I know that this is a weird way of describing a book about the financial apocalypse, but I found The Big Short to be incredibly entertaining. It was by far the most interesting book out of the bunch. The Big Short looks at the crisis from the perspective of traders who predicted the collapse of the mortgage market and earned a fortune betting against the industry and the huge multinational financial institutions that were at its heart. As a morality story, The Big Short reads like a mystery book because of how a number of once-obscure members of the investing industry came to realize that something was dreadfully wrong, and then sought to wager that it would all come tumbling down. As a novel, this narrative is being recounted. The bubble continued to grow, fueled in large part by the popular "knowledge" that home real estate values would never face a big decline and throwing considerable doubt on their bets.
If you really are paying close enough attention to the market, large asset bubbles are not typically going to come as a surprise to you. The length of time that bubbles will continue to exist and the ramifications that will result from their bursting are difficult aspects of bubbles to comprehend. At the height of the technology bubble in the year 2000, for instance, it started to become obvious that many of the businesses in the.com sector were nothing but smoke and mirrors and were destined for failure. Many people were surprised to see that Microsoft and Intel, two of the most lucrative firms in the world, were still valued much lower than they were at their peak valuations over a decade later.
The bubble in the real estate industry is just like that. People knew it was a speculative bubble, but few were able to see how huge investment banks had leveraged their holdings in real estate to take advantage of the opportunity. It was these interconnected investments, in the end, that drove the global economy to the brink of ruin.
Despite the fact that the book does an excellent job of describing the economic development and collapse of the subprime mortgage market, I will offer a quick summary based on the study I have done on the Financial crisis since it is not included in the book. While many things must come together to make such a disaster, there are two that are particularly important to setting the stage: Pressure from Washington lawmakers on lenders to boost the number of low-income customers eligible for low-interest loans was the first of several factors that contributed. Increased house ownership was a primary priority for the government. Second, Wall Street investment companies began to "securitize" mortgages, which implies that they began to package mortgages and offer the bundles as income-producing assets. As a consequence, the risk of the loan was passed to the borrower, and as a result, many lenders began to show little respect for the quality of the loans they were providing.. . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .
These "mortgage backed securities" received good ratings from rating agencies like S&P since they were considered safe and predictable investments at the time. The issue is that the underlying loans quality started to deteriorate with time, while investment frameworks became more complicated. The ratings agencies, on the other hand, appeared to be ignorant to these shifts and continued to provide AAA ratings to investments that were becoming more questionable.
Bundled and issued as bonds, subprime mortgages of low quality were used to get the AAA grade. Repackaging low-rated bonds into Collateralized Debt Obligation (CDO) structures resulted in the AAA rating for many of these CDOs, even though the loans backing the individual CDO bonds were frequently of dubious credit worthiness. These investment-grade products provided somewhat greater returns than Treasuries in a low-interest-rate era. In order to keep the system in motion, financial institutions, including banks, investment banks, and rating agencies, worked together to retain the fees they earned from the new game in town. Right up until the inevitable occurred, that is.
What is the inevitable? So real estate prices could not keep rising at an excessive pace. They didn't, either. When teaser rates ended and much higher ones began kicked in, they began to fall at nearly the same time. Since then, there has been an unprecedented number of loan and CDO defaults and the rest is history. Traders and investors who predicted the impending doom and devised innovative strategies to profit from it are part of that history.
It is intriguing that the author, Michael Lewis, chooses to concentrate on several people whom I am not familiar with rather than concentrating on some of the more well-known players in the market. Portfolio managers Steve Eisman of FrontPoint, Michael Burry of Scion Capital, Deutsche Bank's Greg Lippmann, Cornwall Capital Management's Jamie Mai and Charley Ledley, and Morgan Stanley's Howie Hubler are just a few of the names on this list.
Michael Burry, a former neurology resident at Stanford Hospital, was one among the first people to attempt to wager against particular mortgage bonds. For some reason, he was preoccupied with reading mortgage bond prospectuses that no one else seemed to care about, until he understood that as soon as the teaser rate periods ended, the bonds were going to collapse. Credit default swaps (protection) were the very first $60 million he purchased in May 2005, and by July he had acquired $750 million, all at prices signalling a minuscule default probability. Burry rightly predicted the future, however the market had not yet come to terms with it.
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Deutsche Bank bond trader Greg Lippmann gave a seminar on "Shorting Mezzanine Tranches" in which he demonstrated that those whose houses increased in value by less than 5% per year were four times more likely to default than those who had their housing prices rise by 10% per year. That is to say, prices just needed to slow down a little in order to kick off a big wave of defaults.
Charley Ledley and Jamie Mai started Cornwall Capital Management with $110,000 in a Schwab account in the garage of Jamie Mai's Berkeley house. Some among the first to grasp that the asserted absence of link among the loans in a mortgage bond was a fabrication, and hence that rating a CDO better than the mortgage bonds it housed in represented both tragedy and profit potential.. As a result of their foresight, they were able to transform their $110,000 into $120 million during the market collapse.
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When it comes to these and many other exchanges Lewis discusses in his book, there must have been some losers. AIG's FP subsidiary was at the center of the crisis, and as a result, the Federal Reserve had to provide the company with a credit of more than $180 billion in order for it to meet its derivatives debts to financial institutions. Howie Hubler, a bond trader at Morgan Stanley, was also responsible for a loss of almost $9 billion, the greatest trading loss in Wall Street ever, according to Lewis's estimation.
It is hard to believe things have gotten this bad. Mortgages that were deemed too risky defaulted or were salvaged by government intervention because of the decline in residential real estate values.
For me, I am intrigued about where the accountability lies, and these books are a good place to start. One further thing to ponder is How the hell did this happen? Do you think it was a case of mass insanity or extensive deceit? As you can see, this response has a little bit of both. The 2008 financial catastrophe was the result of a gigantic money grab that encompassed individuals from many areas of life, and nothing in this book has altered my perspective of that fact. Unintentional cooperation between the federal government, Wall Street, banking institutions and mortgage lenders as well as credit rating organizations resulted in the financial crisis. A person may be both good and awful, but the tides of time might alter in a way that brings both together to create something dreadful. In terms of the economy, 2008 was not just one of the worst years ever, but it was also a monster.. . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .
The main lesson I had learned is a sense of caution, which is obvious given the context. It is essential to not only understand the risk that exist in the market but also to avoid underestimating the potential effect such risks may have.
To sum everything up, I just want to add that I feel everyone should read this book. Reading Lewis's narrative is going to be time well spent on your part. It's possible that he won't give us the full tale, but the part that he does share with us is fascinating and instructive. The problem may be understood from a number of viewpoints, each of which is distinct from the others and, to varying degrees, debatable. In spite of this, I believe that "The Big Short" does a fantastic job of providing an overview of the whole crisis, and it does it in a way that is not only intriguing but also rather amusing. A hearty clap in the affirmative!
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