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"The Big Short" by Micheal Lewis - Book Review

January 7th, 2019 at 12:48 pm

The Big Short is more like a biographical novel. It follows the stories of several people who spotted the signs of the oncoming 2008 financial crisis before there was any stress in the system. You get to experience their minds as they spot the absurdity, as the uncover immense moral hazards, as they struggle to find a profitable way to trade on the information, as they fight with investors who want out, as they make the victory, and how they deal with the aftermath of having bet on the demise of the financial world as they knew it. Some of the characters are very amusing, some are irritating, and some are foul. As backwards as it sounds this book captures the human element completely while at the same time discussing something as analytical as financial trading.

Where I found it:
I found this book while browsing the very limited financial section of my library.

What I learned:
The Big Short taught me how corrupt the system can get when moral hazards are present and how blind the big companies can be.

I was amazed by the clearly immoral tricks the loan originators and repackagers played to get their pools of mortgages an AAA rating. AAA! That’s the highest rating possible and better than our current US Treasuries (S&P downgraded US Treasuries to AA+ due to the debt ceiling crisis of 2011). They took a lot of low FICO loans who would most likely default and threw them in with the loans of immigrant workers who don’t have enough history for a low FICO score and only reported the average number, which was high enough to ensure no default. They didn’t care if the pools actually went bad or not because once the pool is sold off, the risk is on the new owner. All they cared about was volume. The more mortgages they sold, the more money they made. They made so many bad mortgages that one originator company had 20% of the mortgages default AT THE FIRST PAYMENT and had to take the loss themselves.

On the other hand, the rating agencies were lost. They didn’t have a model for these mortgages, so they accepted the model they were handed by the packagers. They loved it because rating agencies get paid per security rated. With companies buying up these AAA products in a feeding frenzy, they got a lot of things to rate.

Investment banks were just as lost. They didn’t really care what gave something an AAA rating, they just knew if they filled themselves up with something that wouldn’t default and had a good return, they’d make a ton of money. They snatched these up even faster than they could be produced, so paper mortgage backed securities got invented. The paper securities were not even backed by mortgages, just construed to mimic them financially.

Basically, there was a moral hazard at the beginning of a system as originators learned to game the system. They did it so well and the people later down the chain were so blind and poorly managed that it resulted in a massive financial bloom and rot on such a scale that it put the entire global financial system out of whack.

Recommendations:
I loved seeing into the crisis. There were so many things to discover that I actually talked to people about it a lot while I was reading. Normally people aren’t interested in my random financial obsessions, but this one actually got some engagement. The discoveries were just so appalling that they had to be voiced and people are willing to hear reasons to blame. Not to mention, there were some pretty funny moments.

There aren’t many people I would recommend this book to. The beginning was boring, but the second half made up for it. A few parts are confusingly technical, but you can get the gist of it and move on. You don’t actually have to follow the author’s explanation of the paper mortgage securities, just know that they were cleverly construed. The biggest problem is that a few of the characters use the F word in every thought.

More Financial Book Reviews by Milly

1 Responses to “"The Big Short" by Micheal Lewis - Book Review”

  1. crazyliblady Says:

    There is also a DVD of this story available. I requested it through Netflix.

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