The Big Short

tbs I recently received a copy of The Big Short by Michael Lewis and read the book immediately. It is a quick read and  is one of those books you do not want to put down. The characters are full of interesting quirks and traits and there are many laugh-out-loud moments.

This book will appeal to nearly everyone, and I think non Wall Street readers will enjoy it as much as those that lived it. Michael has a great ability to tell a story, and he does it well in this book. It also does a decent job of explaining what went on with in the subprime mortgage industry and the subsequent securitization of  MBS/ABS/CDO/etc. that ultimately lead us to the brink of financial collapse and, perhaps more importantly, how few people actually understood what was going on. It is also correctly critical of the ratings agencies and their lack of diligence. 

In my view, here is the breakdown of who was at fault to varying degrees:

* borrowers willing to lie about their income wanting to play the housing bubble

* lenders – really originators – who only cared about feeding the system with new loan apps and had no care about the quality of the loans or the consequences

* banks who purchased loans – and even originator firms – to feed the system and fed them with money and instructed them to get as many apps as you can with little standards

* ratings agencies – willingly sold their triple-A ratings for profit – with little understanding of what they were rating

* regulators – totally asleep the entire time… even when explained what was happening, did not care.

* investors – trusted the ratings assigned to the product, without any research on their own part.

* politicians – have pushed the idea that homeownership is somehow an important indication of success, and pushed the limits of credit in order to elevate the homeownership rate on their watch… ultimate leading to credit being extended to people with no business owning a home

* auditors – also asleep at the wheel and never questioned what was inside these ‘investment grade’ assets or the accounting of the risk being taken. Much like Enron, these investment banks were simply ‘black-box’ earnings machines.

 

Many things ultimately led to the crisis, and the madness of crowds certainly played a role. Still, if we learn from it and change the system, there can be a benefit. If we pretend it was a one-off event and change nothing, we are bound to repeat it. It will be exceptionally difficult to change the system. In this political climate were we cannot appoint judges and Fed members, I am skeptical we can accomplish the serious reform needed. In any event, read this book and understand how these few people saw what was happening ahead of time and turned it into the opportunity of a lifetime.

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