Gary
En-Route
You may recognize Michael Lewis from Liars Poker and Moneyball. I enjoy his writing style and his ability to explain relatively complicated ideas in a simple manner. The Big Short was no disappointment! It’s not a long book, 260 pages, has a good pace and provides a lot of good interview and background facts.
While nowhere near as technically detailed as Too Big to Fail, Mr. Lewis does an excellent job of breaking down the sub-prime mortgage bond business and laying out the reasons it was doomed to collapse. Rather than focus on the “big-wigs” of the industry, as Too Big to Fail does, The Big Short concentrates on a handful (and there were only a handful) of brokers who foresaw the collapse and profited immensely from it.
One of the brokers, Mike Burry, a victim of Aspergers syndrome, had great difficulty relating to people, but could spend days concentrating on a bond prospectus. He realized early on that the system of sub-prime mortgages, the Collaterized Debt Obligations (CDO) manufactured from the mortgages and the Credit Default Swaps (CDS) were unsustainable, all that had to happen was the inevitable rise in the mortgage interest rate (nearly all were adjustable) and the rate of increase in real estate to stop rising at the then current rate.
IMHO, it is Mr. Lewis opinion that the sub-prime mortgage collapse was largely due to just two things – greed and ignorance. Ignorance because it is painfully clear, that the mortgagers hadn’t the faintest idea of what they were getting or could afford; the mortgage dealers didn’t care as they were passing them on; and to the greatest extent, the bond traders of the investment banks who had no idea how to value a CDO. Greed, because once past the initial mortgage, everyone up the chain was making tons of money off the fees and didn’t want the process to stop, they were literally inventing capital out of thin air. Thrown into this mix was the utter and complete failure of the rating agencies (Moody’s, S&P) to do even the most cursory due diligence. The real secret of the process was the ability of the investment banks to turn what would be high risk bonds (say a BBB rating) into gold (by basically snowing the rating firms into issuing AAA ratings for the same junk). Contributing to the whole mess was the development of “synthetic” CDO’s that were based on the “real” CDO’s and, of course, the famous CDS – really nothing more than insurance on a bond. Amazingly, one didn’t even have to own the bond to buy insurance for it!
The breadth of the internal self-delusion and arrogance of the investment banks, the rating agencies and, who could forget, AIG, was just staggering. The CEO’s of these firms didn’t have a clue what was happening and were more than willing to brush off warnings since the fees were enormous.
Most of the investment banks are still standing, Lehman Bros. is a notable exception. Many people lost their homes (which they really couldn’t afford anyway), investors were wiped out, yet, the traders made huge bonuses and in the end, the US taxpayer footed the bill. I disliked the TARP program when first proposed, after reading this book (and Too Big to Fail), I really despise it.
While nowhere near as technically detailed as Too Big to Fail, Mr. Lewis does an excellent job of breaking down the sub-prime mortgage bond business and laying out the reasons it was doomed to collapse. Rather than focus on the “big-wigs” of the industry, as Too Big to Fail does, The Big Short concentrates on a handful (and there were only a handful) of brokers who foresaw the collapse and profited immensely from it.
One of the brokers, Mike Burry, a victim of Aspergers syndrome, had great difficulty relating to people, but could spend days concentrating on a bond prospectus. He realized early on that the system of sub-prime mortgages, the Collaterized Debt Obligations (CDO) manufactured from the mortgages and the Credit Default Swaps (CDS) were unsustainable, all that had to happen was the inevitable rise in the mortgage interest rate (nearly all were adjustable) and the rate of increase in real estate to stop rising at the then current rate.
IMHO, it is Mr. Lewis opinion that the sub-prime mortgage collapse was largely due to just two things – greed and ignorance. Ignorance because it is painfully clear, that the mortgagers hadn’t the faintest idea of what they were getting or could afford; the mortgage dealers didn’t care as they were passing them on; and to the greatest extent, the bond traders of the investment banks who had no idea how to value a CDO. Greed, because once past the initial mortgage, everyone up the chain was making tons of money off the fees and didn’t want the process to stop, they were literally inventing capital out of thin air. Thrown into this mix was the utter and complete failure of the rating agencies (Moody’s, S&P) to do even the most cursory due diligence. The real secret of the process was the ability of the investment banks to turn what would be high risk bonds (say a BBB rating) into gold (by basically snowing the rating firms into issuing AAA ratings for the same junk). Contributing to the whole mess was the development of “synthetic” CDO’s that were based on the “real” CDO’s and, of course, the famous CDS – really nothing more than insurance on a bond. Amazingly, one didn’t even have to own the bond to buy insurance for it!
The breadth of the internal self-delusion and arrogance of the investment banks, the rating agencies and, who could forget, AIG, was just staggering. The CEO’s of these firms didn’t have a clue what was happening and were more than willing to brush off warnings since the fees were enormous.
Most of the investment banks are still standing, Lehman Bros. is a notable exception. Many people lost their homes (which they really couldn’t afford anyway), investors were wiped out, yet, the traders made huge bonuses and in the end, the US taxpayer footed the bill. I disliked the TARP program when first proposed, after reading this book (and Too Big to Fail), I really despise it.
