Brothers. The experience prompted him to write his first book, Liar's Poker (1989). Fourteen years later, Lewis wrote Moneyball: The Art of Winning an Unfair Game (2003), in which he investigated the success of Billy Beane and the Oakland Athletics. His 2006 book The Blind Side: Evolution of a Game was his first to be adapted into a film, The Blind Side (2009). In 2010, he released The Big Short: Inside the Doomsday Machine. The film adaptation of Moneyball was released in 2011, followed by The Big Short in 2015.
Lewis's books have won two Los Angeles Times Book Prizes and several have reached number one on the New York Times Bestsellers Lists, including his most recent book, Going Infinite (2023).
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November 27, 2019
”The ability of Wall Street traders to see themselves in their success and their management in their failure would later be echoed, when their firms, which disdained the need for government regulation in good times, insisted on being rescued by government in bad times. Success was an individual achievement; failure was a social problem.”
The real estate market in the United States after several years of frantic growth peaked in 2004, which was the year I decided to start buying properties. I was able to secure 6% interest on about any property I wanted to buy with no money down. I had an 800+ credit score, which had bankers salivating when I walked in the door. I put everything on 30 year notes to give me more cash flow.
The first time I bought a property, the banker wrote it up as an ARM (adjustable rate mortgage). He showed me how much lower my payment would be. Of course, what he didn’t explain was what the payment would look like when the interest rate went up. (I’m the offspring of a farmer and had the opportunity to watch my father negotiate several mortgage notes. My father always said to never trust a banker and, furthermore, never trust that a banker knows what he is doing.) When I told the banker I wanted a fixed mortgage, he looked shocked for a moment. He said, “I haven’t written a fixed note in so long that I’ll have to look up how to do it.”
Warning bells were going off in my head.
My friends and acquaintances from all over the country were buying properties. Many were buying properties they could not afford and knew it, but they were hoping to ride the positive wave of escalating property values which would allow them to keep tapping their equity to pay their bills. Many of them fell into the category of subprime mortgages. ”A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages.”
Michael Lewis talks about ”thin file FICO scores,” which are people with short credit histories, but have good credit. One example that Lewis uses is a Mexican strawberry picker making $14,000, who qualified for a loan for $750,000 all because he hadn’t proved he couldn’t pay.
Anyone with any sense, you don’t need business acumen for this one, can look at that situation and KNOW with certainty that strawberry picker will not be able to make his payments. The whole lending system, from the big boys on Wall Street down to the loan officer in your local bank, was making and encouraging too many loans destined to fail. It was ok though because they were going to bundle them together with a bunch of other notes and sell them to someone else.
Unfortunately, and I blame the car industry for this, Americans are much more interested in a lower payment than they are in how long it will take to pay off a note or how much interest they will end up paying. What is the first thing a car salesman asks a car buying prospect? How big a monthly payment can you pay? It doesn’t matter what type of car or how expensive that vehicle is; what is important is what they are capable of paying per month. Car loans used to be three years in length. Now, most people take seven years to pay off their car. They have no idea how much they will have paid for that vehicle at the end of seven years. I recently bought a new Jeep Cherokee, and when they brought the paperwork, I realized that they hadn’t even asked me if I wanted a five year or a seven year note. They automatically wrote it up for seven. I had them change it to five.
So that same mentality transferred over to mortgages. It was easy to talk Americans into ARMs because of the lower payment offer (interest only) compared to a fixed rate. In most cases, I can guarantee they were never offered or shown a fixed rate. ”Interest only ARM mortgages were only 5.85% of the pool in early 2004, but by late 2004 they were 17.48% of the pool, and by late summer 2005 25.34% of the pool. To say that everything was getting out of balance was an understatement. We were being set up for a disaster. If the real estate dipped or remained flat, the whole, forgive the pun, house of cards, was going to come down. Home owners had to keep gaining equity to stay afloat.
2009 was the year that I decided to refinance all my properties. The interest rate was unbelievably low, and one of my fears was that the paradigm would shift and interest rates would begin to climb. I was on a fixed rate of 6%, which historically that was a great rate for home mortgages, but the interest rate I was about to get was going to blow my mind.
4.25% (now you can probably write a primary loan for less).
Not only did they give me that rate on my primary home, but also across the board on all my rental properties. My main goal for refinancing was to lower the interest, but also to take my 30 year mortgages and put them on 15 years.
The banker said some interesting things to me. One was that they were willing to waive the fees if I’d write new 30 year mortgage notes. He showed me how much lower my monthly payments (ahh yes that old stratagem) would be compared to the 15 year notes. He said that if I wanted to pay them off in fifteen years, all I would have to do is make bigger principle payments. This is extremely bad advice. Most people never make an extra payment on their car or house or with some, totally insane consumers, even their credit cards. They pay the minimum they have to pay.
One of the problems with most loan officers is that they really don’t understand the loans they are writing. I had one property that had a house with a trailer house on the same lot. I could almost hear the pop in the banker’s head when he realized there was a trailer house involved. They don’t finance trailer houses. I explained that the trailer house needed to be considered personal property; I had plenty of equity in the house to meet the criteria for the loan. I had to go up the chain of the bank until finally I was talking to some guy in Milwaukee who got what I was saying and approved the loan. I don’t like the fact that the person who makes the decision about any loan I make is not the person sitting in front of me, but that is the banking system we work with now.
The crises of 2008 should have never happened. Regulations on banks and Wall Street had been relaxed. Without regulations they went crazy. They lost their minds. ”There were more morons than crooks, but the crooks were higher up.”
This book focuses on the handful of brokers who could see the crash coming and decided to bet against homeowners being able to make their payments. It was dicey because if the government stepped in and shored up those home loans, they would lose their bet.
They won, and they won big.
At the time, I supported President Bush’s administration stepping in with a bailout for Wall Street. I was wrong to do so. I was afraid of a further collapse that would bring even those of us who were solvent down with the ones already under water. (I do believe that the bailout of the auto industry was an astute decision that ended up saving that industry and thousands of blue collar jobs.)
I have only a few thousand in the stock market these days. I took my money out and bought a business. I wish more Americans would invest in something tangible, like a business or real estate. I’d rather that when Wall Street goes crazy with greed again, and they will, that they don’t have the retirements of middle class Americans to lose on some greedy short term gain venture.
My advice to everyone is to really KNOW your finances. Don’t assume that a banker or accountant knows what is best for you. Don’t put your future in someone else’s hands. Use their expertise to educate yourself. Don’t over leverage yourself under the assumption that you will make more money in the future. Buy at a price you can afford now, not what you think you will be able to afford later. If you are thinking about buying a home, the concept of buy low and sell high should apply. If possible, wait for a buyer’s market. Buy below market if you can so that you have some ready made equity already in your home. (The quicker you can get enough equity, usually 20%, in your home to avoid PMI payments the better. Private Mortgage Insurance protects the lender if you default on your loan though THEY benefit you pay the premium.) Don’t fall in love with a house until you own it. Don’t ever risk money you can’t afford to lose.
This is a painful book to read from the standpoint of the recklessness, the greed, the foolishness that all contributed to the 2008 subprime mortgage crises. I wasn’t shocked to learn that the “experts” didn’t even know what they were selling or buying most of the time. They didn’t understand their own acronyms. Like, what the fxxk is a CDO (collateralized debt obligation), and what the hell are tranches? It’s okay for me not to know, but these people at Bear Stearns, Merrill Lynch, Lehman Brothers, UBS, Goldman Sachs, and Morgan Stanley didn’t really understand what they were either. These supposedly best and brightest were blinded by greed. They couldn’t see that the track in front of their roaring train loaded with subprime mortgages...had disappeared and the gorge they fell into was... deep.
I’m really looking forward to seeing the movie.
If you wish to see more of my most recent book and movie reviews, visithttp://www.jeffreykeeten.com
I also have a Facebook blogger page at:https://www.facebook.com/JeffreyKeeten
.
The real estate market in the United States after several years of frantic growth peaked in 2004, which was the year I decided to start buying properties. I was able to secure 6% interest on about any property I wanted to buy with no money down. I had an 800+ credit score, which had bankers salivating when I walked in the door. I put everything on 30 year notes to give me more cash flow.
The first time I bought a property, the banker wrote it up as an ARM (adjustable rate mortgage). He showed me how much lower my payment would be. Of course, what he didn’t explain was what the payment would look like when the interest rate went up. (I’m the offspring of a farmer and had the opportunity to watch my father negotiate several mortgage notes. My father always said to never trust a banker and, furthermore, never trust that a banker knows what he is doing.) When I told the banker I wanted a fixed mortgage, he looked shocked for a moment. He said, “I haven’t written a fixed note in so long that I’ll have to look up how to do it.”
Warning bells were going off in my head.
My friends and acquaintances from all over the country were buying properties. Many were buying properties they could not afford and knew it, but they were hoping to ride the positive wave of escalating property values which would allow them to keep tapping their equity to pay their bills. Many of them fell into the category of subprime mortgages. ”A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages.”
Michael Lewis talks about ”thin file FICO scores,” which are people with short credit histories, but have good credit. One example that Lewis uses is a Mexican strawberry picker making $14,000, who qualified for a loan for $750,000 all because he hadn’t proved he couldn’t pay.
Anyone with any sense, you don’t need business acumen for this one, can look at that situation and KNOW with certainty that strawberry picker will not be able to make his payments. The whole lending system, from the big boys on Wall Street down to the loan officer in your local bank, was making and encouraging too many loans destined to fail. It was ok though because they were going to bundle them together with a bunch of other notes and sell them to someone else.
Unfortunately, and I blame the car industry for this, Americans are much more interested in a lower payment than they are in how long it will take to pay off a note or how much interest they will end up paying. What is the first thing a car salesman asks a car buying prospect? How big a monthly payment can you pay? It doesn’t matter what type of car or how expensive that vehicle is; what is important is what they are capable of paying per month. Car loans used to be three years in length. Now, most people take seven years to pay off their car. They have no idea how much they will have paid for that vehicle at the end of seven years. I recently bought a new Jeep Cherokee, and when they brought the paperwork, I realized that they hadn’t even asked me if I wanted a five year or a seven year note. They automatically wrote it up for seven. I had them change it to five.
So that same mentality transferred over to mortgages. It was easy to talk Americans into ARMs because of the lower payment offer (interest only) compared to a fixed rate. In most cases, I can guarantee they were never offered or shown a fixed rate. ”Interest only ARM mortgages were only 5.85% of the pool in early 2004, but by late 2004 they were 17.48% of the pool, and by late summer 2005 25.34% of the pool. To say that everything was getting out of balance was an understatement. We were being set up for a disaster. If the real estate dipped or remained flat, the whole, forgive the pun, house of cards, was going to come down. Home owners had to keep gaining equity to stay afloat.
2009 was the year that I decided to refinance all my properties. The interest rate was unbelievably low, and one of my fears was that the paradigm would shift and interest rates would begin to climb. I was on a fixed rate of 6%, which historically that was a great rate for home mortgages, but the interest rate I was about to get was going to blow my mind.
4.25% (now you can probably write a primary loan for less).
Not only did they give me that rate on my primary home, but also across the board on all my rental properties. My main goal for refinancing was to lower the interest, but also to take my 30 year mortgages and put them on 15 years.
The banker said some interesting things to me. One was that they were willing to waive the fees if I’d write new 30 year mortgage notes. He showed me how much lower my monthly payments (ahh yes that old stratagem) would be compared to the 15 year notes. He said that if I wanted to pay them off in fifteen years, all I would have to do is make bigger principle payments. This is extremely bad advice. Most people never make an extra payment on their car or house or with some, totally insane consumers, even their credit cards. They pay the minimum they have to pay.
One of the problems with most loan officers is that they really don’t understand the loans they are writing. I had one property that had a house with a trailer house on the same lot. I could almost hear the pop in the banker’s head when he realized there was a trailer house involved. They don’t finance trailer houses. I explained that the trailer house needed to be considered personal property; I had plenty of equity in the house to meet the criteria for the loan. I had to go up the chain of the bank until finally I was talking to some guy in Milwaukee who got what I was saying and approved the loan. I don’t like the fact that the person who makes the decision about any loan I make is not the person sitting in front of me, but that is the banking system we work with now.
The crises of 2008 should have never happened. Regulations on banks and Wall Street had been relaxed. Without regulations they went crazy. They lost their minds. ”There were more morons than crooks, but the crooks were higher up.”
This book focuses on the handful of brokers who could see the crash coming and decided to bet against homeowners being able to make their payments. It was dicey because if the government stepped in and shored up those home loans, they would lose their bet.
They won, and they won big.
At the time, I supported President Bush’s administration stepping in with a bailout for Wall Street. I was wrong to do so. I was afraid of a further collapse that would bring even those of us who were solvent down with the ones already under water. (I do believe that the bailout of the auto industry was an astute decision that ended up saving that industry and thousands of blue collar jobs.)
I have only a few thousand in the stock market these days. I took my money out and bought a business. I wish more Americans would invest in something tangible, like a business or real estate. I’d rather that when Wall Street goes crazy with greed again, and they will, that they don’t have the retirements of middle class Americans to lose on some greedy short term gain venture.
My advice to everyone is to really KNOW your finances. Don’t assume that a banker or accountant knows what is best for you. Don’t put your future in someone else’s hands. Use their expertise to educate yourself. Don’t over leverage yourself under the assumption that you will make more money in the future. Buy at a price you can afford now, not what you think you will be able to afford later. If you are thinking about buying a home, the concept of buy low and sell high should apply. If possible, wait for a buyer’s market. Buy below market if you can so that you have some ready made equity already in your home. (The quicker you can get enough equity, usually 20%, in your home to avoid PMI payments the better. Private Mortgage Insurance protects the lender if you default on your loan though THEY benefit you pay the premium.) Don’t fall in love with a house until you own it. Don’t ever risk money you can’t afford to lose.
This is a painful book to read from the standpoint of the recklessness, the greed, the foolishness that all contributed to the 2008 subprime mortgage crises. I wasn’t shocked to learn that the “experts” didn’t even know what they were selling or buying most of the time. They didn’t understand their own acronyms. Like, what the fxxk is a CDO (collateralized debt obligation), and what the hell are tranches? It’s okay for me not to know, but these people at Bear Stearns, Merrill Lynch, Lehman Brothers, UBS, Goldman Sachs, and Morgan Stanley didn’t really understand what they were either. These supposedly best and brightest were blinded by greed. They couldn’t see that the track in front of their roaring train loaded with subprime mortgages...had disappeared and the gorge they fell into was... deep.
I’m really looking forward to seeing the movie.
If you wish to see more of my most recent book and movie reviews, visithttp://www.jeffreykeeten.com
I also have a Facebook blogger page at:https://www.facebook.com/JeffreyKeeten
.
February 4, 2021
Michael Lewis looks at a handful of people who saw what was happening in the US economy, tried to sound an alarm, but also used their knowledge to make barrels of cash.
If the tales told here, following the fiscal 9/11 that is Wall Street ethics, do not scare you away from investing with any Wall Street firm, I do not know what will. Lewis may single-handedly revive stuffing cash in mattresses as a savings option.
Michael Lewis - image from Boston’s WBUR - photo by Robin Lubbock
What becomes clear is that there is no substitute for doing the hard work of gathering and analyzing data. That, really, is what the people portrayed here did. And they were confident enough in their analysis that they used it to personal advantage. Not all are Gordon Gecko types, sociopathic greed machines. Some even tried to warn legislators and corporations at risk just how crazy the bubbling market had become. I suppose it should come as no shock that short-term gain, even if based on insanity, will always triumph long-term rationality if it means reducing the next quarter’s profits. Well, almost always.
One key is the willingness of ratings agencies, like Moody’s and S&P, to hold their noses and rate as triple-A offerings that should have been rated as triple-crap. As long as the ratings agencies are reliant on businesses which bring products to them to rate, it is difficult to see how meaningful change can be effected.
Lewis has produced a very interesting portrait not only of a group of super-bright analysts, but of Wall Street gone wild. The book offers insight into the details of how the mess was made possible. It is one of the best looks at the financial crisis I have seen. Maybe I should invest in a better mattress?
1/22/16 - Saw the film tonight, and it is fracking brilliant!
=============================EXTRA STUFF
Links to Lewis's personal and Facebook sites
Reviews of other books by the author
----- Boomerang
----- Moneyball
If the tales told here, following the fiscal 9/11 that is Wall Street ethics, do not scare you away from investing with any Wall Street firm, I do not know what will. Lewis may single-handedly revive stuffing cash in mattresses as a savings option.
Michael Lewis - image from Boston’s WBUR - photo by Robin Lubbock
What becomes clear is that there is no substitute for doing the hard work of gathering and analyzing data. That, really, is what the people portrayed here did. And they were confident enough in their analysis that they used it to personal advantage. Not all are Gordon Gecko types, sociopathic greed machines. Some even tried to warn legislators and corporations at risk just how crazy the bubbling market had become. I suppose it should come as no shock that short-term gain, even if based on insanity, will always triumph long-term rationality if it means reducing the next quarter’s profits. Well, almost always.
One key is the willingness of ratings agencies, like Moody’s and S&P, to hold their noses and rate as triple-A offerings that should have been rated as triple-crap. As long as the ratings agencies are reliant on businesses which bring products to them to rate, it is difficult to see how meaningful change can be effected.
Lewis has produced a very interesting portrait not only of a group of super-bright analysts, but of Wall Street gone wild. The book offers insight into the details of how the mess was made possible. It is one of the best looks at the financial crisis I have seen. Maybe I should invest in a better mattress?
1/22/16 - Saw the film tonight, and it is fracking brilliant!
=============================EXTRA STUFF
Links to Lewis's personal and Facebook sites
Reviews of other books by the author
----- Boomerang
----- Moneyball
February 29, 2012
The Subprime Mortgage Crisis...it’s too easy to just lay blame on a cabal of greed-constipated Wall Street sphincters who unzipped their consciences, yanked down their morals and dropped a huge deuce on the U.S. financial system.
In many ways it’s TRUE and it feels REALLY good to say...but it’s too easy.
There were clearly some major crooks, scumbags and swindlers involved in this monetary atrocity...a number of whom should have been taken out to the desert and shot, in my very pissed off opinion. However, more than anything else, the crisis was caused by monumental stupidity, a lack of proper checks and balances and a blind, mindless momentum that, once started and fueled by quick profits, became an unstoppable force dragging down the economy.
Michael Lewis opens up the windows on this malodorous morass and let’s some of the stink out by giving us an easily understandable, and eminently readable, synopsis of the financial ponzi-scheme that produced the most astoundingly epic financial crisis in U.S. history.
Told through the lens of a small cast of brilliant, eccentric and highly entertaining money mavens who were the first to see that the Subprime "emperor" was naked and dangerously out of control, Lewis traces the crisis from its origins in the mid-1990s through the bursting of the bubble that began in 2007 and is still leaking all over us. Lewis does a terrific job making this painful, and still fresh memory, an enjoyable read. He also should be complimented on making the extremely compmlicated financial instruments and inner workings of the crisis understandable to the lawman by showing us their origin through the major places of the time. The primary viewpoints used include:
Those that were Right:
Steve Eisman: An anti-social, verbally abusive hedge fund manager with no ability or desire to filter content from his thoughts to his words. Reading about Steve is hysterical as he would offend almost every Wall Street type he came in contact with…and he was usually right.
Dr. Michael Burry: A trained neurologist with Asperger’s Syndrome and one eye who picked stocks in his spare time and eventually formed one of the most successful investment firms (Scion Capital) in the country by making large, large, LARGE bets against the Subprime Mortgage market.
Meredith Whitney: a banking analyst who rose to fame when she predicted, in 2007, the massive failures of Citigroup and Bear Stearns based on their involvement in the Subprime Mortgage market.
Those that were Wrong:
Wing Chau: Head of Merrill Lynch’s CDO (Collateralized debt obligations) Group who knew that he was so right about the viability of the Subprime lending market and the sustainability of housing prices that he ended up losing Billions and bankrupting his employer.
Howie Hubler: Not content to half ass it, Hubler went ahead and lost 9 Billion Dollars on a single trade involving credit default swaps*.
* While there are a book’s worth of details, in essence a credit default swap agreement is an insurance policy whereby one party (the buyer) pays the insuring party (the seller) a series of fees (like an insurance premium) and the insuring party agrees to pay the buyer the face amount of a home loan if it defaults. When foreclosures escalated in the subprime mortgage market, the seller’s of these agreements, which included most of the major WallStreet firms, were S...C...R...E...W...E...D. Very badly screwed...along with the rest of us.
Joseph Cassano: Nicknamed “Patient Zero” of the meltdown, Joe was the executive at AIG in charge of the company’s subsidiary (AIG Financial Products Corporation) that issued billions in credit default swaps (many to Steve Eisman and Michael Burry) that ended up coming due when the housing market tanked.
One of the most interesting aspects of the book for me was how eccentric the people on the "right" side of the crisis were. Lewis shows us just how bold and anti-herd mentality a person has to be in order to be convinced that everyone else in the market is crazy and that they are right. The people in this tale are very, very unique individuals and it makes the reading a lot of fun.
This is a terrific book. Well written, thoroughly engaging and paced very, very well. It entertains while showing us succinctly how we went for economic robustness to just bustness…
Now, there are aspects of the financial meltdown that I would have liked to have seen discussed though I will not call their absence a gripe on my part. A book dealing with all of the permutations and trickle down effects of the mortgage crisis would have looked like a multiple volume encyclopedia and would be a tough read. I just would have liked a little more on the breadth and depth of the disaster that the subprime mortgage market created. The meltdown in the residential housing market following the massive short-term appreciation in the housing market caused by the proliferation of sub-prime mortgages rippled through the entire economy including:
* the massive increase in the value of raw land for residential housing developments that eventually bankrupted so many home builders who spent ungodly amounts per acre on property based on the continuing increase in home prices.
* the related surge in the price of commercial and industrial real estate that followed close behind the jump in residential land prices and led to the largest batch of commercial/industrial foreclosures in U.S. history.
There is no aspect of the U.S. economy that was not significantly impacted by the greed-fueled, short-sighted debacle of the sub-prime mortgage crisis…and no guarantee that there is not significant pain still to come.
Still, for what this book does, it should be applauded. For the reasons stated above, and because it is a terrifically told story, you should read this book.
4.0 stars. HIGHEST POSSIBLE RECOMMENDATION!!
February 12, 2020
...there's a difference between an old-fashioned financial panic and what had happened on Wall Street in 2008. In an old-fashioned panic, perception creates its own reality: Someone shouts "Fire!" in a crowded theater and the audience crushes each other to death in its rush for the exits. On Wall Street in 2008 the reality finally overwhelmed perceptions: A crowded theater burned down with a lot of people still in their seats. Every major firm on Wall Street was either bankrupt or fatally intertwined with a bankrupt system. The problem wasn't that [they] had been allowed to fail. The problem was that [they] had been allowed to succeed.
I must just have a thing for any work having to do with the "Doomsday Machine" that was our economy at and around the Great Recession. Not only did I thoroughly enjoy this book--and learned a hell of a lot from it as well--but I also would put Carousel Court , a fictional account of the Great Recession, in my top 5 reads of 2016.
There are 2 major reasons for why I'm so enthralled by this phenomenon that occurred in our country and had ripple effects throughout the world economy: 1) When this was happening in 2007 and 2008, I was in college. Just another undergraduate student with big dreams and small money. I didn't notice what was going on, as so many around me didn't, because I was used to living off of Ramen noodles and Red Bull, me and 5 of my friends piling into my sedan to go to parties, then still holding down jobs we hated on top of it all. The struggle was real--and it was normalized at that point in our lives, so, at that time, it didn't occur to me that what was going on around me was not the norm. But now, in retrospect, with the sharpened eyes and heightened cultural awareness I have now, it enthralls me for another reason too (2): because the greed, stupidity and raging capitalism that brought this country to its knees (only for our taxpaying dollars to bail it out and pick it back up again, of course) is what I came to understand that we are widely known for and understood as the world over during my time living overseas. Not the Recession itself, but the mentality that got us there. To see it here, to experience it as close to the inside as I can be, so many years removed, through Michael Lewis' The Big Short is to understand what has become our weakness and our strength (depending on who you ask) and a global caricature of our mores, our values and our very personalities: greed to the point of raging ignorance.
Don't worry, I won't soapbox here unless you ask me to.
The basic idea here stemmed from what we already know of America: it is a land where quite often the rich do get richer while the poor do get poorer, and, because of that, there opened up a market for subprime lending like a yet-undiscovered sea full of plentiful fish just waiting to be pillaged and plundered by Wall Street and the big banks. Not only that, but the big banks functioned like dope boys, essentially, flipping their profits at the buyers' expense, destroying their surroundings as they did so--only, these flips yielded billions upon billions, and the companies lost billions upon billions as well. The system was set up to profit from others' losses: as homeowners went into default, homes were lost and lives derailed, there was always someone else there on the other side of the bet (or swap) to get rich off of their loss by buying and betting on the debts of average Americans.
The subprime market tapped a segment of the American public that did not typically have anything to do with Wall Street: the tranche between the fifth and twenty-ninth percentile in their credit ratings. That is, the lenders were making loans to people who were less creditworthy than 71 percent of the population.
I can't even go into the ratings companies, Moody's and S&P, who should have been policing this, but were instead lining their own pockets by selling AAA ratings for fees and looking the other way. And, I won't even further comment on how the mortgage bond market was born and allowed to grow to the size that the U.S. economy came to depend on its stability, all out of greed and ripping off subprime borrowers. Nope, won't do it--but what I will do is say that anyone who's never read this book, anyone who is still scratching their heads and trying to figure out, "What the hell was that about?" should pick up this book and read it.
Not only was it a phenomenal read--wholly entertaining, comedic even--but it was also very insightful. I guarantee you, love this country though we do, you'll understand the next time you're abroad and you get the side-eye glance from the natives. Our reputations precede us, and this is only one of a million reasons why. An easily earned, happily given 5 stars. *****
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I must just have a thing for any work having to do with the "Doomsday Machine" that was our economy at and around the Great Recession. Not only did I thoroughly enjoy this book--and learned a hell of a lot from it as well--but I also would put Carousel Court , a fictional account of the Great Recession, in my top 5 reads of 2016.
There are 2 major reasons for why I'm so enthralled by this phenomenon that occurred in our country and had ripple effects throughout the world economy: 1) When this was happening in 2007 and 2008, I was in college. Just another undergraduate student with big dreams and small money. I didn't notice what was going on, as so many around me didn't, because I was used to living off of Ramen noodles and Red Bull, me and 5 of my friends piling into my sedan to go to parties, then still holding down jobs we hated on top of it all. The struggle was real--and it was normalized at that point in our lives, so, at that time, it didn't occur to me that what was going on around me was not the norm. But now, in retrospect, with the sharpened eyes and heightened cultural awareness I have now, it enthralls me for another reason too (2): because the greed, stupidity and raging capitalism that brought this country to its knees (only for our taxpaying dollars to bail it out and pick it back up again, of course) is what I came to understand that we are widely known for and understood as the world over during my time living overseas. Not the Recession itself, but the mentality that got us there. To see it here, to experience it as close to the inside as I can be, so many years removed, through Michael Lewis' The Big Short is to understand what has become our weakness and our strength (depending on who you ask) and a global caricature of our mores, our values and our very personalities: greed to the point of raging ignorance.
Don't worry, I won't soapbox here unless you ask me to.
The basic idea here stemmed from what we already know of America: it is a land where quite often the rich do get richer while the poor do get poorer, and, because of that, there opened up a market for subprime lending like a yet-undiscovered sea full of plentiful fish just waiting to be pillaged and plundered by Wall Street and the big banks. Not only that, but the big banks functioned like dope boys, essentially, flipping their profits at the buyers' expense, destroying their surroundings as they did so--only, these flips yielded billions upon billions, and the companies lost billions upon billions as well. The system was set up to profit from others' losses: as homeowners went into default, homes were lost and lives derailed, there was always someone else there on the other side of the bet (or swap) to get rich off of their loss by buying and betting on the debts of average Americans.
The subprime market tapped a segment of the American public that did not typically have anything to do with Wall Street: the tranche between the fifth and twenty-ninth percentile in their credit ratings. That is, the lenders were making loans to people who were less creditworthy than 71 percent of the population.
I can't even go into the ratings companies, Moody's and S&P, who should have been policing this, but were instead lining their own pockets by selling AAA ratings for fees and looking the other way. And, I won't even further comment on how the mortgage bond market was born and allowed to grow to the size that the U.S. economy came to depend on its stability, all out of greed and ripping off subprime borrowers. Nope, won't do it--but what I will do is say that anyone who's never read this book, anyone who is still scratching their heads and trying to figure out, "What the hell was that about?" should pick up this book and read it.
Not only was it a phenomenal read--wholly entertaining, comedic even--but it was also very insightful. I guarantee you, love this country though we do, you'll understand the next time you're abroad and you get the side-eye glance from the natives. Our reputations precede us, and this is only one of a million reasons why. An easily earned, happily given 5 stars. *****
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June 27, 2022
I feel a little late to the club reading this now. I did want to understand more fully understand what happened the last time we had a recession, especially now that we keep hearing about how there might be another one impending. I found the book informative but it did feel kind of dry and boring at points. I also kind of wish more time had been spent on the people who created the situation versus those who where able to realize what was going on and capitalize off of the crash.
January 26, 2016
Original review: May 4, 2010
Lewis has a talent for making his readers feel smart. Taking in his best works, you’re granted kinship with the elite. Like a trader at Salomon Brothers, you might laugh at the chumps in the bond market; or like the money-constrained boss of the Oakland A’s, you might cobble together a winning line-up by way of statistics; or like a genius of modern day football, you would recognize the importance of a great left tackle in protecting your quarterback’s blind side. Now, with The Big Short, you will have no doubt foreseen the folly of investing in subprime mortgages with their impending defaults. He does this in a very readable way, too. The characters are all interesting – often genuinely quirky. And his vantage point as a quasi-insider signifies the straight scoop. Whatever the topic, he explains its subtleties well enough that you can paraphrase it to impress friends over cocktails.
Our man Lewis was clever to focus on the winners of the bet. As he explained in an interview, those were the ones who were willing to talk to him. They saw what became obvious in hindsight: that many of the loans backing mortgage securities were originated with very low standards applied (by firms who didn’t have to eat their own cooking), were issued with teaser rates that would soon adjust up, and were likely to default as soon as the air started coming out of the big housing balloon. For reasons Lewis explains well, the bet against the bubble was not so apparent to many. These securities were hidden in tranches of complicated mortgage-backed securities with obscure features that made it harder to do proper due diligence. They were also rated too high by Moody’s and S&P for the default potential they contained (partly because the agencies were easily duped by the Goldmans of the world who were paying their fees and wanted AAA assets to vend). Plus, there was little to go on from past default data because such high levels of credit unworthiness had never before been experienced. Modeling assumptions were poor, too. For instance, it was thought that diversification across regions would reduce risks. The widespread downturn in housing showed otherwise, of course. Default correlations were high. It hurt the cause, too, when some of the strongest personalities in the business, like Cassano at AIG and Hubler at Morgan Stanley, were also some of the wrongest.
The misdeeds on Wall Street were spotlighted well. I couldn’t help feeling, though, especially at the end, that Lewis had overstated his case. There were times when he claimed the investment banks were stupid for not knowing the true value of these assets and at the same time duplicitous in passing them off to customers. You can’t have it both ways, at least not in that case. I was also hoping that he would weigh in on some of the other factors that contributed to the crash, such as the role of government with its CRA program and the poor oversight of its sponsored enterprises, toxic waste-makers Fannie Mae and Freddie Mac. Other points Lewis made against the investment banks were more deserving, I thought, among them, the fact that they are no longer partnerships (where any losses would truly hit home), but rather corporations with limited liability. Agency theory in economics points to the problem of employees receiving a much bigger share of the upside (with bonus structures as they are), and a lot less of any downside. Riskier strategies result. That doesn’t explain everything, though. Several of the notable blow-ups included principal architects who were also major shareholders. For instance, Richard Fuld lost over half a billion in share value when Lehman went under.
The other thing I thought was noteworthy about Lewis’s critique was something he alluded to in the introduction. He said when he wrote Liar’s Poker that he intended for it to be a finger-wagging at the industry’s bad behavior. Many read it instead as a how-to manual. This disconcerted him, and it was apparent that he went to greater lengths this time to dwell on the negatives. That said, might we still get the sense that he wants it both ways? His descriptions are alluring, the language of the cognoscenti is enticing, the personalities are bigger than life, and the market savvy that decides who wins the pot is celebrated. Wittingly or not, there’s an extent to which he glamorizes. I’ll take him at his word that he doesn’t want to see bright young people flocking to Wall Street anymore, but it seems there’s a small, slightly disingenuous part of him that still finds it all pretty fascinating.
In summary: strongly recommended as a guidebook on the crisis, very entertaining, but maybe not the one-stop shopping it might have been for assigning all warranted blame.
Addendum: 1/26/2016
I never would have guessed this book had movie potential. And I never would have thought that if it was adapted, that they’d bring in the director of Anchorman and Talladega Nights to do it. Now I half-way expect the Farrelly brothers to counter with a version of Think and Grow Rich. Or maybe those guys who made Airplane! and the Naked Gun movies could team up to put Who Moved My Cheese? onto the big screen. Now that I’m thinking of it, does Mickey Mouse still do movies?
Lewis has a talent for making his readers feel smart. Taking in his best works, you’re granted kinship with the elite. Like a trader at Salomon Brothers, you might laugh at the chumps in the bond market; or like the money-constrained boss of the Oakland A’s, you might cobble together a winning line-up by way of statistics; or like a genius of modern day football, you would recognize the importance of a great left tackle in protecting your quarterback’s blind side. Now, with The Big Short, you will have no doubt foreseen the folly of investing in subprime mortgages with their impending defaults. He does this in a very readable way, too. The characters are all interesting – often genuinely quirky. And his vantage point as a quasi-insider signifies the straight scoop. Whatever the topic, he explains its subtleties well enough that you can paraphrase it to impress friends over cocktails.
Our man Lewis was clever to focus on the winners of the bet. As he explained in an interview, those were the ones who were willing to talk to him. They saw what became obvious in hindsight: that many of the loans backing mortgage securities were originated with very low standards applied (by firms who didn’t have to eat their own cooking), were issued with teaser rates that would soon adjust up, and were likely to default as soon as the air started coming out of the big housing balloon. For reasons Lewis explains well, the bet against the bubble was not so apparent to many. These securities were hidden in tranches of complicated mortgage-backed securities with obscure features that made it harder to do proper due diligence. They were also rated too high by Moody’s and S&P for the default potential they contained (partly because the agencies were easily duped by the Goldmans of the world who were paying their fees and wanted AAA assets to vend). Plus, there was little to go on from past default data because such high levels of credit unworthiness had never before been experienced. Modeling assumptions were poor, too. For instance, it was thought that diversification across regions would reduce risks. The widespread downturn in housing showed otherwise, of course. Default correlations were high. It hurt the cause, too, when some of the strongest personalities in the business, like Cassano at AIG and Hubler at Morgan Stanley, were also some of the wrongest.
The misdeeds on Wall Street were spotlighted well. I couldn’t help feeling, though, especially at the end, that Lewis had overstated his case. There were times when he claimed the investment banks were stupid for not knowing the true value of these assets and at the same time duplicitous in passing them off to customers. You can’t have it both ways, at least not in that case. I was also hoping that he would weigh in on some of the other factors that contributed to the crash, such as the role of government with its CRA program and the poor oversight of its sponsored enterprises, toxic waste-makers Fannie Mae and Freddie Mac. Other points Lewis made against the investment banks were more deserving, I thought, among them, the fact that they are no longer partnerships (where any losses would truly hit home), but rather corporations with limited liability. Agency theory in economics points to the problem of employees receiving a much bigger share of the upside (with bonus structures as they are), and a lot less of any downside. Riskier strategies result. That doesn’t explain everything, though. Several of the notable blow-ups included principal architects who were also major shareholders. For instance, Richard Fuld lost over half a billion in share value when Lehman went under.
The other thing I thought was noteworthy about Lewis’s critique was something he alluded to in the introduction. He said when he wrote Liar’s Poker that he intended for it to be a finger-wagging at the industry’s bad behavior. Many read it instead as a how-to manual. This disconcerted him, and it was apparent that he went to greater lengths this time to dwell on the negatives. That said, might we still get the sense that he wants it both ways? His descriptions are alluring, the language of the cognoscenti is enticing, the personalities are bigger than life, and the market savvy that decides who wins the pot is celebrated. Wittingly or not, there’s an extent to which he glamorizes. I’ll take him at his word that he doesn’t want to see bright young people flocking to Wall Street anymore, but it seems there’s a small, slightly disingenuous part of him that still finds it all pretty fascinating.
In summary: strongly recommended as a guidebook on the crisis, very entertaining, but maybe not the one-stop shopping it might have been for assigning all warranted blame.
Addendum: 1/26/2016
I never would have guessed this book had movie potential. And I never would have thought that if it was adapted, that they’d bring in the director of Anchorman and Talladega Nights to do it. Now I half-way expect the Farrelly brothers to counter with a version of Think and Grow Rich. Or maybe those guys who made Airplane! and the Naked Gun movies could team up to put Who Moved My Cheese? onto the big screen. Now that I’m thinking of it, does Mickey Mouse still do movies?
December 25, 2015
Update: Christmas greetings to those of you who celebrate!
Paul and I are seeing this movie today!
I'm guessing the movie will be great!
Hasn't everyone read this book? In my area --extra copies could be found at bus stops around town -on tables in Star Bucks -
I wouldn't have been surprised if books were added to people's grocery bags. At one time this was the 'it' book to read.
"The Big Short" was everywhere. Michael Lewis became a popular-household name....
Hugely entertaining and informative look at the current economic shambles! ---
If you have not read this yet--go to your local library --(I'm sure you can find a free copy) --and refresh your history with the financial disaster which 'touched/touches' our lives...
BEFORE seeing the movie this year.
The movie looks great! 'Almost' as wonderful as Michael Lewis is at being a storyteller.
Paul and I are seeing this movie today!
I'm guessing the movie will be great!
Hasn't everyone read this book? In my area --extra copies could be found at bus stops around town -on tables in Star Bucks -
I wouldn't have been surprised if books were added to people's grocery bags. At one time this was the 'it' book to read.
"The Big Short" was everywhere. Michael Lewis became a popular-household name....
Hugely entertaining and informative look at the current economic shambles! ---
If you have not read this yet--go to your local library --(I'm sure you can find a free copy) --and refresh your history with the financial disaster which 'touched/touches' our lives...
BEFORE seeing the movie this year.
The movie looks great! 'Almost' as wonderful as Michael Lewis is at being a storyteller.
December 14, 2011
Remember that point, in recent years, when we all started to notice something strange? Houses were getting more and more expensive, interest rates were dropping more and more, and most of us knew someone who had no money, but was able to get a huge mortgage. And then there were all the stories of people buying houses with no money down and interest-only payments for three years. How exactly were these people expecting to make principal payments in three years? And why was anyone lending them money?
In “The Big Short,” Michael Lewis explains that all of this was just the tip of an iceberg: an iceberg floating in exceedingly murky water. There was a reason for all of the bad mortgages. The people making the mortgages were selling them, so they didn’t care how bad they were. The mortgages were being bought by companies that bundled them and turned them into bonds—which they were able to sell, so they didn’t care how bad the mortgages were either.
In order to be sold, the bonds had to be rated by one of three rating agencies. In a reasonable financial system, rating agency analyst would be the career the most ambitious business students aspired to. As it is, these analysts are some of the lowest-paid and least-respected employees in the financial world. The smartest and most talented people on Wall Street are never at the rating agencies. (They tend to become bond traders.) The agencies are paid to rate bonds by the very companies that produce the bonds. As mortgage bonds were a new kind of bond, they needed help understanding them. So the same companies also explained the bonds to the rating agencies. None of this was illegal: in fact, it is standard practice.
Not surprisingly under the circumstances, a great many of these bonds (which increasingly consisted of utterly worthless mortgages) were rated triple A, the highest possible rating. The bonds that consisted of the absolutely worst mortgages were given a triple B rating. But the financial companies soon realized that triple B-rated mortgage bonds could in turn be bundled into another financial product, a collateralized debt obligation (CDO). Presented with the CDOs, the rating agencies tended to give them triple A ratings—which suggested that they were as safe an investment as U.S. Treasury bonds. Shockingly, very few people, at any level of the financial world or the U.S. government, understood that the ratings—and the bonds they described—were worthless.
This is a book about many things, but it is particularly a story of incentives, and the calamitous effects of incentivizing irresponsible behavior. In a system in which virtually everyone had an incentive to do the wrong thing, almost everyone did: and almost everyone, from mortgage lenders to the Fed, failed to understand that disaster was imminent. “The Big Short” describes the very small—and very eccentric—group of people who saw it coming.
The cast of characters begins with Steve Eisman, a socially inept hedge fund manager, who had turned cynic after witnessing a flagrant case of fraud on which the government refused to take action. Mike Burry is a brilliant hedge fund manager who is virtually incapable of human relationships, a problem which he blamed on his glass eye but turned out to be undiagnosed Asperger’s syndrome. Charlie Ledley and Ben Hockett were two rather aimless friends who proved to have an uncanny ability to work the financial market. Greg Lippmann was a cynical Deutsche Bank bond trader who realized that the market was unsustainable.
They shared a key insight: that the market was going to collapse, and therefore the only safe bet was a bet against the market. (To short a bond is to bet that it will lose value.) Michael Lewis rivetingly describes how they first made, and then won, this bet, becoming extremely rich in the process.
Recently–at Politics & Prose Bookstore, at an entertaining event with Michael Lewis–Joel Achenbach said that this book had undermined his belief in capitalism, and asked if we should all become socialists. It was a joke, but it’s also a fair question. Lewis depicts a system in utter disarray, where financial products are too complex to be understood by either buyers or sellers; the agencies in charge of evaluating these products are both under-valued and embroiled in a serious conflict of interest; and there are no incentives to encourage responsible behavior. All of this links the health of the U.S. economy to a large gamble in which virtually no one has any idea what he is doing. It is to be hoped that this book will help foster a movement toward a truly sane financial system.
In “The Big Short,” Michael Lewis explains that all of this was just the tip of an iceberg: an iceberg floating in exceedingly murky water. There was a reason for all of the bad mortgages. The people making the mortgages were selling them, so they didn’t care how bad they were. The mortgages were being bought by companies that bundled them and turned them into bonds—which they were able to sell, so they didn’t care how bad the mortgages were either.
In order to be sold, the bonds had to be rated by one of three rating agencies. In a reasonable financial system, rating agency analyst would be the career the most ambitious business students aspired to. As it is, these analysts are some of the lowest-paid and least-respected employees in the financial world. The smartest and most talented people on Wall Street are never at the rating agencies. (They tend to become bond traders.) The agencies are paid to rate bonds by the very companies that produce the bonds. As mortgage bonds were a new kind of bond, they needed help understanding them. So the same companies also explained the bonds to the rating agencies. None of this was illegal: in fact, it is standard practice.
Not surprisingly under the circumstances, a great many of these bonds (which increasingly consisted of utterly worthless mortgages) were rated triple A, the highest possible rating. The bonds that consisted of the absolutely worst mortgages were given a triple B rating. But the financial companies soon realized that triple B-rated mortgage bonds could in turn be bundled into another financial product, a collateralized debt obligation (CDO). Presented with the CDOs, the rating agencies tended to give them triple A ratings—which suggested that they were as safe an investment as U.S. Treasury bonds. Shockingly, very few people, at any level of the financial world or the U.S. government, understood that the ratings—and the bonds they described—were worthless.
This is a book about many things, but it is particularly a story of incentives, and the calamitous effects of incentivizing irresponsible behavior. In a system in which virtually everyone had an incentive to do the wrong thing, almost everyone did: and almost everyone, from mortgage lenders to the Fed, failed to understand that disaster was imminent. “The Big Short” describes the very small—and very eccentric—group of people who saw it coming.
The cast of characters begins with Steve Eisman, a socially inept hedge fund manager, who had turned cynic after witnessing a flagrant case of fraud on which the government refused to take action. Mike Burry is a brilliant hedge fund manager who is virtually incapable of human relationships, a problem which he blamed on his glass eye but turned out to be undiagnosed Asperger’s syndrome. Charlie Ledley and Ben Hockett were two rather aimless friends who proved to have an uncanny ability to work the financial market. Greg Lippmann was a cynical Deutsche Bank bond trader who realized that the market was unsustainable.
They shared a key insight: that the market was going to collapse, and therefore the only safe bet was a bet against the market. (To short a bond is to bet that it will lose value.) Michael Lewis rivetingly describes how they first made, and then won, this bet, becoming extremely rich in the process.
Recently–at Politics & Prose Bookstore, at an entertaining event with Michael Lewis–Joel Achenbach said that this book had undermined his belief in capitalism, and asked if we should all become socialists. It was a joke, but it’s also a fair question. Lewis depicts a system in utter disarray, where financial products are too complex to be understood by either buyers or sellers; the agencies in charge of evaluating these products are both under-valued and embroiled in a serious conflict of interest; and there are no incentives to encourage responsible behavior. All of this links the health of the U.S. economy to a large gamble in which virtually no one has any idea what he is doing. It is to be hoped that this book will help foster a movement toward a truly sane financial system.
June 6, 2016
“Be fearful when others are greedy and greedy only when others are fearful.”
- Warren Buffett
Some of the most essential financial lessons I ever learned came from comic books back in the ‘90s when a bubble fueled by idiotic speculation on crappy books marketed as ‘collector’s editions’ eventually burst. It left me with several copies of all the variant covers for Jim Lee’s X-Men #1, and the realization that something is only as valuable as what someone will actually pay you for it. It was also eye opening to discover that a large company like Marvel would cut its own throat in the long term by compromising quality which alienated its most loyal readers for a short term gain and resulted in the company filing for bankruptcy in ’96. (Don’t worry. They landed on their feet.)
A decade later I didn’t pay much attention to the real estate market because I wasn’t a home owner at the time, but occasionally I’d see or read some news about the fantastic housing market that was booming. People were seeing the value of their homes skyrocket, house prices were soaring, they were still selling, and a whole lot of people were getting very rich as analysts promised that the gravy train would roll on forever.
“Well, that’s not gonna end well,” I’d think remembering all those bagged copies of The Death of Superman and Image comics sitting in my parents basement. Sadly, it didn’t occur to me to try and capitalize on those idle thoughts, but I’d like to think that if I had met any of the guys featured in this book about that time I’d have drawn on that experience and handed them my every dime I had to bet on the whole thing falling apart.
Michael Lewis has written a succinct and fascinating explanation as to why and how a handful of people recognized the coming financial crisis years before it hit and found ways to profit enourmously from it. Some were smart and cynical Wall Street insiders who knew that a whole lot of people in their industry didn’t even realize the risk that their institutions had taken on when they were buying up blocks of subprime mortgages. An eccentric former medical doctor turned hedge fund manager was sure mortgages being handed out to anyone who asked would became a wave of defaults when the low teaser interest rates expired after a couple of years. A couple of outsiders who had made a small fortune by playing stock market longshots saw the upside in laying out a relatively low amount of cash that would pay off big if things went south.
You might wonder at why no one sounded an alarm if they saw the collapse coming, and the short answer is that they couldn’t get anyone to listen to them when they tried. It was so inconceivable to the banks and Wall Street that the real estate market might collapse that these people pretty much had to invent ways to bet on it happening. Even the ones who could see the writing on the wall would find themselves frequently shocked at the levels of greed and stupidity they’d encounter as well as the utter lack of government oversight that might have prevented it.
There’s a lot of fascinating human elements behind all of these stories, and Mike Burry, the doctor turned financial guru, is a particularly interesting person to read about. Obviously there’s many complex financial pieces that have to be explained and much of it was so complicated that even the people involved didn’t understand all of it. So there's a few parts where I found myself scratching my head. However, just as he made the story of finding new ways to measure the performance and value of baseball players in Moneyball interesting Lewis also manages to make his explanations of things like credit default swaps readable.
It’s slightly depressing to read since it’s a reminder of the whole meltdown in 2008, but it’s nice to hear that at least a few deserving people got something out of the whole mess.
I’d also highly recommend the film adaptation of this which mined the story for black humor and found very clever ways to explain the financial pieces.
January 8, 2023
A fascinating story of greed, hubris and willful ignorance. I think the movie is more compelling but still a great read
It’s really hard to know when you’re lucky or you’re smart
The system basically was fuck the poor one of the main characters of The Big Short: Inside the Doomsday Machine notes quite early in the book, and that seems an apt description of the failings in the subprime market. While well known now, the level callousness in ninja loans (no income, no job, no assets) and other mortgages for people who never would get money if not for the assumption that the residential real estate market couldn't possibly fall, is still breathtaking.
Some people saw the risks, but even a fund manager who made 242% returns in 5 years versus the S&P500 dropping by 6% in the same period, has a hard time convincing his investors that conventional wisdom doesn't hold.
Human inventiveness, figuring out how to bet against AIG for instance, is well portrayed. AIG accepted risks without being required to hold capital for Credit Default Swaps, using its AAA rating to profit of a nascent market where it trusted upon credit ratings and the illusion of ever rising housing prizes. Models of AIG assumed 10% subprime loans in the portfolio's its insured, versus 95% in reality, with the insurance giant getting only 12bps of insurance revenue in exchange for assuming 50 billion of risk.
Here is a strange but true fact: The closer you were to the market the harder it was to see it’s folly, and many who want to bet against the folly of the market via event driven investments, are first seen as idiots by Goldman Sachs, Lehman Brothers or Deutsche Bank staff.
Long options being missed-priced by the Black Scholes model, and Morgan Stanley betting both short and long on RMBS’s and losing $9billion, while paying the fund manager more than $25m in 2006, show the fragility and the complex tangle the financial system got itself into.
The line between gambling and investing is thin and artificial and It’s laissez faire until you are in deep shit seem true indictments, certainly when just this week there was an FT article on how the large Wallstreet banks made $1.000b profit over the last ten years.
I missed Arianna Grande and Richard Thaler (the movie is excellent!) but Michael Lewis depicts a sobering view of the financial sector, which still feels relevant today.
It’s really hard to know when you’re lucky or you’re smart
The system basically was fuck the poor one of the main characters of The Big Short: Inside the Doomsday Machine notes quite early in the book, and that seems an apt description of the failings in the subprime market. While well known now, the level callousness in ninja loans (no income, no job, no assets) and other mortgages for people who never would get money if not for the assumption that the residential real estate market couldn't possibly fall, is still breathtaking.
Some people saw the risks, but even a fund manager who made 242% returns in 5 years versus the S&P500 dropping by 6% in the same period, has a hard time convincing his investors that conventional wisdom doesn't hold.
Human inventiveness, figuring out how to bet against AIG for instance, is well portrayed. AIG accepted risks without being required to hold capital for Credit Default Swaps, using its AAA rating to profit of a nascent market where it trusted upon credit ratings and the illusion of ever rising housing prizes. Models of AIG assumed 10% subprime loans in the portfolio's its insured, versus 95% in reality, with the insurance giant getting only 12bps of insurance revenue in exchange for assuming 50 billion of risk.
Here is a strange but true fact: The closer you were to the market the harder it was to see it’s folly, and many who want to bet against the folly of the market via event driven investments, are first seen as idiots by Goldman Sachs, Lehman Brothers or Deutsche Bank staff.
Long options being missed-priced by the Black Scholes model, and Morgan Stanley betting both short and long on RMBS’s and losing $9billion, while paying the fund manager more than $25m in 2006, show the fragility and the complex tangle the financial system got itself into.
The line between gambling and investing is thin and artificial and It’s laissez faire until you are in deep shit seem true indictments, certainly when just this week there was an FT article on how the large Wallstreet banks made $1.000b profit over the last ten years.
I missed Arianna Grande and Richard Thaler (the movie is excellent!) but Michael Lewis depicts a sobering view of the financial sector, which still feels relevant today.
August 11, 2017
Wall Street is probably best known for the movie quote "Greed is good."
But after reading The Big Short, Michael Lewis' excellent book about the lead up to the 2008 global financial crisis and the small group of people who saw the collapse coming and bet against it, I think Wall Street needs a new saying: "Y'all are a bunch of greedy assholes."
I've read several Michael Lewis books, and he does a good job explaining complex subjects to lay people. I'd recommend this book (and the quirky movie based on it) to those interested in trying to understand the last financial crisis. Because based on the large number of greedy assholes in Wall Street, it will probably happen again.
Meaningful Passage
"The line between gambling and investing is artificial and thin. The soundest investment has the defining trait of a bet (you losing all of your money in hopes of making a bit more), and the wildest speculation has the salient characteristic of an investment (you might get your money back with interest). Maybe the best definition of 'investing' is 'gambling with the odds in your favor.' The people on the short side of the subprime mortgage market had gambled with the odds in their favor. The people on the other side — the entire financial system, essentially — had gambled with the odds against them. Up to this point, the story of the big short could not be simpler. What's strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble table left rich."
But after reading The Big Short, Michael Lewis' excellent book about the lead up to the 2008 global financial crisis and the small group of people who saw the collapse coming and bet against it, I think Wall Street needs a new saying: "Y'all are a bunch of greedy assholes."
I've read several Michael Lewis books, and he does a good job explaining complex subjects to lay people. I'd recommend this book (and the quirky movie based on it) to those interested in trying to understand the last financial crisis. Because based on the large number of greedy assholes in Wall Street, it will probably happen again.
Meaningful Passage
"The line between gambling and investing is artificial and thin. The soundest investment has the defining trait of a bet (you losing all of your money in hopes of making a bit more), and the wildest speculation has the salient characteristic of an investment (you might get your money back with interest). Maybe the best definition of 'investing' is 'gambling with the odds in your favor.' The people on the short side of the subprime mortgage market had gambled with the odds in their favor. The people on the other side — the entire financial system, essentially — had gambled with the odds against them. Up to this point, the story of the big short could not be simpler. What's strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble table left rich."
January 19, 2016
This book made me want to vomit, then take a bath in a tub of bleach. Not because it's not well-written, but because the story is so repugnant and grotesque.
Lewis' last book "The Blind Side" told the stories of a lot of people who, when faced with impossible situations, chose to do the right thing and/or work harder. This book exclusively features people who were criminally stupid, those who were just flat-out criminals, and the scumbags who were smart enough to profit from it when the financial world was burning down.
One sweetheart described himself as "orgasmic" when he received reports on the failing housing market. This guy Eisman, who Lewis places centrally in the story as if he was some kind of hero, sniffed out the giant steaming pile of crapulence early and bet heavily against it. There is no mention that Eisman ever made any attempts to contact regulators or even reporters, only that he wanted to obscure what he was doing so that he could do it longer and for increasingly greater amounts. He walked away from the debacle with a $500 million profit - and has the gall to give interviews to Michael Lewis, all indignant about how the banks were victimizing the poor?! It's psychopathic.
In addition to Eisman, several other folks in the narrative also figure out what going on. Unfortunately, none of them worked for the SEC, the Federal Reserve, the FBI or the Wall Street Journal - they all worked for hedge funds. They all actively participated in the machinery, reaped returns in the hundreds of percent on their investment, and clearly pat themselves on the back for getting out while the going was good.
As the final slap in the face, the government swoops in in the third act to pass out pallets of cash to sinking banks with almost no strings.
Yes, Main Street America got taken for a ride. Most of the people who took out these subprime loans probably had no idea of the massive financial malfeasance going on several rungs up the ladder. And the same population that saw their savings wiped out and their homes repossessed will now have the pleasure of paying for the bailout with their tax dollars for the next century.
But some of the blame lies at Main Street America's door as well. So Average Joe doesn't understand complex derivative products. He surely understands "too good to be true." Some people took interest only, floating rate, negative-amortizing mortgages. Did they really think, "I can borrow buckets of money, truly insane multiples of my gross income, make miniscule payments to start, and have the rest of what I owe rolled into a bigger principal, the interest rate on which I don't even know - this is going to end well"? I occasionally watch Suze Orman's show, and get the feeling that some Americans truly don't understand the difference between being able to afford something, and being able to afford the minimum payments on something.
That this catastrophe happened within a decade of Enron is unfathomable. And the scariest thing is, it doesn't sound like anyone - not the public, the banks or the government - learned enough to prevent this sort of thing from happening again. Apocalypse is coming, y'all.
Lewis' last book "The Blind Side" told the stories of a lot of people who, when faced with impossible situations, chose to do the right thing and/or work harder. This book exclusively features people who were criminally stupid, those who were just flat-out criminals, and the scumbags who were smart enough to profit from it when the financial world was burning down.
One sweetheart described himself as "orgasmic" when he received reports on the failing housing market. This guy Eisman, who Lewis places centrally in the story as if he was some kind of hero, sniffed out the giant steaming pile of crapulence early and bet heavily against it. There is no mention that Eisman ever made any attempts to contact regulators or even reporters, only that he wanted to obscure what he was doing so that he could do it longer and for increasingly greater amounts. He walked away from the debacle with a $500 million profit - and has the gall to give interviews to Michael Lewis, all indignant about how the banks were victimizing the poor?! It's psychopathic.
In addition to Eisman, several other folks in the narrative also figure out what going on. Unfortunately, none of them worked for the SEC, the Federal Reserve, the FBI or the Wall Street Journal - they all worked for hedge funds. They all actively participated in the machinery, reaped returns in the hundreds of percent on their investment, and clearly pat themselves on the back for getting out while the going was good.
As the final slap in the face, the government swoops in in the third act to pass out pallets of cash to sinking banks with almost no strings.
Yes, Main Street America got taken for a ride. Most of the people who took out these subprime loans probably had no idea of the massive financial malfeasance going on several rungs up the ladder. And the same population that saw their savings wiped out and their homes repossessed will now have the pleasure of paying for the bailout with their tax dollars for the next century.
But some of the blame lies at Main Street America's door as well. So Average Joe doesn't understand complex derivative products. He surely understands "too good to be true." Some people took interest only, floating rate, negative-amortizing mortgages. Did they really think, "I can borrow buckets of money, truly insane multiples of my gross income, make miniscule payments to start, and have the rest of what I owe rolled into a bigger principal, the interest rate on which I don't even know - this is going to end well"? I occasionally watch Suze Orman's show, and get the feeling that some Americans truly don't understand the difference between being able to afford something, and being able to afford the minimum payments on something.
That this catastrophe happened within a decade of Enron is unfathomable. And the scariest thing is, it doesn't sound like anyone - not the public, the banks or the government - learned enough to prevent this sort of thing from happening again. Apocalypse is coming, y'all.
March 28, 2010
It was a good book, but it disappointed. I will tell you what let me down:
1. One of the reasons for the credit crash was the lenght of the easy monetary policy pursued by the FED and Greenspan after 9/11. Mr. Lewis devotes about one paragraph towards the end of the book to it and Mr. Greenspan is only mentioned three times, even though his policies were the cause of the housing bubble, my opinion.
2. I found the book repetitious. He tells the same story from three different points of view, even though it was the same story. The first and last part of the book were very informative, the middle could have been skipped and the book would have accomplished the same.
3. No mention of the role the Government Sponsored Entities. Freddie and Fannie, played in the roll of the CDO market and the fact that their over leverage will cost the taxpayer over $1 trillion.
On the other hand, I found the description of the role and CDO managers and the rating agencies, moody and SP, absolutely fascinating. The part that really astounded me is the fact that this individual were not prosecuted for crminal behaviour. At least they should have been civilly prosecuted for failure to do due dilligence.
There are also good leassons to be learned. Do not invest in thing you do not understand and do your homework when you hire an investment manager. Finally, we ned to have our government invest money in the employment of individuals who are as competent in investigating fraud as investment firms do in hiring crooks.
1. One of the reasons for the credit crash was the lenght of the easy monetary policy pursued by the FED and Greenspan after 9/11. Mr. Lewis devotes about one paragraph towards the end of the book to it and Mr. Greenspan is only mentioned three times, even though his policies were the cause of the housing bubble, my opinion.
2. I found the book repetitious. He tells the same story from three different points of view, even though it was the same story. The first and last part of the book were very informative, the middle could have been skipped and the book would have accomplished the same.
3. No mention of the role the Government Sponsored Entities. Freddie and Fannie, played in the roll of the CDO market and the fact that their over leverage will cost the taxpayer over $1 trillion.
On the other hand, I found the description of the role and CDO managers and the rating agencies, moody and SP, absolutely fascinating. The part that really astounded me is the fact that this individual were not prosecuted for crminal behaviour. At least they should have been civilly prosecuted for failure to do due dilligence.
There are also good leassons to be learned. Do not invest in thing you do not understand and do your homework when you hire an investment manager. Finally, we ned to have our government invest money in the employment of individuals who are as competent in investigating fraud as investment firms do in hiring crooks.
December 22, 2016
This book propelled me back to a conversation from the fall of 2005. I was at my son’s junior peewee football game on a warm autumn day talking to some other dads at halftime. The conversation was on how people were refinancing their homes at unheard of values and next to nothing interest rates. The group was a mix of men, some in real estate, a few newly minted mortgage brokers and some others of various professions and income levels. I recall, as the game resumed and the conversation wound down, speculating with one of the guys on what would happen in a couple – three years when these adjustable rates all reset.
“Something’s gotta give” I recall saying and he agreed. Nevertheless, these mortgage brokers were raking in more money than the local pot farmers in our Sierra Nevada foothill town and everyone seemed to be getting in on the party. I figured the people on Wall Street fueling this must know what they were doing. Now, after reading The Big Short, I know that the vast majority really didn’t and/or they didn’t care.
While I know of Michael Lewis’ work, this was the first of his books that I have read and it certainly will not be my last. The book takes the most arcane financial concepts, terms and people and presents them in an easy to understand (for the most part) and extremely interesting and fast paced manner.
This book shed tremendous light on the different people, players, banks, agencies and how the “betting system” worked. I was struck by how the rating firms seemed to be the crux of the whole mess.
The book is an excellent account of a crazy time that could have destroyed the US economy. Some would say the jury is still out and we have yet the feel the real ramifications of the bailouts and whole fiasco of 2008. We'll see.
It’s interesting that the movie was nominated for 5 academy awards on the same day (January 14, 2016) that Goldman Sachs agreed to a $5 billion fine for their part in this. It is also interesting that no one really seems to care and the Goldman Sachs brand appears to be as strong as ever.
Oh yeah, that group of dads from that balmy October afternoon, some lost their homes, others just faded away. One, however, actually went to jail for making predatory loans or something of that nature, I never really knew exactly what the circumstances were but understand he will be released from Federal prison soon. Most of us just kept our heads down and managed through what I hope will be the worst financial crisis of our lifetimes. Only time will tell and The Big Short tells the back-story extraordinarily well.
Related, yesterday a NYT opinion piece from Steve Eisman – a main subject in the book –was published on his opinion of the biggest financial issue facing the country in early 2016:
http://www.nytimes.com/2016/02/07/opi...
My Star Rating Criteria:
1 star – Not for me & gave up reading
2 stars – Not for me & likely will not finish
3 stars – Solid book that I will finish at some point – probably later.
4 stars – Great book that I will finish sooner than later.
5 stars – Excellent book that I will modify my schedule to finish ASAP.
“Something’s gotta give” I recall saying and he agreed. Nevertheless, these mortgage brokers were raking in more money than the local pot farmers in our Sierra Nevada foothill town and everyone seemed to be getting in on the party. I figured the people on Wall Street fueling this must know what they were doing. Now, after reading The Big Short, I know that the vast majority really didn’t and/or they didn’t care.
While I know of Michael Lewis’ work, this was the first of his books that I have read and it certainly will not be my last. The book takes the most arcane financial concepts, terms and people and presents them in an easy to understand (for the most part) and extremely interesting and fast paced manner.
This book shed tremendous light on the different people, players, banks, agencies and how the “betting system” worked. I was struck by how the rating firms seemed to be the crux of the whole mess.
The book is an excellent account of a crazy time that could have destroyed the US economy. Some would say the jury is still out and we have yet the feel the real ramifications of the bailouts and whole fiasco of 2008. We'll see.
It’s interesting that the movie was nominated for 5 academy awards on the same day (January 14, 2016) that Goldman Sachs agreed to a $5 billion fine for their part in this. It is also interesting that no one really seems to care and the Goldman Sachs brand appears to be as strong as ever.
Oh yeah, that group of dads from that balmy October afternoon, some lost their homes, others just faded away. One, however, actually went to jail for making predatory loans or something of that nature, I never really knew exactly what the circumstances were but understand he will be released from Federal prison soon. Most of us just kept our heads down and managed through what I hope will be the worst financial crisis of our lifetimes. Only time will tell and The Big Short tells the back-story extraordinarily well.
Related, yesterday a NYT opinion piece from Steve Eisman – a main subject in the book –was published on his opinion of the biggest financial issue facing the country in early 2016:
http://www.nytimes.com/2016/02/07/opi...
My Star Rating Criteria:
1 star – Not for me & gave up reading
2 stars – Not for me & likely will not finish
3 stars – Solid book that I will finish at some point – probably later.
4 stars – Great book that I will finish sooner than later.
5 stars – Excellent book that I will modify my schedule to finish ASAP.
April 19, 2010
I have to SHOUT during this review. Now I finally know the sleaziest, oily, untruthful, and arrogant class of people in the US--financial brokers at the big Wall Street investment banks. The Big Short is a rare look deep inside the machinery that broke the spine of our real estate industry. This is not the more common bottom-up look at the mortgage loan sweatshop industry; instead, this is a top-down view from the rarefied air above 20 stories at Goldman Sachs, Morgan Stanley, Merryl Lynch, JP Morgan, Lehman Brothers, Bear Sterns, Citigroup, and the other fu**ing RAPISTS in south Manhattan.
I'm a fiscal conservative (and a social moderate), but I'm slowly, creakily becoming more convinced that our free market needs a bit more regulation. That concept was anathema to me just a couple years ago. But, to the big boys, the ones who won't deal unless there's more than $100 million on the table, the free market is an opportunity to collude, cheat, lie, and hedge against forces in the free market that eventually--but slowly--follow their maneuvering with mute regulations. These financiers move ahead of the market that they help mold and shape behind them like dumb, brown clay. But what happened with the mortgage industry, especially at the very top with mortgage-backed Credit Default Swaps (CDS) and Collateral Debt Obligations (CDO), was truly a once in a lifetime collusion that generated multi-trillions of dollars of imaginary money based on an industry-wide hallucination that the US taxpayer made real by bailing the IDIOTS out.
CDSs and CDOs are a type of bundled bond certificate. The definition and concept of these debt instruments are so arcane that the overwhelming majority of Ivy-Leaguers that packaged and traded them had no idea what collateral was in them. Yet trades of $10 Billion at a pop were as common on Wall Street as Italian suits. At the time of the crash, 2007-2008, even the hundred million salaried CEOs couldn't answer the most simple questions about CDOs, and the risk their firms were running by owning them.
In a nutshell a CDS is this: a loan company finds hundreds of buyers that DON'T HAVE TO BE QUALIFIED, and sells them exotic floating-interest only adjustable rate mortgages. Mortgage companies then repackage several sets of hundreds of loans from across the country. The mortgage company then sells this package of thousands of loans to the big investment firms. The firms then merge and repackage these loans into bonds that represent tens of thousands of mortgages across the country. They push these mortgage-backed bonds to the rating agencies (Moody's and S & P) as CDSs, which are then given a rating from Triple-B to Triple-A. These CDSs can now be sold in the market to hedge funds, municipal retirement funds, collegiate holding funds, and international pension funds. The bonds have been repackaged so many times, that even the most savvy investors cannot clearly determine the particulars of the mortgages in each bond.
A CDO is even more complicated AND SLEAZY. A CDO is made up of all the lower and lowest rated CDSs. For example, a Triple-B rated CDS is more difficult and expensive to sell, because of its ostensible inherent risk. A CDO basically launders those low rated CDSs. Yes, launders them like a freaking Mafia drug front. So, you take all these poorly rated CDSs, shuffle, and repackage them with other poorly rated CDSs, and suddenly you have a new bond vehicle that receives a new rating from a lowly Triple-B to a stellar Triple-A. Just keep repackaging and reshuffling and eventually you can kluge together a combination of the worst possible double-reverse-negative-amortizing-40-year-floating-post-adjustable-rate-mortgages into an investment vehicle that receives a Triple-A rating and can be sold in the billions to other large investors. Meanwhile, at every step in the laundering process, Goldman Sucks and Merryl Stench and Lehman Fu**ers and the others each take a percentage of the overall value of the bond. These commissions quickly arrive at Carl Sagan's favorite number, billions-and-billions.
So what happens when people begin to default on the underlying mortgages, like they did in the thousands, especially in states like California, Florida and Arizona. AHA!! Nobody, not one intermediate institution believed that mass default was possible. Wall Street was particularly insistent that defaults, at rates that would hurt CDOs, was simply not possible. It had never happened before and all their foolproof analysis proved that that was impossible. The rating agencies too, the gatekeepers in the middle, also ran calculus showing that a bond with tens of thousands of mortgages couldn't default at once. At the most, everyone on Wall Street saw a 5% default rate as the worst possible scenario. And yet, if you dug into the CDOs, you'd discover that most of them were NOT heterogeneous; instead, they were comprised of all the crappy exotic loans made within a few months on the same types of homes to people who couldn't afford them, and they were all going to reset within a few months of each other. But nobody, with all their arrogant and condescending intelligence could know for sure that most exotic loans from 2004 onwards were made to folks who didn't need proof of employment, proof of collateral, or even proof of citizenship. Strippers in Vegas had 5 multimillion dollar homes. Strawberry pickers with $14,000 annual salary were living mortgage free in $750,000 homes. The mortgage rates were beginning to reset ad infinitum in summer of 2007.
You know the rest of the story folks. This is a must-read book. And if you'd like to compliment the top-down view with a bottom-up perspective I recommend http://www.goodreads.com/review/show/...
The Big Short takes a neat perspective. Michael Lewis, instead of simply documenting the nuclear build-up, reveals Wall Street through the handful of contrarians that were trying to bet against the CDOs. Each of these handful of men have a very odd beginning and has some unusual attribute that led them, either by genius or character flaw, to see that this was the Mother-Of-All-Scams. In 2004, in fact, there wasn't even invented yet a vehicle to short the CDSs and CDOs. The concept of shorting a bond that was deemed un-defaultable was not even considered by Wall Street. All trading instruments (equities, bonds, T-bills) must have a shorting vehicle--that's what balances the price between 'puts' and 'calls,' and provides the institutional brakes on the price of a commodity. Without a shorting vehicle, in essence, CDOs had no down-side jeopardy. The book describes the numbers, the risk-split, and Value of Risk (VaR) that these bonds were given, and they were RIDICULOUS! What's even more galling, when the big investment firms finally invented a CDO 'shorting' instrument, and sold them off in the billions, when the crash finally occurred, the firms couldn't cover the spread. What's that mean? It means that even though the shorts were sitting on a legal transaction, the firms could only pay a percentage, and they could only pay that percentage with government help. That means YOU were on the hook, not only to bailout Wall Street, but to pay off the smart folks who tried to apply the brakes to CDOs.
The government bailout is another story entirely, and not covered in depth by The Big Short. But suffice it to say that's it's ugly and controversial enough that it forces me back to my free market position that I almost gave up in second paragraph, first sentence. The government dicked up with the bailouts, and didn't let these BIG SLEAZY, OILY Wall Street investment firms take a bigger hit. And now, 19 April 2010, Goldman Sachs is under SEC investigation for CDO manipulation, while Goldman announced last Thursday that it has allotted $5 point something billion dollars in employee bonuses.
I was going to continue this rant and provide my investment advice/philosophy for the next 10-15 years, but I'll spare you. If there's enough people interested, I'll continue in the comments sections. Have a wonderful day.
I'm a fiscal conservative (and a social moderate), but I'm slowly, creakily becoming more convinced that our free market needs a bit more regulation. That concept was anathema to me just a couple years ago. But, to the big boys, the ones who won't deal unless there's more than $100 million on the table, the free market is an opportunity to collude, cheat, lie, and hedge against forces in the free market that eventually--but slowly--follow their maneuvering with mute regulations. These financiers move ahead of the market that they help mold and shape behind them like dumb, brown clay. But what happened with the mortgage industry, especially at the very top with mortgage-backed Credit Default Swaps (CDS) and Collateral Debt Obligations (CDO), was truly a once in a lifetime collusion that generated multi-trillions of dollars of imaginary money based on an industry-wide hallucination that the US taxpayer made real by bailing the IDIOTS out.
CDSs and CDOs are a type of bundled bond certificate. The definition and concept of these debt instruments are so arcane that the overwhelming majority of Ivy-Leaguers that packaged and traded them had no idea what collateral was in them. Yet trades of $10 Billion at a pop were as common on Wall Street as Italian suits. At the time of the crash, 2007-2008, even the hundred million salaried CEOs couldn't answer the most simple questions about CDOs, and the risk their firms were running by owning them.
In a nutshell a CDS is this: a loan company finds hundreds of buyers that DON'T HAVE TO BE QUALIFIED, and sells them exotic floating-interest only adjustable rate mortgages. Mortgage companies then repackage several sets of hundreds of loans from across the country. The mortgage company then sells this package of thousands of loans to the big investment firms. The firms then merge and repackage these loans into bonds that represent tens of thousands of mortgages across the country. They push these mortgage-backed bonds to the rating agencies (Moody's and S & P) as CDSs, which are then given a rating from Triple-B to Triple-A. These CDSs can now be sold in the market to hedge funds, municipal retirement funds, collegiate holding funds, and international pension funds. The bonds have been repackaged so many times, that even the most savvy investors cannot clearly determine the particulars of the mortgages in each bond.
A CDO is even more complicated AND SLEAZY. A CDO is made up of all the lower and lowest rated CDSs. For example, a Triple-B rated CDS is more difficult and expensive to sell, because of its ostensible inherent risk. A CDO basically launders those low rated CDSs. Yes, launders them like a freaking Mafia drug front. So, you take all these poorly rated CDSs, shuffle, and repackage them with other poorly rated CDSs, and suddenly you have a new bond vehicle that receives a new rating from a lowly Triple-B to a stellar Triple-A. Just keep repackaging and reshuffling and eventually you can kluge together a combination of the worst possible double-reverse-negative-amortizing-40-year-floating-post-adjustable-rate-mortgages into an investment vehicle that receives a Triple-A rating and can be sold in the billions to other large investors. Meanwhile, at every step in the laundering process, Goldman Sucks and Merryl Stench and Lehman Fu**ers and the others each take a percentage of the overall value of the bond. These commissions quickly arrive at Carl Sagan's favorite number, billions-and-billions.
So what happens when people begin to default on the underlying mortgages, like they did in the thousands, especially in states like California, Florida and Arizona. AHA!! Nobody, not one intermediate institution believed that mass default was possible. Wall Street was particularly insistent that defaults, at rates that would hurt CDOs, was simply not possible. It had never happened before and all their foolproof analysis proved that that was impossible. The rating agencies too, the gatekeepers in the middle, also ran calculus showing that a bond with tens of thousands of mortgages couldn't default at once. At the most, everyone on Wall Street saw a 5% default rate as the worst possible scenario. And yet, if you dug into the CDOs, you'd discover that most of them were NOT heterogeneous; instead, they were comprised of all the crappy exotic loans made within a few months on the same types of homes to people who couldn't afford them, and they were all going to reset within a few months of each other. But nobody, with all their arrogant and condescending intelligence could know for sure that most exotic loans from 2004 onwards were made to folks who didn't need proof of employment, proof of collateral, or even proof of citizenship. Strippers in Vegas had 5 multimillion dollar homes. Strawberry pickers with $14,000 annual salary were living mortgage free in $750,000 homes. The mortgage rates were beginning to reset ad infinitum in summer of 2007.
You know the rest of the story folks. This is a must-read book. And if you'd like to compliment the top-down view with a bottom-up perspective I recommend http://www.goodreads.com/review/show/...
The Big Short takes a neat perspective. Michael Lewis, instead of simply documenting the nuclear build-up, reveals Wall Street through the handful of contrarians that were trying to bet against the CDOs. Each of these handful of men have a very odd beginning and has some unusual attribute that led them, either by genius or character flaw, to see that this was the Mother-Of-All-Scams. In 2004, in fact, there wasn't even invented yet a vehicle to short the CDSs and CDOs. The concept of shorting a bond that was deemed un-defaultable was not even considered by Wall Street. All trading instruments (equities, bonds, T-bills) must have a shorting vehicle--that's what balances the price between 'puts' and 'calls,' and provides the institutional brakes on the price of a commodity. Without a shorting vehicle, in essence, CDOs had no down-side jeopardy. The book describes the numbers, the risk-split, and Value of Risk (VaR) that these bonds were given, and they were RIDICULOUS! What's even more galling, when the big investment firms finally invented a CDO 'shorting' instrument, and sold them off in the billions, when the crash finally occurred, the firms couldn't cover the spread. What's that mean? It means that even though the shorts were sitting on a legal transaction, the firms could only pay a percentage, and they could only pay that percentage with government help. That means YOU were on the hook, not only to bailout Wall Street, but to pay off the smart folks who tried to apply the brakes to CDOs.
The government bailout is another story entirely, and not covered in depth by The Big Short. But suffice it to say that's it's ugly and controversial enough that it forces me back to my free market position that I almost gave up in second paragraph, first sentence. The government dicked up with the bailouts, and didn't let these BIG SLEAZY, OILY Wall Street investment firms take a bigger hit. And now, 19 April 2010, Goldman Sachs is under SEC investigation for CDO manipulation, while Goldman announced last Thursday that it has allotted $5 point something billion dollars in employee bonuses.
I was going to continue this rant and provide my investment advice/philosophy for the next 10-15 years, but I'll spare you. If there's enough people interested, I'll continue in the comments sections. Have a wonderful day.
June 22, 2021
I think most are aware of the role subprime mortgages played in the 2007 banking crisis and the resulting worldwide financial crisis that followed in 2008. The subprime market was made up of house purchase loans and secondary (often re-finance) loans which were also secured against the property. This book walks us through the timeline following the rise in the popularity of these loans, how and when they began to get batched together and sold off in packages and the resultant collapse of the market. It also follows a few bright people who had nous to predict the fall of the market and take steps to enrich themselves on the back of it.
The first thing that struck me was that some of the terminology – actually much of the terminology – is impenetrable without detailed explanation. In truth, it’s only marginally less unyielding with the explanation! But though the minutia of the story might be a little too intricate for most its fair to say that the central idea is easy enough to grasp. The second thing that grabbed me is that the financial world was replete with people who either didn’t understand what they were doing or were knowingly and maliciously manipulating events to put money in their own pockets.
Loans were granted to many people who didn’t have the financial means to keep up payment. These loans in themselves were risky but subsequent loans granted on the presumption that any loss would be covered by the ever increasing value of the property were even less secure. When someone came up with the idea of batching these loans up and selling them on as subprime mortgage bonds it had the effect of protecting the original lender against future default. It’s clear that few people in the investment banks that dealt in such bonds really understood the risks involved. In any case, there was a standing presumption that property values would continue to increase and that defaults would be minimal, so what was there to worry about?
On the other side of the equation the few people with the insight to realise that the bubble would have to eventually burst on this market and, crucially, the means to do something about it set about effectively gambling on a market implosion. An instrument called a credit default swap was purchased by a number of hedge funds. These derivatives were structured to pay out huge sums of money if mortgage defaults went beyond, say, 7%. When the implosion came many investment banks went into meltdown as their holdings of subprime mortgage bonds became effectively worthless whereas the holders of credit default swaps made hundreds of millions in profits.
It’s an interesting angle on events and it did provide quite a few answers in a way that’s reasonably easy to understand. Worth seeking out if you’re interested in getting further under the skin of an event that’s had such worldwide impact.
The first thing that struck me was that some of the terminology – actually much of the terminology – is impenetrable without detailed explanation. In truth, it’s only marginally less unyielding with the explanation! But though the minutia of the story might be a little too intricate for most its fair to say that the central idea is easy enough to grasp. The second thing that grabbed me is that the financial world was replete with people who either didn’t understand what they were doing or were knowingly and maliciously manipulating events to put money in their own pockets.
Loans were granted to many people who didn’t have the financial means to keep up payment. These loans in themselves were risky but subsequent loans granted on the presumption that any loss would be covered by the ever increasing value of the property were even less secure. When someone came up with the idea of batching these loans up and selling them on as subprime mortgage bonds it had the effect of protecting the original lender against future default. It’s clear that few people in the investment banks that dealt in such bonds really understood the risks involved. In any case, there was a standing presumption that property values would continue to increase and that defaults would be minimal, so what was there to worry about?
On the other side of the equation the few people with the insight to realise that the bubble would have to eventually burst on this market and, crucially, the means to do something about it set about effectively gambling on a market implosion. An instrument called a credit default swap was purchased by a number of hedge funds. These derivatives were structured to pay out huge sums of money if mortgage defaults went beyond, say, 7%. When the implosion came many investment banks went into meltdown as their holdings of subprime mortgage bonds became effectively worthless whereas the holders of credit default swaps made hundreds of millions in profits.
It’s an interesting angle on events and it did provide quite a few answers in a way that’s reasonably easy to understand. Worth seeking out if you’re interested in getting further under the skin of an event that’s had such worldwide impact.
March 27, 2010
Lawd. This book took my breath away. I remember what I was doing at several critical moments described in the book and to have been so unaware makes me breathless. I learned things and feel oddly vindicated and cheated at the same time. I knew dumb people were making money with my money: vindicated. I thought some people in the government might be smart enough to realize what happened and know what to do: cheated.
Michael Lewis played two roles in writing this book about the subprime loan debacle. One the one hand he did the plebian job of untangling a very messy ball of knotted threads and on the other hand did a herculean job of elevating the discussion above the rock-slinging and shouting to which some angry losers are wont to resort. His characterizations of those involved on both sides of the trades are intimate enough to involve our emotions as well as our interest, but I think what really charmed me was the absurdity of some phrases that matched so perfectly the absurdities he was describing:
Osama and his team of bombers couldn't have done what our own Wall Street firms and their rating agencies and regulators did to the to the U.S. people and to the credibility of the U.S. government:
It seems ridiculous for me to urge you to read this book. Don't read it. You'll sleep better. But please don't go investing on Wall Street unless you want your nuts torn off.
Michael Lewis played two roles in writing this book about the subprime loan debacle. One the one hand he did the plebian job of untangling a very messy ball of knotted threads and on the other hand did a herculean job of elevating the discussion above the rock-slinging and shouting to which some angry losers are wont to resort. His characterizations of those involved on both sides of the trades are intimate enough to involve our emotions as well as our interest, but I think what really charmed me was the absurdity of some phrases that matched so perfectly the absurdities he was describing:
Inside Morgan Stanley, the subprime lending boom created a who-put-chocolate-in-my-peanut-butter moment. (p.201)
Osama and his team of bombers couldn't have done what our own Wall Street firms and their rating agencies and regulators did to the to the U.S. people and to the credibility of the U.S. government:
It was as if bombs of differing sizes had been placed in virtually every major financial institution. The fuses had been lit and could not be extinguished. All that remained was to observe the speed of the spark, and the size of the explosions. (p.225)
It seems ridiculous for me to urge you to read this book. Don't read it. You'll sleep better. But please don't go investing on Wall Street unless you want your nuts torn off.
March 10, 2013
The best book on Wall Street months before the recession hit. Its a Wall Street history book.
March 28, 2024
2020-06-24 - I keep coming back to this book, the movie and the far better book by John Allison mentioned below, because the subject keeps popping up.
But after about three years of pondering all three, I am convinced more than ever that Lewis is fundamentally dishonest, and dangerous, since he is such a good writer. He has obfuscated and misrepresented the basic causes of the 2008 Financial Crash with a pandering to his anti-capitalist tropes. He focuses on "greed" of course, for his explanation for how the financial bubble was created by all the evil &/or stupid people on wall street and how just a few (prescient off Wall St. investors/speculators) benefited from it. His total ignorance or dismissal of all the government programs, policies, tax breaks, cozy deals, etc. etc. is just unconscionable.
The one really great thing about the book and movie was the portrayal of the search for truth and incredible courage of convictions against massive pressures by several speculators/investors, who reaped big rewards by betting against the prevailing bubble craze. The movie in particular very dramatically showed how difficult that bet was in terms of lost customers/investors, short term losses, and incredible pressures to give up on one's own judgement and bet. Because of the very impressive prose and this, I have upped my rating to 2 stars, but only for that reason. I still urge anyone who has ANY concern for the truth about this big issue to check out Allison's book "The Financial Crisis" in addition to this one, to judge for themselves.
2 Aug. 2017 - am starting this review again for several reasons.
Have to grit my teeth an awful lot though, due to the anti-capitalist bias, lack of basic understanding of economics, Lewis's interest in making some people, organizations and industries look bad, and totally mischaracterizing the real nature and history of government regulator activity, motivations and constraints.
Am also reading John Allison's "The Financial Crisis" book in tandem with listening to this, and the contrast is amazing. You can follow my account of both here: https://www.goodreads.com/review/show...
But just to give you a flavor:
Allison uncovers all the various causes to the 2008 Financial Crisis
The Federal Reserve Board's easy money policy, pumping billions of dollars into the economy and keeping interest rates artificially low, then incredibly raising the rates way higher and faster than anything a free market would perpetrate. Plus their failure to regulate the things they were committed by law to regulate.
The FDIC's long history of increasingly corrosive policies which subsidized bad behavior, socializing it, wearing down the incentives for bankers to be prudent, thrifty and watch out for customers' (depositors') interests. The same policies created the complementary problem of weaning investors/savers off of the need to pay any attention to the safety and security of the banks they were depositing in. When your deposits are insured, why pay any attention to the safety of the particular banks?
The SEC's focus on Sarbanes-Oxley regulations, which added huge additional costs on banks and other public corporations, but actually took away from the natural need and desire of market participants to pay attention to real safety and prudent investment risk issues.
One of the very biggest government policies to affect the financial situation, spurred on the bad behavior and which created false signals was the change in WHO paid the fees of the bond rating agencies. Previous to the government mandate for the switch, the fees were paid by the bond BUYERS, the people who needed the most accurate and trustworthy info. But the government changed that to have the bond ISSUERS paying the raters. How is that for a conflict of interest? In addition, the government limited the number of rating agencies to only three, a nice little oligopoly, so bad behavior had a tougher time being exposed and countered. Guess what happened?
Allison reveals many, many more gems, from his very "inside baseball" yet easy and clear to understand perspective. DON'T miss his book, if you have any interest in this subject at all, or want to know just which of the many key points Lewis missed (on purpose or out of ignorance?).
-----------------
My review from June 2014:
This book is wildly misleading.
The author has a sensationalist bent that is not touched by any significant exposure to basic economics.
He's great at labelling people jerks, liars, cheats, etc. but he just does not know what some people legitimately need or desire and can learn from, when they experience bad deals and better deals.
In other words, he thinks he knows better than most everyone else and wants the government regulators to be something they just can't be. He sees some of the flaws of Wall St. and some of the flaws of the government regulators, but almost none of the benefits of Wall St. and wants the regulators to do something they just can't do in the real world.
I only listened to most of the first disc, since the style and lessons from the CD are so awful, unrealistic, and part of the problem. (I later finished the whole thing - see above.)
When I heard that one of the main characters "the only socialist on Wall Street" (Steve Eisman) in addition to being basically a crook, due to misleading people about the soundness of investments, was the author's favorite person, that about summed up Lewis' morality.
2024-01-02 Besides Allison's book, for those who who would like to see other books on the topic of the 2008 Financial Crisis more based in crucial facts than this book, I also recommend:
"The House that Uncle Sam Buil"t by Peter Boettke, Steve Horwitz, et. al. Very short and easy to read pamphlet.
"Meltdown" by Thomas Woods (warning: this book is very polemically written, so may offend those not already understanding of free markets)
But after about three years of pondering all three, I am convinced more than ever that Lewis is fundamentally dishonest, and dangerous, since he is such a good writer. He has obfuscated and misrepresented the basic causes of the 2008 Financial Crash with a pandering to his anti-capitalist tropes. He focuses on "greed" of course, for his explanation for how the financial bubble was created by all the evil &/or stupid people on wall street and how just a few (prescient off Wall St. investors/speculators) benefited from it. His total ignorance or dismissal of all the government programs, policies, tax breaks, cozy deals, etc. etc. is just unconscionable.
The one really great thing about the book and movie was the portrayal of the search for truth and incredible courage of convictions against massive pressures by several speculators/investors, who reaped big rewards by betting against the prevailing bubble craze. The movie in particular very dramatically showed how difficult that bet was in terms of lost customers/investors, short term losses, and incredible pressures to give up on one's own judgement and bet. Because of the very impressive prose and this, I have upped my rating to 2 stars, but only for that reason. I still urge anyone who has ANY concern for the truth about this big issue to check out Allison's book "The Financial Crisis" in addition to this one, to judge for themselves.
2 Aug. 2017 - am starting this review again for several reasons.
Have to grit my teeth an awful lot though, due to the anti-capitalist bias, lack of basic understanding of economics, Lewis's interest in making some people, organizations and industries look bad, and totally mischaracterizing the real nature and history of government regulator activity, motivations and constraints.
Am also reading John Allison's "The Financial Crisis" book in tandem with listening to this, and the contrast is amazing. You can follow my account of both here: https://www.goodreads.com/review/show...
But just to give you a flavor:
Allison uncovers all the various causes to the 2008 Financial Crisis
The Federal Reserve Board's easy money policy, pumping billions of dollars into the economy and keeping interest rates artificially low, then incredibly raising the rates way higher and faster than anything a free market would perpetrate. Plus their failure to regulate the things they were committed by law to regulate.
The FDIC's long history of increasingly corrosive policies which subsidized bad behavior, socializing it, wearing down the incentives for bankers to be prudent, thrifty and watch out for customers' (depositors') interests. The same policies created the complementary problem of weaning investors/savers off of the need to pay any attention to the safety and security of the banks they were depositing in. When your deposits are insured, why pay any attention to the safety of the particular banks?
The SEC's focus on Sarbanes-Oxley regulations, which added huge additional costs on banks and other public corporations, but actually took away from the natural need and desire of market participants to pay attention to real safety and prudent investment risk issues.
One of the very biggest government policies to affect the financial situation, spurred on the bad behavior and which created false signals was the change in WHO paid the fees of the bond rating agencies. Previous to the government mandate for the switch, the fees were paid by the bond BUYERS, the people who needed the most accurate and trustworthy info. But the government changed that to have the bond ISSUERS paying the raters. How is that for a conflict of interest? In addition, the government limited the number of rating agencies to only three, a nice little oligopoly, so bad behavior had a tougher time being exposed and countered. Guess what happened?
Allison reveals many, many more gems, from his very "inside baseball" yet easy and clear to understand perspective. DON'T miss his book, if you have any interest in this subject at all, or want to know just which of the many key points Lewis missed (on purpose or out of ignorance?).
-----------------
My review from June 2014:
This book is wildly misleading.
The author has a sensationalist bent that is not touched by any significant exposure to basic economics.
He's great at labelling people jerks, liars, cheats, etc. but he just does not know what some people legitimately need or desire and can learn from, when they experience bad deals and better deals.
In other words, he thinks he knows better than most everyone else and wants the government regulators to be something they just can't be. He sees some of the flaws of Wall St. and some of the flaws of the government regulators, but almost none of the benefits of Wall St. and wants the regulators to do something they just can't do in the real world.
I only listened to most of the first disc, since the style and lessons from the CD are so awful, unrealistic, and part of the problem. (I later finished the whole thing - see above.)
When I heard that one of the main characters "the only socialist on Wall Street" (Steve Eisman) in addition to being basically a crook, due to misleading people about the soundness of investments, was the author's favorite person, that about summed up Lewis' morality.
2024-01-02 Besides Allison's book, for those who who would like to see other books on the topic of the 2008 Financial Crisis more based in crucial facts than this book, I also recommend:
"The House that Uncle Sam Buil"t by Peter Boettke, Steve Horwitz, et. al. Very short and easy to read pamphlet.
"Meltdown" by Thomas Woods (warning: this book is very polemically written, so may offend those not already understanding of free markets)
January 1, 2024
The shocking criminal history of American capitalist greed and the sub-prime mortgage crisis that rocked the world's markets!
Make no mistake. THE BIG SHORT is a non-fiction piece of American history, it’s a story of American culture, it’s a complex reality tale of the structure of the US economy and its financial markets, it’s a shocking revelation of the negligence of US regulatory agencies and their lack of oversight of the markets for which they were responsible, but, more than anything else, THE BIG SHORT should be characterized as a true-crime dramatization of what was arguably the grandest of grand thefts in the history of the world!
The self-entitled attitudes of the moneyed class in the riotous aftermath of the collapse of the sub-prime mortgage derivative market was simply appalling:
“The ability of Wall street traders to see themselves in their success and their management in their failure would later be echoed, when their firms, which disdained the need for government regulation in good times, insisted on being rescued by government in bad times. Success was individual achievement; failure was a social problem.”
The powers that be could have stepped “in at any time to prevent individual American subprime mortgage borrowers from failing. The powers that be never did that, of course. Instead they stepped in to prevent the failure of the big Wall Street firms that had contrived to bankrupt themselves by making a lot of dumb bets on subprime borrowers.”
“The Wall Street firm became a black box. The shareholders who financed the risk taking had no real understand of what the risk takers were doing, and, as the risk taking grew ever more complex, their understanding diminished.”
But as to laying of criminal charges and the prosecution of traders and corporations and their boards of directors?? Don’t be ridiculous. It didn’t happen then and, to this day, if hard right-wing Republican politicians continue to have their way in government thanks to millions of starry-eyed, gullible, misinformed voters who imagine themselves as the next possible billionaire on the block, it never will happen. Strict regulation of financial markets remains a pipe dream!
“… the unwillingness of the US government to allow the bankers to fail was less a solution than a symptom of a still deeply dysfunctional financial system.”
My mind is still reeling as I try to absorb the reality of a US political, legislative, judicial and regulatory system that betrayed its citizenry by the refusal to recognize the criminality behind the virtually complete collapse of markets in 2008 and the necessity for steps to ensure it doesn't happen again!
Paul Weiss
Make no mistake. THE BIG SHORT is a non-fiction piece of American history, it’s a story of American culture, it’s a complex reality tale of the structure of the US economy and its financial markets, it’s a shocking revelation of the negligence of US regulatory agencies and their lack of oversight of the markets for which they were responsible, but, more than anything else, THE BIG SHORT should be characterized as a true-crime dramatization of what was arguably the grandest of grand thefts in the history of the world!
The self-entitled attitudes of the moneyed class in the riotous aftermath of the collapse of the sub-prime mortgage derivative market was simply appalling:
“The ability of Wall street traders to see themselves in their success and their management in their failure would later be echoed, when their firms, which disdained the need for government regulation in good times, insisted on being rescued by government in bad times. Success was individual achievement; failure was a social problem.”
The powers that be could have stepped “in at any time to prevent individual American subprime mortgage borrowers from failing. The powers that be never did that, of course. Instead they stepped in to prevent the failure of the big Wall Street firms that had contrived to bankrupt themselves by making a lot of dumb bets on subprime borrowers.”
“The Wall Street firm became a black box. The shareholders who financed the risk taking had no real understand of what the risk takers were doing, and, as the risk taking grew ever more complex, their understanding diminished.”
But as to laying of criminal charges and the prosecution of traders and corporations and their boards of directors?? Don’t be ridiculous. It didn’t happen then and, to this day, if hard right-wing Republican politicians continue to have their way in government thanks to millions of starry-eyed, gullible, misinformed voters who imagine themselves as the next possible billionaire on the block, it never will happen. Strict regulation of financial markets remains a pipe dream!
“… the unwillingness of the US government to allow the bankers to fail was less a solution than a symptom of a still deeply dysfunctional financial system.”
My mind is still reeling as I try to absorb the reality of a US political, legislative, judicial and regulatory system that betrayed its citizenry by the refusal to recognize the criminality behind the virtually complete collapse of markets in 2008 and the necessity for steps to ensure it doesn't happen again!
Paul Weiss
March 22, 2017
An extremely well-written account of the 2008 financial collapse. It explained complex ideas like subprime mortgage bonds and CDO's in a clear way, and almost read like a fast paced thriller.
Essentially it seems that a bad ratings system and human greed created an economy that fostered the creation of a lot of bad debts, that eventually went bad, and caused a lot of big companies to go under (Lehman brothers, Bear Sterns), or require a bailout (Goldman Sachs, AIG). This is the real crime. These big companies were so focused on short term profits that they failed to see that long term what they were doing wasn't going to work. They should be appropriately punished for this, and instead many of them were saved by Uncle Sam. Would we have had a worse recession if Obama hadn't done that? Maybe. Maybe not. Lewis should write another book about that :)
Let me see if I can get this right. The book explains that mortgages are sold by the banks that issue them, passing off the risk. Mortgages are aggregated into groups in mortgage bonds, which are then packaged into tranches, which are rated by agencies such as Moody's and S&P's. The math was complex, but apparently somehow tranches that consisted almost entirely of "subprime" (aka risky) mortgages were being given high A ratings. I guess the theory was that by spreading out the risk across lots of mortgage bonds it lowered the risk. Too bad this didn't work.
Many of these mortgages were the variety that started 2 year fixed then went floating. They were largely taken out in 2005 - 2006, and as they hit 2 years the interest rates jumped as they went floating, and hoards of people defaulted. This explains why we teetered in 2007 and crashed in 2008. One of my favorite quotes to illustrate the madness:
"In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000."
And it wasn't just in Bakersfield. All over the country people were taking out loans that were too big for their britches, because the banks were encouraging it:
"The simple measure of sanity in housing prices, Zelman argued, was the ratio of median home price to income. Historically, in the United States, it ran around 3:1; by late 2004, it had risen nationally, to 4:1. “All these people were saying it was nearly as high in some other countries,” says Zelman. “But the problem wasn’t just that it was four to one. In Los Angeles it was ten to one and in Miami, eight-point-five to one."
Economics is about incentives, and this book explained how they went very awry. But it was also a story about greed, and how even unintelligent people made a lot of money by riding the subprime mortgage train. The book followed several investors who noticed what was happening, but when they tried to tell people and test their "crazy" hypothesis that the financial world was going to collapse, they were mocked or ignored. So they just ended up shorting (betting against) the whole thing to make some money, which is what a good investor does.
"What are the odds that people will make smart decisions about money if they don’t need to make smart decisions—if they can get rich making dumb decisions?"
I think the lesson in the end is that if it looks to good to be true, it is. That, and we need smarter people working at the ratings agencies.
Essentially it seems that a bad ratings system and human greed created an economy that fostered the creation of a lot of bad debts, that eventually went bad, and caused a lot of big companies to go under (Lehman brothers, Bear Sterns), or require a bailout (Goldman Sachs, AIG). This is the real crime. These big companies were so focused on short term profits that they failed to see that long term what they were doing wasn't going to work. They should be appropriately punished for this, and instead many of them were saved by Uncle Sam. Would we have had a worse recession if Obama hadn't done that? Maybe. Maybe not. Lewis should write another book about that :)
Let me see if I can get this right. The book explains that mortgages are sold by the banks that issue them, passing off the risk. Mortgages are aggregated into groups in mortgage bonds, which are then packaged into tranches, which are rated by agencies such as Moody's and S&P's. The math was complex, but apparently somehow tranches that consisted almost entirely of "subprime" (aka risky) mortgages were being given high A ratings. I guess the theory was that by spreading out the risk across lots of mortgage bonds it lowered the risk. Too bad this didn't work.
Many of these mortgages were the variety that started 2 year fixed then went floating. They were largely taken out in 2005 - 2006, and as they hit 2 years the interest rates jumped as they went floating, and hoards of people defaulted. This explains why we teetered in 2007 and crashed in 2008. One of my favorite quotes to illustrate the madness:
"In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000."
And it wasn't just in Bakersfield. All over the country people were taking out loans that were too big for their britches, because the banks were encouraging it:
"The simple measure of sanity in housing prices, Zelman argued, was the ratio of median home price to income. Historically, in the United States, it ran around 3:1; by late 2004, it had risen nationally, to 4:1. “All these people were saying it was nearly as high in some other countries,” says Zelman. “But the problem wasn’t just that it was four to one. In Los Angeles it was ten to one and in Miami, eight-point-five to one."
Economics is about incentives, and this book explained how they went very awry. But it was also a story about greed, and how even unintelligent people made a lot of money by riding the subprime mortgage train. The book followed several investors who noticed what was happening, but when they tried to tell people and test their "crazy" hypothesis that the financial world was going to collapse, they were mocked or ignored. So they just ended up shorting (betting against) the whole thing to make some money, which is what a good investor does.
"What are the odds that people will make smart decisions about money if they don’t need to make smart decisions—if they can get rich making dumb decisions?"
I think the lesson in the end is that if it looks to good to be true, it is. That, and we need smarter people working at the ratings agencies.
October 5, 2015
Michael Lewis turns the 2008 financial meltdown into a compelling narrative about two very smart, very abrasive skeptics who realized the juggernaut Wall Street had created was doomed to self-destruct, and worked out how to cash in big — the big short.
Steve Eisman began his career as a corporate lawyer. Eisman was an outspoken curmudgeon. Stupidity bored him. Tact was not one of his gifts. When others spoke it looked like he was sampling rather than listening. It's difficult to imagine how he managed to sit through corporate meetings or deal with clients. At 31 he switched careers and became an equity analyst at Oppenheimer. In December 1991 he wet his feet in the murky waters of the subprime lending world. In September 1997 he issued a prescient and bluntly worded report on publicly traded subprime lenders. The verdict — Sell. By 2002 publicly traded subprime lenders were gone. That opened the door to Act II, Household Finance Corporation's reincarnation as an aggressive home equity lender. The company enticed borrowers with fraudulent low interest rates based on voodoo math. When the company was brought to court it received a fine. Nobody went to jail. HSBC, a British congomerate, acquired HFC in 2002. The only losers were the hapless borrowers. Eisman with his black and white mindset was outraged, and the experience would fuel his subsequent zeal.
Eisman was determined to make his analytic gifts pay off. By 2004 he had started his own hedge fund, FrontPoint Partners. He knew he could profit from the debacle unfolding in slow-motion before his eyes. The key was timing.
The second protagonist in Lewis' story was an obsessive financial blogger completing his medical internship. His name was Dr. Michael Burry, and he was attracting a lot of attention from savvy, heavy-hitting investors. He, too, realized he needed a career change. In 2000 he founded a hedge fund called Scion Capital. Like Eisman, he discerned the inherent flaw in the logic of the subprime mortgage bond market. Like Eisman, Burry was looking for a way to capitalize on that insight.
Lewis follows these two men from 2000 to 2007 along with the rapidly mutating bond market. The narrative reads like a detective novel uncovering a trail of clues. The technique adds a measure of suspense to a story whose ending is already well known. The first clue was the rise of the originate-and-sell business model. Fees and commissions, not the mortgage bond itself, was the profit generator. Lenders needed increased volume not loan quality to feed profits. The same was true for the investment banks buying these bonds and collecting their own commissions. Default risk was the buyer's problem. Sy Jacobs, an analyst who trained at Salomon Brothers, summed up: “Any business where you can sell a product and make money without having to worry how the product performs is going to attract sleazy people.” In that sense, what followed was inevitable. Originators waived documentation, lured borrowers with artifically low teaser rates which would not reset for 2 years, and finally, no money down loans to feed the profit machine. The adjustment, of course, would occur 2 years into the loan when the floating and substantially higher market rate would kick in. Borrowers would be forced to either sell or refinance, an easy decision as long as real estate prices continued to escalate steeply.
Who would buy such risky loans? The loans were bundled into huge pools where the risk could be disguised. As a further refinement, the pools were subdivided so that levels designated to absorb the earliest defaults were assigned higher rates of return to compensate for the increased risk. The underlying pitch, however, was: What were the odds that all (or a significant percent) of the borrowers in a given level would default? In the beginning Eisman and Burry were the only ones who reasoned the answer had to be 100%.
Other clues emerged. By 2005 75% of subprime loans were made at adjustable teaser rates rather than fixed rates. Housing prices were rising precipitously. However, if that rise merely slowed, a cascade of defaults would be triggered. The median house price to income ratio had risen from the traditional 3:1 to 4:1, but in some markets, such as Los Angeles, the ratio had climbed to an unbelievable 10:1. Eisman and Burry detected yet another clue when they examined the methodology applied by ratings agencies such as Moody's and Standard and Poor. Their examiners looked at the characteristics of an entire pool, not the characteristics of the individual underlying bonds. One metric was the FICO score or credit rating of borrowers. The average FICO for a pool was used for the rating formula. Packagers quickly created pools with a wide range of scores; the result looked exactly like a package whose scores clustered closely around the mean. Moreover, all FICO's were not equal. A Mexican migrant worker who spoke no English and who had no assets but had never borrowed could have the same high FICO as an affluent borrower with plenty of assets and disposable income. In his inimitable way, Lewis summarizes: “The Mexican harvested strawberries; Wall Street harvested his FICO score.” After learning all of this, Eisman and Burry realized that a triple A rated slice of the pool was no less risky that the worst slice of the worst pool.
Act III of this drama introduced Greg Lippman, a bond salesman employed by Deutsche Bank. People described Lippman as over-the-top: Loud, self-aggrandizing, self-confident, brash. Such chutzpah... and such a long long list of contacts. Lippman was the mobilizer, the catalyst. The insurance giant AIG had figured out a way to enter the lucrative mortgage market, now morphed into the synthetic subprime mortgage bond-backed collateralized debt obligation. Too much of a mouthful? How about the CDO. Certain the bond pools were safe, AIG began to sell bond insurance, a conventional instrument for hedging. The insurance was not called insurance but rather a credit default swap. Lippman also began to look into the bond market and discovered the flaw. To him, the swaps were a bonanza. It was the vehicle he and his customers needed to short the bond market and he began talking to anyone who would listen. Anyone within AIG who suspected the ugly reality was quickly silenced by AIG Financial Products division head Joe Cassano. By the time AIG woke up it was like closing the barn door after the cattle have escaped.
Lewis deftly reduces what are ultimately complex legal contracts and accounting strategies into terms understandable to the ordinary person. He strips away the ambiguities of Wall Street “market speak.” A collateralized debt obligation was actually the smoke and mirrors backed subprime bond. The bonds weren't even classed as mortgage bonds but as “asset-backed securities” like car loans, student loans and credit card debt. Mobile homes were termed “manufactured housing,” certainly a more stable sounding proposition for the unwary investor. Defaults were referred to as “involuntary payments.” The bottom or riskiest tranche wasn't called the basement; it was a mezzanine tranche. With this lexicon it is no wonder that bond buyers were befuddled and Wall Street started to believe its own lies.
Lewis never underplays the role of luck or the degree of risk in his account. Eisman and Burry did the meticulous grueling analysis that led to the right answers, but the market does not always reward those who are right. They were placing their bets in 2005 but the collapse did not begin until 2007. In the interim they were obligated to pay out huge sums in premiums and collateral. Their backers became alarmed at the short-term negative returns. Paradoxically, bond prices kept rising even as the bad news started to surface. The bond prices did not begin to fall uninterrupted until June 2007. By 2008 those on the short end of the bet had yet one more worry. The entire financial system could collapse and their creditors could declare bankruptcy. If that happened theirs would be a pyrrhic victory.
Those looking for a precise chronology of events or a nuanced quantitative narrative should look elsewhere. This is a riveting story about institutional greed and driven by colorful characters who say and do shocking things. The amounts of money involved are not millions but billions. Lewis draws from emails, letters, interviews and conversations and provides a context filled with striking metaphors and surprising drama.
NOTE:
The film based on Lewis' book is scheduled for release on December 23, 2015
Steve Eisman began his career as a corporate lawyer. Eisman was an outspoken curmudgeon. Stupidity bored him. Tact was not one of his gifts. When others spoke it looked like he was sampling rather than listening. It's difficult to imagine how he managed to sit through corporate meetings or deal with clients. At 31 he switched careers and became an equity analyst at Oppenheimer. In December 1991 he wet his feet in the murky waters of the subprime lending world. In September 1997 he issued a prescient and bluntly worded report on publicly traded subprime lenders. The verdict — Sell. By 2002 publicly traded subprime lenders were gone. That opened the door to Act II, Household Finance Corporation's reincarnation as an aggressive home equity lender. The company enticed borrowers with fraudulent low interest rates based on voodoo math. When the company was brought to court it received a fine. Nobody went to jail. HSBC, a British congomerate, acquired HFC in 2002. The only losers were the hapless borrowers. Eisman with his black and white mindset was outraged, and the experience would fuel his subsequent zeal.
Eisman was determined to make his analytic gifts pay off. By 2004 he had started his own hedge fund, FrontPoint Partners. He knew he could profit from the debacle unfolding in slow-motion before his eyes. The key was timing.
The second protagonist in Lewis' story was an obsessive financial blogger completing his medical internship. His name was Dr. Michael Burry, and he was attracting a lot of attention from savvy, heavy-hitting investors. He, too, realized he needed a career change. In 2000 he founded a hedge fund called Scion Capital. Like Eisman, he discerned the inherent flaw in the logic of the subprime mortgage bond market. Like Eisman, Burry was looking for a way to capitalize on that insight.
Lewis follows these two men from 2000 to 2007 along with the rapidly mutating bond market. The narrative reads like a detective novel uncovering a trail of clues. The technique adds a measure of suspense to a story whose ending is already well known. The first clue was the rise of the originate-and-sell business model. Fees and commissions, not the mortgage bond itself, was the profit generator. Lenders needed increased volume not loan quality to feed profits. The same was true for the investment banks buying these bonds and collecting their own commissions. Default risk was the buyer's problem. Sy Jacobs, an analyst who trained at Salomon Brothers, summed up: “Any business where you can sell a product and make money without having to worry how the product performs is going to attract sleazy people.” In that sense, what followed was inevitable. Originators waived documentation, lured borrowers with artifically low teaser rates which would not reset for 2 years, and finally, no money down loans to feed the profit machine. The adjustment, of course, would occur 2 years into the loan when the floating and substantially higher market rate would kick in. Borrowers would be forced to either sell or refinance, an easy decision as long as real estate prices continued to escalate steeply.
Who would buy such risky loans? The loans were bundled into huge pools where the risk could be disguised. As a further refinement, the pools were subdivided so that levels designated to absorb the earliest defaults were assigned higher rates of return to compensate for the increased risk. The underlying pitch, however, was: What were the odds that all (or a significant percent) of the borrowers in a given level would default? In the beginning Eisman and Burry were the only ones who reasoned the answer had to be 100%.
Other clues emerged. By 2005 75% of subprime loans were made at adjustable teaser rates rather than fixed rates. Housing prices were rising precipitously. However, if that rise merely slowed, a cascade of defaults would be triggered. The median house price to income ratio had risen from the traditional 3:1 to 4:1, but in some markets, such as Los Angeles, the ratio had climbed to an unbelievable 10:1. Eisman and Burry detected yet another clue when they examined the methodology applied by ratings agencies such as Moody's and Standard and Poor. Their examiners looked at the characteristics of an entire pool, not the characteristics of the individual underlying bonds. One metric was the FICO score or credit rating of borrowers. The average FICO for a pool was used for the rating formula. Packagers quickly created pools with a wide range of scores; the result looked exactly like a package whose scores clustered closely around the mean. Moreover, all FICO's were not equal. A Mexican migrant worker who spoke no English and who had no assets but had never borrowed could have the same high FICO as an affluent borrower with plenty of assets and disposable income. In his inimitable way, Lewis summarizes: “The Mexican harvested strawberries; Wall Street harvested his FICO score.” After learning all of this, Eisman and Burry realized that a triple A rated slice of the pool was no less risky that the worst slice of the worst pool.
Act III of this drama introduced Greg Lippman, a bond salesman employed by Deutsche Bank. People described Lippman as over-the-top: Loud, self-aggrandizing, self-confident, brash. Such chutzpah... and such a long long list of contacts. Lippman was the mobilizer, the catalyst. The insurance giant AIG had figured out a way to enter the lucrative mortgage market, now morphed into the synthetic subprime mortgage bond-backed collateralized debt obligation. Too much of a mouthful? How about the CDO. Certain the bond pools were safe, AIG began to sell bond insurance, a conventional instrument for hedging. The insurance was not called insurance but rather a credit default swap. Lippman also began to look into the bond market and discovered the flaw. To him, the swaps were a bonanza. It was the vehicle he and his customers needed to short the bond market and he began talking to anyone who would listen. Anyone within AIG who suspected the ugly reality was quickly silenced by AIG Financial Products division head Joe Cassano. By the time AIG woke up it was like closing the barn door after the cattle have escaped.
Lewis deftly reduces what are ultimately complex legal contracts and accounting strategies into terms understandable to the ordinary person. He strips away the ambiguities of Wall Street “market speak.” A collateralized debt obligation was actually the smoke and mirrors backed subprime bond. The bonds weren't even classed as mortgage bonds but as “asset-backed securities” like car loans, student loans and credit card debt. Mobile homes were termed “manufactured housing,” certainly a more stable sounding proposition for the unwary investor. Defaults were referred to as “involuntary payments.” The bottom or riskiest tranche wasn't called the basement; it was a mezzanine tranche. With this lexicon it is no wonder that bond buyers were befuddled and Wall Street started to believe its own lies.
Lewis never underplays the role of luck or the degree of risk in his account. Eisman and Burry did the meticulous grueling analysis that led to the right answers, but the market does not always reward those who are right. They were placing their bets in 2005 but the collapse did not begin until 2007. In the interim they were obligated to pay out huge sums in premiums and collateral. Their backers became alarmed at the short-term negative returns. Paradoxically, bond prices kept rising even as the bad news started to surface. The bond prices did not begin to fall uninterrupted until June 2007. By 2008 those on the short end of the bet had yet one more worry. The entire financial system could collapse and their creditors could declare bankruptcy. If that happened theirs would be a pyrrhic victory.
Those looking for a precise chronology of events or a nuanced quantitative narrative should look elsewhere. This is a riveting story about institutional greed and driven by colorful characters who say and do shocking things. The amounts of money involved are not millions but billions. Lewis draws from emails, letters, interviews and conversations and provides a context filled with striking metaphors and surprising drama.
NOTE:
The film based on Lewis' book is scheduled for release on December 23, 2015
May 31, 2016
Achievement unlocked: I finally understand what the term "shorting" actually means.
Lewis provides a thorough and interesting take on the financial crisis, and now I think I finally begin to understand what caused the world economy to tank. As Lewis notes, there was plenty of greed to go around, but it was the criminal irresponsibility of the bankers, the investors, the bond traders, that really created the opportunity for such large-scale corruption.
I found this book particularly difficult because of my own fears of debt. My personality tends towards "control freak" and I find the idea of being in debt utterly terrifying. I have lived in suburbia for over five years without owning a car, commuting everywhere by bicycle, partly because the amount of money involved in buying a car simply scares me. Just thinking about the national debt makes my heart race. As a kid, I remember hearing my parents talk about variable-rate mortgages and the way that banks were using them to trick credulous and innocent buyers, but it was hard to see what banks could get out of selling homes to people who couldn't afford them. Now I understand: the homes were secondary to the CDOs that could be constructed from the loans. I find the story of the shadow banking system playing with peoples' lives and hopes this way, tempting them into a lifestyle beyond their means, utterly disgusting. Sure, you could say people should know better, but that's not sufficient and it's not fair. As Lewis notes, the incentives for everyone involved, from the homeowners to the bonds salesmen to the regulators, were simply all wrong. And they're still all wrong.
The one issue I'm left with is Lewis's take on his protagonists, a group of men who all "shorted" the sub-prime market industry. He treats them as heroes, as isolated voices of sanity in an increasingly insane world. But if they hadn't acted as buyers for sub-prime market insurance, there couldn't have been sellers, either. They ended up earning billions of dollars, and this type of finance is a zero-sum game. Their gains meant the losses of the sellers, and, ultimately, the American taxpayers. Sure, they didn't do anything strictly unethical, and sure, several of them apparently attempted to shut down the industry. But in the end, when they couldn't get anyone to listen, they settled for exploitation. And because they didn't turn around and, say, donate all that money to the ultimate victims of the sharks of Wall Street, I find it hard to see that choice as heroic.
If you, like me, are a financial dunce but still want to understand what on earth caused our economy to fail, I heartily recommend The Big Short. It may leave you disgusted with every person even tangentially involved with Wall Street and the shadow banking system, but at least you'll have a clue about how they took down our economy, and how they're probably going to do it all over again.
By the way: Dr. Michael Burry, the most intriguing and savvy character in the book, believes we're in for another bust. And I believe him.
Lewis provides a thorough and interesting take on the financial crisis, and now I think I finally begin to understand what caused the world economy to tank. As Lewis notes, there was plenty of greed to go around, but it was the criminal irresponsibility of the bankers, the investors, the bond traders, that really created the opportunity for such large-scale corruption.
I found this book particularly difficult because of my own fears of debt. My personality tends towards "control freak" and I find the idea of being in debt utterly terrifying. I have lived in suburbia for over five years without owning a car, commuting everywhere by bicycle, partly because the amount of money involved in buying a car simply scares me. Just thinking about the national debt makes my heart race. As a kid, I remember hearing my parents talk about variable-rate mortgages and the way that banks were using them to trick credulous and innocent buyers, but it was hard to see what banks could get out of selling homes to people who couldn't afford them. Now I understand: the homes were secondary to the CDOs that could be constructed from the loans. I find the story of the shadow banking system playing with peoples' lives and hopes this way, tempting them into a lifestyle beyond their means, utterly disgusting. Sure, you could say people should know better, but that's not sufficient and it's not fair. As Lewis notes, the incentives for everyone involved, from the homeowners to the bonds salesmen to the regulators, were simply all wrong. And they're still all wrong.
The one issue I'm left with is Lewis's take on his protagonists, a group of men who all "shorted" the sub-prime market industry. He treats them as heroes, as isolated voices of sanity in an increasingly insane world. But if they hadn't acted as buyers for sub-prime market insurance, there couldn't have been sellers, either. They ended up earning billions of dollars, and this type of finance is a zero-sum game. Their gains meant the losses of the sellers, and, ultimately, the American taxpayers. Sure, they didn't do anything strictly unethical, and sure, several of them apparently attempted to shut down the industry. But in the end, when they couldn't get anyone to listen, they settled for exploitation. And because they didn't turn around and, say, donate all that money to the ultimate victims of the sharks of Wall Street, I find it hard to see that choice as heroic.
If you, like me, are a financial dunce but still want to understand what on earth caused our economy to fail, I heartily recommend The Big Short. It may leave you disgusted with every person even tangentially involved with Wall Street and the shadow banking system, but at least you'll have a clue about how they took down our economy, and how they're probably going to do it all over again.
By the way: Dr. Michael Burry, the most intriguing and savvy character in the book, believes we're in for another bust. And I believe him.
May 2, 2010
This is the best description so far of the inside story about the sub-prime mortgage crisis. Reading this book is like riding a time machine back a couple years, walking into the Wall Street offices and asking them, "What in the world were you thinking?" The story is told from the view point of several investors who were betting against the sub-prime mortgage industry. But there were so few other people who saw it their way that they kept second guessing their position because they couldn't understand why so few other people agreed with them. It's apparent that the vast majority of "experts" were totally oblivious to impending doom.
The book tells of one individual who visits numerous investment companies trying to get them to bet against the sub-prime mortgage industry, but almost nobody was willing to believe him. He even had a complete power point presentation explaining how buying credit default swaps (betting against sub-prime mortgages) was a virtual sure thing. Still, he convinced few people.
The book also tells of the owner of an investment company that shorted the home mortgage business, and the investors in his company wanted their money back. They thought he was crazy to bet against house prices continuing to go up. He refused to give their money back because he was highly leveraged and would experience large losses if he gave their money back. So the investors sued him. In the midst of this rancor the housing market collapsed and suddenly their investments increased 70 fold. In other words, a million dollar investment was suddenly worth 70 million. His investors had gone from a position of asking for a big loss to a position of receiving a tremendous gain. After it was over, not one of his investors apologized, said thank you, or said "You were right and I was wrong."
The narrative of the book is structured to build suspense in the mind of the reader even though we all know what happens in the end. Michael Lewis did a good job writing this book. In the end he sums up by speculating why so many smart people were so stupid. It can be blamed on incentives and shedding of risks.
The book tells of one individual who visits numerous investment companies trying to get them to bet against the sub-prime mortgage industry, but almost nobody was willing to believe him. He even had a complete power point presentation explaining how buying credit default swaps (betting against sub-prime mortgages) was a virtual sure thing. Still, he convinced few people.
The book also tells of the owner of an investment company that shorted the home mortgage business, and the investors in his company wanted their money back. They thought he was crazy to bet against house prices continuing to go up. He refused to give their money back because he was highly leveraged and would experience large losses if he gave their money back. So the investors sued him. In the midst of this rancor the housing market collapsed and suddenly their investments increased 70 fold. In other words, a million dollar investment was suddenly worth 70 million. His investors had gone from a position of asking for a big loss to a position of receiving a tremendous gain. After it was over, not one of his investors apologized, said thank you, or said "You were right and I was wrong."
The narrative of the book is structured to build suspense in the mind of the reader even though we all know what happens in the end. Michael Lewis did a good job writing this book. In the end he sums up by speculating why so many smart people were so stupid. It can be blamed on incentives and shedding of risks.
October 2, 2023
John Adam’s said:
Every problem is an opportunity in disguise.
If John Adam’s was right.
And I think he was.
Than I think the reverse is also true:
Every opportunity is a problem in disguise.
The people who saw opportunity in the financial Armageddon of 2008, bet against the house, suffered tremendous isolation and ridicule, and ultimately ended up being right and getting rich.
But it was a hollow victory, as millions of innocent people got hopelessly fucked (including me and maybe you too), while the responsible parties got paid billions in American tax dollar bailouts (supplied by you and me).
This is a funny, gripping, tragic and smart book.
A must read.
5/5 ⭐️
Every problem is an opportunity in disguise.
If John Adam’s was right.
And I think he was.
Than I think the reverse is also true:
Every opportunity is a problem in disguise.
The people who saw opportunity in the financial Armageddon of 2008, bet against the house, suffered tremendous isolation and ridicule, and ultimately ended up being right and getting rich.
But it was a hollow victory, as millions of innocent people got hopelessly fucked (including me and maybe you too), while the responsible parties got paid billions in American tax dollar bailouts (supplied by you and me).
This is a funny, gripping, tragic and smart book.
A must read.
5/5 ⭐️
September 5, 2021
I try not to read books too quickly; for me, "pageturner" is not a good thing. The text should be digested, not only by the conscious mind, but by the subconscious as well, to get the most out of it (even in fiction, but especially in nonfiction). So I am a little regretful that I read this book as quickly as I did; this is an important (and subtle) topic, and I want to attempt to get as much out of it as I can. But I admit, Michael Lewis is a heck of a storyteller.
The short-hand version of "what caused the 2008 Fiscal Crisis" that most people know is, "the banks got greedy and loaned money to people to buy houses, even though they knew that they couldn't afford those houses; then the banks blew up, and the Feds rescued them with our money". Up to a point, it is basically correct. But, the problem with this story is that it more or less assumes the problem which caused the Fiscal Crisis was, that bankers were greedy. But, they are always greedy, they were at least as greedy in the past as they were in the naughties. It's like answering the question "why did it rain today?" with, "because there was moisture in the air", but not mentioning anything about a change in temperature or pressure. It's not so much that it's incorrect, as that it's irrelevant, because it has always been true. The banks (by which we really mean "financial firms") did not get greedier than they were before; they were always greedy. What happened was that their methods for satisfying their greed became more complex, until even they were not competent to know what was really going on.
Part of the problem, I think, is that even capitalism's opponents want to imagine the billionaire's club as being full of smart people. Vicious, but not clueless. This probably has something to do with the need for a good story. A good story requires a good villain, and a good villain has to know what they're doing. If the villain is simply too confused, clueless, or otherwise incompetent to realize what they're doing, it does not make for an heroic tale, even if the villain is also evil and greedy. The hero who defeats a villain that was out of their depth anyway, is not so heroic. Even more tragic, if the villain that is out of their depth never even gets defeated.
But in the end, this is the real lesson (still mostly unlearned) which one should take from the Fiscal Crisis: the people running the show, don't really know what's going on. The higher up you go, the less likely it is that they understand. The only people in this story who could see clearly that, beneath all of the layers of complexity in the financial instruments involved, what was really going on was "lending money to people to buy houses at prices they cannot possibly afford, then reselling those loans in fantastically complex ways," were people who were at the fringes of the industry. The closer the person was to being an "insider", the more one is reminded of the saying by Upton Sinclair:
“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”
There is, as with the movie "Titanic", a certain building tension to the story from the fact that we know the end already from before we start watching. We know, while the various protagonists of Lewis' story are getting vilified, ridiculed, and ostracized for saying that the sky is falling, that they will be proven correct in abundance by the end of the tale. Unlike the movie romance of a rich young woman and a fashionable but poor young man who pick the wrong trans-Atlantic crossing, we also get sentences like this:
"Here was another bizarre fact about CDOs: Often they simply repackaged tranches of other CDOs, presumably those tranches their Wall Street creators had found difficult to sell. Even more amazing was their circularity: CDO "A" would contain a piece of CDO "B"; CDO "B" would contain a piece of CDO "C"; and CDO "C" would contain a piece of CDO "A"! Looking for bad bonds inside a CDO was like fishing for crap in a Port-O-Let: The question wasn't whether you'd catch some but how quickly you'd be satisfied you'd caught enough."
To his enormous credit, Michael Lewis manages to make a book about some of the most (deliberately) arcane and obscure financial instruments imaginable, eminently readable and even exciting. The reason, no doubt, is in part that we know why all of this baroque banking detail matters: it is going to tear down the economy and create the worst spike in unemployment since the Great Depression.
But there was another ominous strain running through the back of my mind as I read this book: has any of this really been fixed? Granted, house prices corrected in a big way for a few years, and thus came back down within reach of the people who were supposed to be making the mortgage payments. But at one point in the book it is mentioned that the historical norm for the ratio of median household income, to median house price, is 1:3, and it was a sign of problems ahead when it had moved to 1:4. Looking up the numbers for Austin in 2021, I found the current ratio to be 1:5.75. Well I did a bit of quick research, and while the exact ratio seems a bit different than what is listed in the book (it might depend on whether you are using median income, or median household income, etc.), but the overall trend is pretty clearly back in 2005 territory:
https://www.longtermtrends.net/home-p...
I am quite certain that I have not truly digested all that I should from "The Big Short"; I may have to revisit it. But the real answer to "what caused the Fiscal Crisis?" seems to be, "what is it you thought would prevent it?" There is nothing in our system to prevent the financial sector from loaning money to people who cannot repay it, as long as they process the loans in very complex ways. If it appears to pay off in the short-term, it will be copied massively in short order. Like printing money up until hyperinflation, or a Ponzi scheme which appears to be working great up until the moment it doesn't, this is not a problem which fixes itself. It certainly cannot be fixed by hoping for less greedy financiers. Any system which relies upon people who choose a career handling money, to not be greedy, is a broken system. We have a broken system. We have done nothing to fix it. Why not? In large part, because there is almost no one left any more, who understands how it works well enough to do so.
"What has happened before will happen again. What has been done before will be done again. There is nothing new in the whole world. 'Look,' they say, 'here is something new!' But no, it has all happened before, long before we were born." - Ecclesiastes 1:9-10
The short-hand version of "what caused the 2008 Fiscal Crisis" that most people know is, "the banks got greedy and loaned money to people to buy houses, even though they knew that they couldn't afford those houses; then the banks blew up, and the Feds rescued them with our money". Up to a point, it is basically correct. But, the problem with this story is that it more or less assumes the problem which caused the Fiscal Crisis was, that bankers were greedy. But, they are always greedy, they were at least as greedy in the past as they were in the naughties. It's like answering the question "why did it rain today?" with, "because there was moisture in the air", but not mentioning anything about a change in temperature or pressure. It's not so much that it's incorrect, as that it's irrelevant, because it has always been true. The banks (by which we really mean "financial firms") did not get greedier than they were before; they were always greedy. What happened was that their methods for satisfying their greed became more complex, until even they were not competent to know what was really going on.
Part of the problem, I think, is that even capitalism's opponents want to imagine the billionaire's club as being full of smart people. Vicious, but not clueless. This probably has something to do with the need for a good story. A good story requires a good villain, and a good villain has to know what they're doing. If the villain is simply too confused, clueless, or otherwise incompetent to realize what they're doing, it does not make for an heroic tale, even if the villain is also evil and greedy. The hero who defeats a villain that was out of their depth anyway, is not so heroic. Even more tragic, if the villain that is out of their depth never even gets defeated.
But in the end, this is the real lesson (still mostly unlearned) which one should take from the Fiscal Crisis: the people running the show, don't really know what's going on. The higher up you go, the less likely it is that they understand. The only people in this story who could see clearly that, beneath all of the layers of complexity in the financial instruments involved, what was really going on was "lending money to people to buy houses at prices they cannot possibly afford, then reselling those loans in fantastically complex ways," were people who were at the fringes of the industry. The closer the person was to being an "insider", the more one is reminded of the saying by Upton Sinclair:
“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”
There is, as with the movie "Titanic", a certain building tension to the story from the fact that we know the end already from before we start watching. We know, while the various protagonists of Lewis' story are getting vilified, ridiculed, and ostracized for saying that the sky is falling, that they will be proven correct in abundance by the end of the tale. Unlike the movie romance of a rich young woman and a fashionable but poor young man who pick the wrong trans-Atlantic crossing, we also get sentences like this:
"Here was another bizarre fact about CDOs: Often they simply repackaged tranches of other CDOs, presumably those tranches their Wall Street creators had found difficult to sell. Even more amazing was their circularity: CDO "A" would contain a piece of CDO "B"; CDO "B" would contain a piece of CDO "C"; and CDO "C" would contain a piece of CDO "A"! Looking for bad bonds inside a CDO was like fishing for crap in a Port-O-Let: The question wasn't whether you'd catch some but how quickly you'd be satisfied you'd caught enough."
To his enormous credit, Michael Lewis manages to make a book about some of the most (deliberately) arcane and obscure financial instruments imaginable, eminently readable and even exciting. The reason, no doubt, is in part that we know why all of this baroque banking detail matters: it is going to tear down the economy and create the worst spike in unemployment since the Great Depression.
But there was another ominous strain running through the back of my mind as I read this book: has any of this really been fixed? Granted, house prices corrected in a big way for a few years, and thus came back down within reach of the people who were supposed to be making the mortgage payments. But at one point in the book it is mentioned that the historical norm for the ratio of median household income, to median house price, is 1:3, and it was a sign of problems ahead when it had moved to 1:4. Looking up the numbers for Austin in 2021, I found the current ratio to be 1:5.75. Well I did a bit of quick research, and while the exact ratio seems a bit different than what is listed in the book (it might depend on whether you are using median income, or median household income, etc.), but the overall trend is pretty clearly back in 2005 territory:
https://www.longtermtrends.net/home-p...
I am quite certain that I have not truly digested all that I should from "The Big Short"; I may have to revisit it. But the real answer to "what caused the Fiscal Crisis?" seems to be, "what is it you thought would prevent it?" There is nothing in our system to prevent the financial sector from loaning money to people who cannot repay it, as long as they process the loans in very complex ways. If it appears to pay off in the short-term, it will be copied massively in short order. Like printing money up until hyperinflation, or a Ponzi scheme which appears to be working great up until the moment it doesn't, this is not a problem which fixes itself. It certainly cannot be fixed by hoping for less greedy financiers. Any system which relies upon people who choose a career handling money, to not be greedy, is a broken system. We have a broken system. We have done nothing to fix it. Why not? In large part, because there is almost no one left any more, who understands how it works well enough to do so.
"What has happened before will happen again. What has been done before will be done again. There is nothing new in the whole world. 'Look,' they say, 'here is something new!' But no, it has all happened before, long before we were born." - Ecclesiastes 1:9-10
May 29, 2019
The Big Short. Remember that movie? We all should, and never forget...
If you're like me, and don't know anything about the Wall Street high finance, but just kind of suspect that it's all bullshit and nobody really knows what they are doing, then this is the book for you!
The 2007-2008 financial crisis was one of the most important historical events of the young 21st century. It wasn't even that long ago, and already we've mostly forgotten. Whether or not you're the type to have strong political opinions, on this it's just too complicated for most of us to care about.
Luckily, Michael Lewis has penned this fascinatingly entertaining book. A book which is in no way a dull summation of mortgage fraud, although you'll definitely learn a lot about CDOs and the culture which nearly destroyed the entire system. But really, this is a book about people. And that's the brilliance of it.
An engaging tome about those who were smart enough to predict what in retrospect should have been obvious all along. This is the best way to learn, by hearing it from the true experts themselves who are fascinating characters in their own right. That is why The Big Short is the best book for learning about all these things, because of Lewis' excellent writing readers will care on a deeper level.
(However, if you've watched the film first you may be a bit confused by how the film changed most of the names of these real people. Another reason why reading is ultimately superior to watching movies, if one truly wants to be educated, right?)
Sadly, upon finishing this you may be left with much pessimism. It doesn't seem that Wall Street and the government have learned any lessons at all from this catastrophe and we are doomed to repeat it all over again very soon. Seriously, think about who is in charge now and shudder.
Well, should make for a good sequel soon enough ~
If you're like me, and don't know anything about the Wall Street high finance, but just kind of suspect that it's all bullshit and nobody really knows what they are doing, then this is the book for you!
The 2007-2008 financial crisis was one of the most important historical events of the young 21st century. It wasn't even that long ago, and already we've mostly forgotten. Whether or not you're the type to have strong political opinions, on this it's just too complicated for most of us to care about.
Luckily, Michael Lewis has penned this fascinatingly entertaining book. A book which is in no way a dull summation of mortgage fraud, although you'll definitely learn a lot about CDOs and the culture which nearly destroyed the entire system. But really, this is a book about people. And that's the brilliance of it.
An engaging tome about those who were smart enough to predict what in retrospect should have been obvious all along. This is the best way to learn, by hearing it from the true experts themselves who are fascinating characters in their own right. That is why The Big Short is the best book for learning about all these things, because of Lewis' excellent writing readers will care on a deeper level.
(However, if you've watched the film first you may be a bit confused by how the film changed most of the names of these real people. Another reason why reading is ultimately superior to watching movies, if one truly wants to be educated, right?)
Sadly, upon finishing this you may be left with much pessimism. It doesn't seem that Wall Street and the government have learned any lessons at all from this catastrophe and we are doomed to repeat it all over again very soon. Seriously, think about who is in charge now and shudder.
Well, should make for a good sequel soon enough ~
December 16, 2019
“The line between gambling and investing is artificial and thin.”
The story behind the 2007/8 financial crisis, as told by Michael Lewis in The Big Short is so outrageous it is at times hard to believe it is true. The detail with which Lewis dissects the mechanics of the mortgage crisis, is at once fascinating and horrifying. It makes clear exactly how real this story is. Built on greed, lies, and a healthy dose of wilful ignorance, this is a story that has to be read to be believed, and should be read to be understood by everyone taking on debt in our capitalist economy.
The story behind the 2007/8 financial crisis, as told by Michael Lewis in The Big Short is so outrageous it is at times hard to believe it is true. The detail with which Lewis dissects the mechanics of the mortgage crisis, is at once fascinating and horrifying. It makes clear exactly how real this story is. Built on greed, lies, and a healthy dose of wilful ignorance, this is a story that has to be read to be believed, and should be read to be understood by everyone taking on debt in our capitalist economy.
August 15, 2016
This was a really captivating read. It's a good intro to what occurred in 2008 and who were involved that led up to the failure of the banks. Makes one really wonder how oblivious they all were to their impact to the general population. Banks are pretty soulless and detached from reality.
January 24, 2011
In The Big Short, Michael Lewis outlines the causes of the housing crisis (which led to the larger Financial Crisis of 2007-2010), and tells the story of three small investment companies (basically four different investors) who saw it coming, bet against it, and made millions of dollars in the process. I really enjoyed reading about these individuals who foresaw the coming doom. Great human interest stories.
I think one of the greatest take-away learnings for me is the explanation why nannies who lived in Queens (or really why anyone was liberally offered a loan he/she couldn't afford) were loaned enough money to buy five townhomes (that really happened). For quite some time, Wall Street has packaged corporate loans and sold them as low-risk bonds, low-risk because the corporations were so diversified. Some genius on Wall Street decided that packaging sub-prime loans and selling them off as bonds would be a great idea and assumed they were low-risk simply because they were coming from people all around the country rather than one specific geographical area. Because the big banks on Wall Street were selling off the risk of all the horrible loans they were making (and making oodles of money as they were selling the bonds), they wanted more and more raw material (loans) to sell as bonds. This explains why people were able to get loans they could never afford, which increased the demand for housing and increased housing prices so drastically. One line I remember particularly from the book is that many of these people were "one broken refrigerator away from defaulting on their loan". Once the "teaser rates" on these loans expired, about two years after the loans were made, people began defaulting on the loans en masse, and the housing crisis was born.
What is absolutely astonishing is that so few people saw it coming (according to the author). Many of the risk models used on Wall Street didn't even have a way to value what would happen if housing prices went down. They all assumed housing prices would always go up and up and up. And the rating agencies that rated the bonds were absolutely clueless. It instills all kinds of confidence in the financial system (hope you're picking up the sarcasm).
And probably the greatest lesson of the book is the power of incentives. When people on Wall Street can engulf their companies in flames and still walk away pocketing millions of dollars that year, there is definitely an incentive problem. Why behave responsibly with other people's money if you can get rich regardless of the outcome?
Oh, and for my friends who would like to know, there is some strong language sprinkled quite liberally throughout the book, thanks to quotes from the investors in the book.
I think one of the greatest take-away learnings for me is the explanation why nannies who lived in Queens (or really why anyone was liberally offered a loan he/she couldn't afford) were loaned enough money to buy five townhomes (that really happened). For quite some time, Wall Street has packaged corporate loans and sold them as low-risk bonds, low-risk because the corporations were so diversified. Some genius on Wall Street decided that packaging sub-prime loans and selling them off as bonds would be a great idea and assumed they were low-risk simply because they were coming from people all around the country rather than one specific geographical area. Because the big banks on Wall Street were selling off the risk of all the horrible loans they were making (and making oodles of money as they were selling the bonds), they wanted more and more raw material (loans) to sell as bonds. This explains why people were able to get loans they could never afford, which increased the demand for housing and increased housing prices so drastically. One line I remember particularly from the book is that many of these people were "one broken refrigerator away from defaulting on their loan". Once the "teaser rates" on these loans expired, about two years after the loans were made, people began defaulting on the loans en masse, and the housing crisis was born.
What is absolutely astonishing is that so few people saw it coming (according to the author). Many of the risk models used on Wall Street didn't even have a way to value what would happen if housing prices went down. They all assumed housing prices would always go up and up and up. And the rating agencies that rated the bonds were absolutely clueless. It instills all kinds of confidence in the financial system (hope you're picking up the sarcasm).
And probably the greatest lesson of the book is the power of incentives. When people on Wall Street can engulf their companies in flames and still walk away pocketing millions of dollars that year, there is definitely an incentive problem. Why behave responsibly with other people's money if you can get rich regardless of the outcome?
Oh, and for my friends who would like to know, there is some strong language sprinkled quite liberally throughout the book, thanks to quotes from the investors in the book.
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