The Big Short

Based on reading Michael Lewis' Liar's Poker and Moneyball, I wondered whether The Big Short would prove to be entertaining and informative. If you've read some of Lewis' books, you might agree that the "entertaining" part would seem to be a reasonably safe bet. It turns out, it is. The Big Short is fast-paced, straightforward, conversational and salty--very much like his earlier works. Indeed, if you didn't know Michael Lewis had written this book, you could probably guess it. It is easy reading and very hard to put down. In short (no pun), The Big Short doesn't disappoint in being entertaining. In a sense, this book is similar to Moneyball in that Lewis tells his story by following a host of characters that most of us have never heard of--people like Steve Eisman (the closest thing to a main character in the book), Vincent Daniel, Michael Burry, Greg Lippmann, Gene Park, Howie Hubler and others. How informative is the book? Well, it may seem that Lewis has his work cut out for himself, since the events of the recent financial crisis are already well known. More than that, lots of people have their minds made up concerning who the perps of the last few years are--banks and their aggressive managers, "shadow banks" and their even more aggressive managers, hedge funds, credit default swaps, mortgage brokers, the ratings agencies, Fannie Mae and Freddie Mac, the Fed's monetary policy, various federal regulators, short sellers, politicians who over-pushed home ownership, a sensationalist media, the American public that overextending itself with excessive borrowing (or that lied in order to get home loans), housing speculators, etc. The list goes on--and on. Okay, so you already know this. The defining aspect of this book, however, is that it asks (and answers) "Who knew?" about the impending financial crisis beforehand. Who knew--before the financial crisis cracked open for everyone to see (and, perhaps, to panic) in the fall of 2008--that a silent crash in the bond market and real estate derivatives market was playing out? Indeed, the good majority of this book addresses events that occurred before Lehman's failure in September of 2008. In describing what led up to the darkest days of the crisis, Lewis does a good job helping the reader to see how the great financial storm developed. All in all, this is an informative book. Interestingly, in the book's prologue, Salomon Brothers alumnus Lewis explains how, after he wrote Liar's Poker over 20 years ago, he figured he had seen the height of financial folly. However, even he was surprised by the much larger losses suffered in the recent crisis compared to the 1980s, which seem almost like child's play now. For a taste of The Big Short, Steve Eisman was a blunt-spoken "specialty finance" research analyst at Oppenheimer and Co., originally in the 1990s, and he eventually helped train analyst Meredith Whitney, who most people associate with her string of negative reports on the banking industry, primarily from late 2007. Giving a flavor of his style, Eisman claims that one of the best lines he wrote back in the early 1990s was, "The [XYZ] Financial Corporation is a perfectly hedged financial institution--it loses money in every conceivable interest rate environment." His own wife described him as being "not tactically rude--he's sincerely rude." Vinny Daniel worked as a junior accountant in the 1990s (and eventually worked for Eisman), and he found out how complicated (and risky) Wall Street firms were when he tried to audit them. He was one of the early analysts to notice the high default rates on manufactured home loans, which led to Eisman writing a 1997 report critical of subprime originators. Michael Burry (later Dr. Michael Burry) was, among other things, a bond market researcher in 2004 who studied Warren Buffett and Charlie Munger, and who correctly assessed the impact of "teaser rates" and interest rate re-sets on subprime loans. In 2005, Burry wrote to his Scion Capital investors that, "Sometimes markets err big time." How right he would be. Greg Lippmann was a bond trader for Deutsche Bank, who discussed with Eisman ways to bet against the subprime mortgage market. Before home prices declined, he noted, for example, that people whose homes appreciated 1 - 5% in value were four times more likely to default than those whose homes appreciated over 10%. In other words, home prices didn't need to actually fall for problems to develop. (Of course, home prices fell a lot.) When Lippmann mentioned this to a Deutsche Bank colleague, he was called a Chicken Little. To which, Lippmann retorted, "I'm short your house!" He did this by buying credit default swaps on the BBB-rated tranches (slices) of subprime mortgage bonds. If that's not a mouthful, read further in the book for a description of Goldman Sachs and "synthetic subprime mortgage bond-backed CDOs." Then there's the AIG Financial Products story, told through the story of Gene Park, who worked at AIG, and his volatile boss, Joe Cassano. Did I say this book is informative? Here's a bit more: Did you know that a pool of mortgages, each with a 615 FICO score, performs very differently (and better) than a pool of mortgages with half of the loans with a 550 FICO score and half with a 680 FICO score (for a 615 average)? If you think about it, the 550/680 pool is apt to perform significantly worse, because more of the 550 FICO score loans develop problems. Think about how that got gamed. There's more, but hopefully you've gotten the point. This is a very interesting, entertaining and informative book that accomplishes what it sets out to do. Chances are you'll enjoy it.

In describing the behavior of Wall Street bankers prior to the financial crisis, many adjectives have been bandied about. Greedy, say some; arrogant, claim others. What is only now beginning to gain ground on these populist declarations of discontent is a third, and far more horrifying, descriptor: stupid. This trait may at first seem less offensive to those of us who flaunt our self-prescribed moral superiority over these perceived miscreants. The reality, however, is anything but comforting. In The Big Short: Inside the Doomsday Machine, Michael Lewis, author of Moneyball and Liar's Poker, dabbles in the thriller genre, often to hilarious effect, as he details the inner workings of a financial world that was truly ill-prepared for its inevitable Waterloo. I'll admit it: The Big Short is a very, very entertaining book. Mine is an admission whose sheepishness can only be understood once one has finished reading the book. It reads like a John Grisham novel, yet John Maynard Keynes is a far likelier neighbor on a library shelf. Lewis is profligate in his use of such terms as "big Wall Street firms" (32 occurrences, according to Google Books) and he is wont to transcribe entire conversations whose accuracy is often questionable but whose content leaves the reader in stitches. Ultimately, it is funny, isn't it? Here were our best and brightest, as David Halberstam might say, assuring us that our money was safe, that real estate prices would continue to rise, that subprime loans were the healthy product of a heightened ability to reduce risk, not a house of cards upon which much of the global economy now rested precariously. And they were wrong, not because they intentionally lied (though some did), but because they failed to recognize the bright red flags everywhere on (and sometimes off) their own balance sheets. The Securities and Exchange Commission's civil lawsuit against Goldman Sachs this week has resulted in even more vitriolic rhetoric against investment bankers and their ilk, a demographic Lewis takes no pains to please in The Big Short. He opens his book with this: "The willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grown-ups remains a mystery to me to this day." And he ends it on an account of his lunch with an investment banker, his old boss at Salomon Brothers, recounted with equal parts nostalgia and regret. In between, he rips apart much of the industry, railing against "the madness of the machine" and buttressing his anecdotes with footnotes that occasionally take up half the page. It's hard to say whom Lewis ridicules more, the bankers or the ratings agencies: while The Big Short is premised on the fact that high-powered bankers failed to research or even understand their own investments, Lewis makes it painfully clear that the foundation upon which all risk analysis rested was the highly coveted -- and, it turns out, highly manipulable -- ratings from industry leaders such as Moody's and Standard and Poor's. According to Lewis, employees of these firms, instead of conducting far-reaching investigations into the nature of subprime collateralized debt obligations (CDOs), they simply took at face value much of what the banks told them. And since there were large fees to be had for each rating bestowed on these shadowy financial instruments, Moody's and S&P had significant incentive to perpetuate the subprime industry. In one particularly enlightening passage, Steve Eisman, one of the book's central characters whose disgust for Wall Street types figured prominently into his investing strategy, explained the lack of incentives for analysts at ratings agencies, a misalignment that helped to create and foster the crisis. "'They're underpaid,' said Eisman. 'The smartest ones leave for Wall Street firms so they can help manipulate the companies they used to work for. There should be no greater thing you can do as an analyst than to be the Moody's analyst...So why does the guy at Moody's want to work at Goldman Sachs? The guy who is the bank analyst at Goldman Sachs should want to go to Moody's. It should be that elite.'" The Big Short is filled with quotes such as this. And although not all of them are as penetrating or as keenly observant of the recession's underlying fault lines, each is helpful in piecing together a panorama of the landscape that existed in and around these "big Wall Street firms." Michael Lewis has not compiled a tell-all here; if he has revealed any industry secret, it is simply the astonishing truth that, in the subprime lending business, there were none. When the dust had settled around our financial ground zero, it soon became apparent that even Wall Street had failed to understand Wall Street. In this, if nothing else, it shares the same fate as Main Street.

Considering that I have read just about every other book about the crisis, I am pretty late to the party in reading this book. I downloaded it last week and read it through within 24 hours. First, I have to say Lewis provides the most entertaining account of the crisis. Lewis presents an account of a few short-sellers out of about 20 who were completely short the market. I will not go into details about the short-sellers since all the other reviewers mention them. I will say, however, what's most notable is who Lewis generally left out: John Paulson. After all, he was the biggest short-seller of them all. He made the "greatest trade ever" by buying up CDS's, an insane multi-billion dollar profit. Paulson, however, was still a typical Wall Street actor. He happened to see the crisis coming, but he also bet on it in a typical Wall Street way. Unlike Burry, who used his investment letters to say everybody else was stupid, Paulson sold his fund as merely a hedge on extreme movements in the housing market. Many investors who may not have bought the certainty of doomsday did put money for insurance against doomsday. Lewis realized his Wall Street demeanor made Paulson uninteresting and consequently Lewis dedicates only a few pages to him. And it's a good thing he did because the short-sellers, Burry, Cornwall Capital and Eisman, all make for fascinating characters and fascinating stories. In a field of dry business writers, Lewis is the one true story-teller. He breaks up monotony about the structuring of CDO's with more and more fascinating antidotes. He does a great service for presenting the truth about the financial crisis in a form people uninterested in finance can appreciate. The only reason I am giving 4 stars is his Epilogue and the lack of good prescriptions past blaming investment banks going public. To a certain extent, the argument does make a good bit of sense. Before the banks went public, only financially sophisticated partners made decisions. After going public, shareholders pressured the bank CEO's to do anything necessary to increase profits. Furthermore, the banks had huge incentives to make their balance sheet and accounting as opaque as possible. The shareholders just were not sophisticated enough to dig through the balance sheet and realize that they were really invested in an extremely leveraged hedge fund filled with the most opaque OTC assets. After layer upon layer upon layer of obfuscation of the banks' assets as well as its counterparty risks, the CEO's took the easy way out and focused on paper profits above everything else. That said, I do not find the partnership argument wholly convincing. It seems like Lewis is using the argument to somehow vindicate bankers. Even after all his crazy antidotes about how bankers had no clue what they were buying and selling, the argument somehow says "the finance people were in fact smart, but the shareholders made them do it." For one thing, going public was not just to get a big payday for partners, although that was a big part of it. Banks were also going into more capital-intensive businesses. After computers really hit finance in the 80's, banks had to find a source of capital to buy all their computerized trading desks, data centers, etc. If Salomon Brothers did not go public, another bank eventually would have. Also, not enough people mention the SEC ending commission minimums in the 70's. For whatever reason, the SEC used to mandate minimum commissions and the banks basically earned very easy money from executing stock trades for institutional investors. When the commissions ended, the banks traditional market-making business had become very commoditized. To keep making decent money, the banks had to create more and more exotic instruments with higher transaction costs and find a way to sell them. If Salomon didn't create the MBS market, with the ensuing CDO market, somebody would have eventually just to earn the higher transaction costs. The real answer is that some sort of reregulation is needed just like we had with the FDIC and the SEC starting in the 30's. People often respond to this suggestion by saying regulators were sleeping at the switch and regulation caused part of the reason the crisis happened in the first place (especially Basel II risk-weighting of AAA tranches, which I won't get into here). This argument against regulation does not mention that regulation and regulators became very intertwined during the Reagan, Clinton and the two Bush administrations. Neither side had a real incentive to actually limit the activity of banks. The institutions who bought fixed-income instruments also didn't have a real political constituency like the retail stockholders of Enron and Worldcom. There was no political reason to make the fixed income market more transparent. With no political pressure and cushy finance jobs awaiting them, the regulators quickly became "partners" with the banks rather adversaries and past some SEC pressure for SOX compliance, there was very little if any regulation. With the lack of regulation, the banks became more like the banks of the 1920's. Sure, there was FDIC insurance, but retail deposits up to $250,000 were chump-change compared to the various deposit-like instruments for institutions in the shadow banking sector. The opaque repo market basically functioned as a retail deposit for those wanting to park 100's of millions of dollars. Before the crisis, a bank's word was considered as good as the Treasury's. Instead of keeping their short-term money in cash, Pension funds could park the money with a bank in the Repo market and earn a bit of interest. Same story in the Money Market, which funneled funds through the Commercial Paper market. Both Repo and Commercial Paper had to be rolled over frequently, which was also part of their great appeal to Institutions. They could forgo most interest rate and couterparty risk by getting 100 cents on the dollar in a month rather than years. The banks liked this short-term funding too because it was cheap. Borrowing short and lending long is a pretty good gig if you can get it. Another short-term financing component were OTC options. I still do not know how exactly banks put the CDS liabilities to Burry, Paulson and others on their balance sheets. Did the CDS payments just count as pure income and retained earnings? Maybe I'll find out one day. In any case, opaque OTC options had an inherent short-term liability in them waiting to explode if the bank bet wrongly. In the worst days of the crisis, all the banks' short-term financing dried up completely and margin calls went through the roof. With 1929-style regulation, it should be no surprise that there was a 1929-style bank run in the shadow sector. It isn't dumb bankers, dumb Germans, dumb stockholders, big bonuses, etc. behind the crisis, it's the lack of FDIC-style regulation and insurance for the short-term financing in the shadow sector. I would also guess that 1 out of 10 people who started reading this review are still reading. If you're still reading, then I sincerely appreciate it. It also shows why my argument has not gotten a lot of airtime. The deposits in the shadow-banking sector don't make for great political speeches or even great books, but it's the argument that makes the most sense to me. Without drastically regulating the shadow banking sector like the retail banking sector was regulated in the 30's, we will be doomed to repeat the crisis. Before the Great Depression, a banking panic happened about once a generation. Bankers remember, control risk for a time and then the next generation of bankers bets other people's money again, causing another panic. Before the Panic of 1929, we had the Panics of 1819, 1837, 1857, 1873, 1893 and 1907. In the era of post-1980 deregulation, we have now had the Panic of 2008. Sadly I do not think Dodd-Frank goes far enough and it probably won't be our last.

I usually read the book before I watch the movie, but this time I didn't. As soon as I finished watching the 2015 movie “The Big Short,” I immediately decided to read Michael Lewis’ book “The Big Short: Inside the Doomsday Machine,” which forms the basis for the film. Lewis, who was himself a Wall Street bond trader in the 1980s and 90s, is the author of several non-fiction books, many of them dealing with the world of finance. “The Big Short: Inside the Doomsday Machine” isn’t so much “about” the financial crisis as it is about what caused the meltdown in the first place. Lewis tells his story through the actions of four separate investment groups: Scion Capital; managed by Dr. Michael Burry; FrontPoint Partners LLC, led by Steve Eisman; Cornwall Capital, co-managed by James Mai and Charlie Ledley; and Greg Lippmann, a bond trader with Deutsche Bank. These investors, each working independently from each other, correctly foresaw the collapse of the housing markets in the United States in 2007. Nobody else saw it – or wanted to, for that matter. For years, many of the world’s biggest investment and commercial banks had been investing heavily in high-risk subprime mortgages. This caused housing prices to rise, and a “housing bubble” to form. But soon, variable interest rates on these mortgages would begin to rise sharply, and massive numbers of people with little or no income would begin to default on mortgages they could no longer afford. Our four investors each decided to “sell short” the housing markets by investing in “credit default swaps” – a form of insurance against mortgage defaults. They essentially were betting against the housing markets: when (not if) the housing markets failed, the investors would end up making millions… “The Big Short” is a very well written book. It’s fast-paced, easy to read, and short (less than 300 pages). Michael Lewis’ story is very much character-driven. His profiles of the main players are surprisingly detailed, brutally honest, and fascinating. Some people who start out looking like villains end up as quite heroic and admirable figures. Others do not fare so well. One of the things Michael Lewis does best is explain many of the technical aspects of the financial system in a manner that I could easily understand. Although I’m sure “mortgage backed securities,” “credit default swaps,” and “collateral debt obligations” are probably a lot more complicated than even Lewis presents them, I found his explanations simple, straightforward, and very useful. As a result, I gained a better knowledge of the financial crisis. “The Big Short: Inside the Doomsday Machine” is a very informative and entertaining book. For those looking to understand the basics of the 2008 financial crisis, this is one very good place to start. Highly recommended.

The movie runs like a novel. Not the book, this one is written as non-fiction. Very entertaining if you are interested in the subject.

Economics is a social science. It is predicated on an understanding of human behavior, among other things. It's also recognition that what we think we know may be incorrect. In their recent book, From Poverty To Prosperity - Intangible Assets, Hidden Liabilities and the Lasting Triumph Over Scarcity, Nick Schulz and Arnold Kling posed the following question to Douglass North, Nobel Laureate in Economics (1993). North is the Spencer T. Olin Professor in Arts and Science at Washington University in St. Louis: Here's the question from Schulz and King: "What other obstacles prevent economists and policymakers from seeing what really matters?" North's response: "Until they understand that our understanding of the world is very fragmentary, is not complete, is - I believe - partially incorrect, no matter how intelligent we are, we're not going to make sense of the world." p. 151. We live in a world where we must listen for the voices of dissent - the contrarians. When Michael Lewis' The Big Short was delivered, I thought I might pick it up and read a few pages. Warning: This magnificent work is crafted in such a way that sampling the first few pages will transform your day (as it did mine) into devouring this masterpiece cover-to-cover. It is a book about the dissenters, the contrarians, "the few who truly knew" - who developed and exercised the foresight to comprehend the emerging financial crisis in the U.S. (and around the globe). It is a story from the perspective of a very few who recognized that "a great nation lost its financial mind." P. xiv As Lewis writes: "A smaller number of people - more than ten, fewer than twenty, made a straightforward bet against the entire multi-trillion-dollar, sub-prime mortgage market and, by extension, the global financial system. In and of itself it was a remarkable fact: The catastrophe was foreseeable, yet only a handful noticed." P. 105 "Even as late as the summer of 2006, as home prices began to fall, it took a certain kind of person to see the ugly facts and react to them - to discern, in the profile of the beautiful young lady, the face of an old witch. Each of these people told you something about the state of the financial system, in the same way that people who survive a plane crash told you something about the accident, and also about the nature of people who survive accidents - all of them were, almost by definition, odd. But they were not all odd in the same way." P. 107 This book is incredibly insightful regarding the motivation of homo sapiens in a capitalist society, how we think, what we overlook, and the necessity to learn to question the world around us. Consider the following excerpts from this book: "All shared a distinction: They had proven far less capable of grasping basic truths in the heart of the U.S. financial system than a one-eyed money manager with Asperger's syndrome." Lewis' commentary on the failure of foresight by Paulson, Geithner, Bernanke, Blankfein (Goldman Sachs), Mack (Morgan Stanley), and Pandit (Citigroup) vs. hedgefund manager Michael Burry of Cupertino, CA P. 260. "I hated discussing ideas with investors," he said, "because I then become a Defender of the Idea, and that influences your thought process." Once you became an idea's defender you had a harder time changing your mind about it. P. 56 - quote from Michael Burry. "In retrospect, their ignorance seems incredible - but, then, an entire financial system was premised on their not knowing, and paying them for this talent." --- Lewis' characterization on what percentage of credit default swaps were sub-prime. P.88 "Lippmann soon found that the people he most expected to see the ugly truth of the subprime mortgage market-the people who ran funds that specialized in mortgage bond trading-were the ones least likely to see anything but what they had been seeing for years. Here was a strange but true fact: The closer you were to the market, the harder it was to perceive its folly." P. 91 "The markets were predisposed to underestimating the likelihood of dramatic change." P.108 "Just throw your model in the garbage can. The models are all backward-looking - the models don't have any idea of what this world has become." P. 176 - quote from Steve Eisman. Lewis has an uncanny ability to use interviews and the sheer creative power of his mastery of language to explain terribly complicated concepts in a way the layperson can comprehend. Regarding the design of Morgan Stanley's Credit Default Swap (CDS), Lewis uses the following phrase to characterize this instrument - "what amounted to home insurance on a house designated for demolition." (P. 202). In terms of the CDO market, Lewis says: "Their trade now seemed to them ridiculously obvious - it was as if they had bought cheap fire insurance on a house engulfed in flames." P. 164 --- ...you get the point. If you think that Lewis' "The Big Short - Inside The Doomsday Machine" is "just another book" about a vanilla investigative perspective regarding the U.S. and global financial crisis - YOU'RE WRONG. Don't succumb to this deception! This book is truly unique and will/must be enjoyed by a very broad audience. This work is a truly masterpiece. If you're interested in human behavior, cognitive economics or yearning for a "can't put it down" or how "a great nation lost its financial mind," --- this particular work stands out from all the rest of the pack. Buy it. Devour it. Think about it. Act upon it. Buy three for your colleagues and friends. If you're a U.S. citizen, it's your patriotic duty to read this book. If you are employed in the financial services sector of the global economy, this is required reading. My most heartfelt gratitude to Michael Lewis for sharing the stories of the few who truly knew: Those who "had the nerve to bet on their vision. It's not easy to stand apart from mass hysteria -to believe that most of what's in the financial news is wrong, to believe that the most important financial people are either lying or deluded - without being insane." P.xviii To Michael Burry, Steve Eisman, Vincent Daniel, Danny Moses, Jamie Mai, Charlie Ledley, Ben Hockett, and your families; here's something from my family to you and yours: You're "not nuts." You're the folks who provide me with the essential courage to inquire, think, ponder and wonder about the prospects for a better future in this world. You exemplify the few who have lived their lives, embraced incomprehensible pain and sacrifice, and paid an unimaginable personal price --- in pursuit of exposing systemic deception and, begin to restore my faith in the inherent value in the necessity for the contrarian among us. It's people like you who give me hope as my family, my community, our country, and our world continue to struggle as "collateral damage" in the ongoing, ever-unfolding, yet-to-be-experienced, dimensions of the aftermath of this fiasco. I needed to believe in "heroes" again. Thank you for being "something" in the midst of nothing. It's your character, tenacity, insight, intelligence and unwavering commitment to a pursuit of the truth amidst a sea of deception, which will endure with me. True stories of human heroism will never lose their charm. Thank you for living these truths for us.

This book is primarily about greed. I would sum up the moral of this book with Proverbs 22:16: He who oppresses the poor to make more for himself Or who gives to the rich, will only come to poverty. Lewis (The Blind Side, Liar's Poker) is one of the best nonfiction writers of our time, a fantastic storyteller. If you've not read his long-form article in Vanity Fair on the Greek debt crisis from last year, it's very much worth your time and you'll see why any efforts to keep Greece on the euro will ultimately fail. This tells the story of some of the very few people who called the housing bubble correctly, put their money where their mouth was, and made hundreds of millions of dollars. Michael Burry (this video posted by Bloomberg today tells his story), a former neurosurgeon turned California hedge fund manager who discovers he has Asperger syndrome during the course of his story. His Aspergers explain why he was so successful at consistently being ahead of the market, but also why he burnt out emotionally. Steve Eisman, a cynical bond trader who also probably has some mental disorder, who often confronted CEOs and other people he saw as villains. He saw shorting the housing market as part of a greater crusade. A trio of normal guys who start fund called Cornwall Capital, basically betting on "Black Swan" events, even when they didn't know what they were doing. These guys didn't get famous like John Paulson, but Paulson might not have existed without Burry originating the idea. But these guys pioneered the market for credit default swaps on housing-related CDOs. For Burry and Cornwall, they got to experience the rough treatment that outsiders get from firms like Goldman Sachs-- who basically cheat their customers when they can. (What are you going to do, sue Goldman Sachs?) The underlying greed of those making money off of housing is the central theme in this book. "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." The loan is an adjustable rate loan made by someone-- a bank or a mortgage broker-- who knows the migrant won't be able to repay, but the lender doesn't care. Because he has already sold the loan to an investment bank and gotten paid a nice commission for it. Reproduce this transaction thousands of times over in the U.S. Lenders even start making interest-only loans where the borrower never pays down any principle. A stripper in Vegas somehow gets five home equity loans...The investment bank takes the loans and packages them into asset-backed securities (ABS), a pool of mortgages of varying quality which it convinces Moody's or S&P to rate AAA. Moody's and S&P get paid fees for doing this, so they have an incentive to rate as many assets as they can, even if they think the underlying loans are junk-- that's not their problem. Next, another investment bank might buy several of the ABS and strip out some of the worst tranches, repackage them into a CDO. Even though the underlying mortgages are of low quality, the ratings agencies again rate the CDO as AAA. Maybe because their models say that the low-quality loans are from various regions of the country, and U.S. home values have never all fallen at once (no one was alive in the 1930s, right?). Or their models were flawed in other ways -- rating a floating-rate mortgage higher than a fixed rate, assuming someone could make payments just as easily at 12% as 8%, etc. Maybe because the fees they're raking in help their bottom lines and boosts their stock price--they are publicly traded companies. Maybe because they're incompetent (the smartest guys on Wall Street don't work at the ratings agencies). When there are no more loans to be made, CDOs are re-created synthetically, multiplying the amount of people who are basically betting on these assets. But very few people recognized that these assets would go bust when rates adjusted upwards in a couple years. Their trading desks kept billions of dollars worth on their books. Their risk management models only speculated that maybe 5% of the underlying loans would default. Everyone is basically passing the buck-- we collect our fees and commissions now, worry about the rest later. Guys like Burry and Eisman bought millions of dollars worth of credit default swaps on these CDOs, insurance that would pay out if the assets became worth less. When they finally did, the biggest financial companies in the world paid up and went bust. At one point in 2006 Eisman is invited to a subprime conference in Vegas organized solely to promote mortgage-backed securities and convince investors to stay in the market. He is basically awestruck by how how dumb everyone is and how "the world has turned upside down." The guys creating the CDOs, the trading desks buying them up, everyone seems to be drinking the kool aid that these are safe bets. "Something must have come over Eisman, for he stopped looking for a fight and started looking for higher understanding. He walked around the Las Vegas casino incredulous at the spectacle before him: seven thousand people, all of whom seemed delighted with the world as they found it. A society with deep, troubling economic problems had rigged itself to disguise those problems, and the chief beneficiaries of the deceit were its financial middlemen. How could this be?" There is a lot of profanity in this book, Lewis wants the world to see that Wall Street, where he used to work, is not holy. The "villains" of the story, the mortgage brokers, the CDO sellers, the traders and CEOs who lost their companies billions betting on CDOs, mostly walk away with their bank accounts intact, and keeping the millions in bonuses they earned along the way. The taxpayers took the ultimate fall along with, of course, those who lost their homes. Despite the profanity, I have made it a required text in Money & Banking. The students will see that they will be confronted with incentives that may conflict with Christian ethics. Would you really care what the adverse consequences for others might be so long as you're making millions of dollars? Would you pass the buck? They will also see that it's not true or that simple to say "everyone knew the housing bubble would burst," or "it was all the government's fault." I give this book 4 stars out of 5. What I really gleaned from the book is the importance of the ratings agencies in all of this. There are so many accounting rules and laws in our financial system that revolve around capital cushions and the value of assets, and if something is rated AAA and is really BBB-, that causes a lot of problems. It doesn't appear to me that those problems are very easily solvable.

Just, yikes. I was working in a political office in Washington in late 2008 and early 2009 when this whole thing went down, and I quickly found my day overrun by phone calls, literally hundreds of phone calls, on this topic. At the time, still today for many, it's easy to get drowned in the information and opinions on what exactly caused the financial crisis. The characters in this book will astound you, and your blood will boil at the ineptitude of people working on Wall Street and regulating Wall Street. My buddies that work in finance refuse to read this book, likely because it questions the very foundation of their salary and existence in the office for 50 hours a week. They think the book is something of a witch hunt, but ironically still seem to fail to understand or counter points made in it. For someone with no background knowledge of the finance world, the author does a great job making things as easy to understand as possible, which is funny because as he goes through the book it becomes clear that 98% of the financial industry did not understand the basics of what would ruin the economy: credit default swaps. Without going into too much detail here, that these things exist and weren't regulated, or fully understood in the ever so glorious free market, is pretty shocking. Essentially there was a small group of investors who saw very clearly that, at some point, home values would drop and people, large numbers of people, would begin defaulting on their mortgage. Ratings agencies also take a huge hit, being not so much there to keep investors honest about the risk of their holdings, and more an accomplice in valuing something they didn't understand and just slapping a perfect rating on garbage. One of the more telling episodes of this is rating mortgages. Firms would put together pools of loans to rate, from best to worst, to the ratings agency. When getting back the ratings, it would pool together all the worst loans of many different pools, and resubmit for ratings. Suddenly, a loan that was deemed BBB (very risky), would now have a AAA rating in the new pool, and be seen as having the same risk as a AAA loan in the original pool. How they got away with this for so long, is beyond me, but the author believes that, since there are only a few rating agencies (Moody's, Standard and Poor's) that essentially they are in competition for ratings (i.e. they are each trying to get business by handing out the best ratings). What makes this all the worse for the financial industry is the backdrop of the book: a guy who used to be a doctor but now manages his own wealth. He sees all this in plain sight, along with very few others. He did what we all expect our financial advisers to do, but only Lord knows what their day actually looks like. With the titans of wealth and power, a dude working in his home office sees this meltdown coming, not by luck or some fortune cookie, but by being an actually financial adviser. As someone who likes to discuss (read: argue) politics, this book has proved to be a wealth of information. Few people take the time to read up on this issue, partly because it just feels daunting, but this book makes it interesting and at the same time frustrating that it ever happened at all, and that it's unlikely anyone really learned much from it (let alone actually fired or imprisoned). The highlight of this was in a drunken 3 AM discussion I had with a friend, who works in finance. It started innocently enough, I asked him what he thought of the crisis and what he thinks has changed since then. Well, he blamed it on the Community Reinvestment Act of the late 1970s and the decisions of Fannie Mae and Freddie Mac. I pointed out that it seems ridiculous to blame the 2008 crisis on a law in place when the band Queen was still rocking and the loans that they made actually performed better, which surprised him. While only an anecdote, it seems to be a prevalent theme throughout the financial industry. Keep your head down, cover your butt, and keep cashing your checks. With so many cogs working in the building, doing the same thing you're doing, it can't be illegal or morally corrupt, right?