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bloodygranuaileI am writing this review a mere two days after I finished the book! I'm almost back to being sort of on task about things, it looks like. Woohoo.
Today's book is Michael Lewis' The Big Short: Inside the Doomsday Machine, which is about the subprime housing bubble. Specifically, the book is a character-driven non-fiction narrative about the handful of people who were smart enough to "short" the subprime mortgage marking (meaning, for other high-finance-illiterate people, that they bet against it) and thereby made a lot of money and a lot of enemies, and discovered new and exciting levels of cynical to become every time they thought they were sufficiently cynical already.
This book is written for people who don't have a lot of background in economics and Wall Street hijinks, and I think one of the book's greatest strengths is that it does this without being too dumbed down--it's written for people who can grasp complex concepts, but merely lack almost all of the background knowledge necessary to figure out a good goddamn thing about mortgage derivatives and whatnot. Through ample use of metaphor and analogy, (what as far a I can tell is) good judgment about what parts of a financial "product" the reader needs to know about and what they don't, and extremely good integration of financial lecturing with the more narrative part of the story, Michael Lewis can make an uninformed but reasonably intelligent reader actually understand what a synthetic subprime mortgage-bond backed collateralized debt obligation is, which is something that nobody dealing with the things at the time seemed to know. The book ultimately reads kind of like a murder mystery, and in a sense, it is ("Who killed the global economy?")
The main characters in this story are: Michael Burry, a med student with Aspberger's and a glass eye whose obsessive Asperger hobby just happened to be market analysis, who quit the medical world to open his own investment firm (Scion Capital, named so because he was a nerd) where he distinguished himself by actually reading financial reports instead of chumming around with his investors and thereby making them buckets of money; Steve Eisman, a loudmouthed analyst at his parents' investment firm who eventually became "the financial market's first socialist" (p. 20); Vinny Daniel and Danny Moses, Steve Eisman's teammates; and Greg Lippman, a bond trader for Deutsche Bank who has the dubious distinction of, in a book entirely about Wall Street high finance dudes, being the one who I remembered as "the one who's an asshole." (Lippman has some great lines, though--in one scene, he gets in an argument with another Deutsche Bank guy and tells him "Fuck you. I'm short your house."(p. 65))
While Michael Lewis' writing style is pretty conversational and witty, most of the humor in this book is either Lippman quotations or Eisman quotations, with Eisman getting noticeably more page time. If these two guys didn't say such hilarious things, and inspire other people to say hilarious things about them ("'I love Greg,' said one of his bosses at Deutsche Bank. 'I have nothing bad to say about him except that he's a fucking whack job.'" p.64), all the chummy asides and casual cursing and general David-Foster-Wallace-ian style in the world may not have been enough to make the book readable, and may in fact have just seemed inappropriate, because the rest of the subject matter kind of makes you want to bang your head repeatedly against a wall.
For example, the aforementioned "synthetic subprime mortgage-bond backed collateralized debt obligation": it is basically when you take the crappiest-rated pools of bonds (called "tranches") from a bunch of different towers of crappy bonds, put them in a big pile, and get the ones on top re-rated as triple-A because now they are at the top of a bond tower, whereas yesterday the exact same pool of bonds was rated triple-B because it was on the bottom of a bond tower. Lewis explains this all using a metaphor of actual buildings; the way I thought of it was more like if you took the kid with the lowest class rank from every class of high school seniors in the state and put them all in one class, then a bunch of kids would suddenly go from having low class ranks to having high class ranks. And then they applied for college and the colleges neglected to look at their actual transcripts or SAT scores or any other things colleges usually look at, and just went "You are in the top third of your class! Here, have a scholarship." Head, meet wall.
I, personally, enjoyed learning long euphemistic strings of vocab words that all essentially just mean "gambling," or in some cases "money laundering" (er, debt laundering?), because I am a word nerd. Michael Lewis also appears to be having a lot of fun translating the meaningless nonsense into plain, if very snarky, English. This really doesn't make it any less troubling that Wall Streeters found it necessary to come up with so many obfuscatory terms to cover up when (a) they had no idea what they were doing, (b) what they were doing was really really shady, or (c) they had no idea what they were doing but they figured it was probably pretty shady.
This book is short, being only about 250 pages, but it covers from the beginning of the subprime industry as an integral part of Wall Street (sometime in the mid nineties) up through the collapse of Bear Stearns and the government's bailout program, both TARP and the less publicized other giant bucketfuls of no-strings-attached free money. The last two chapters in this book are marked by deliciously unadulterated outrage, full of angry catchphrases like describing the "new regime" as "free money for capitalists, free markets for everyone else" (p. 262) and ripping the federal government several new ones for their failure to demand any kind of accountability from the banks they were bailing out with taxpayer money.
On a related note, The Daily Show had a couple of great jokes last night on exactly this subject, in a new segment entitled "How the F#@k Is It That Martha Stewart Went to Jail?" including explaining what "TARP" stands for: "'Troubled Assets Relief Program,' where by 'assets' we mean 'liabilities' and by 'troubled' we mean 'worthless.'" It is worth watching the segment yourself:
Anyway, this is all getting very depressing, so I'm going to go read a steampunk alternate history version of World War I which involves cross-dressing teenage girls and some flying whales. It may not fix the global economy but I am going to feel so much better.
Today's book is Michael Lewis' The Big Short: Inside the Doomsday Machine, which is about the subprime housing bubble. Specifically, the book is a character-driven non-fiction narrative about the handful of people who were smart enough to "short" the subprime mortgage marking (meaning, for other high-finance-illiterate people, that they bet against it) and thereby made a lot of money and a lot of enemies, and discovered new and exciting levels of cynical to become every time they thought they were sufficiently cynical already.
This book is written for people who don't have a lot of background in economics and Wall Street hijinks, and I think one of the book's greatest strengths is that it does this without being too dumbed down--it's written for people who can grasp complex concepts, but merely lack almost all of the background knowledge necessary to figure out a good goddamn thing about mortgage derivatives and whatnot. Through ample use of metaphor and analogy, (what as far a I can tell is) good judgment about what parts of a financial "product" the reader needs to know about and what they don't, and extremely good integration of financial lecturing with the more narrative part of the story, Michael Lewis can make an uninformed but reasonably intelligent reader actually understand what a synthetic subprime mortgage-bond backed collateralized debt obligation is, which is something that nobody dealing with the things at the time seemed to know. The book ultimately reads kind of like a murder mystery, and in a sense, it is ("Who killed the global economy?")
The main characters in this story are: Michael Burry, a med student with Aspberger's and a glass eye whose obsessive Asperger hobby just happened to be market analysis, who quit the medical world to open his own investment firm (Scion Capital, named so because he was a nerd) where he distinguished himself by actually reading financial reports instead of chumming around with his investors and thereby making them buckets of money; Steve Eisman, a loudmouthed analyst at his parents' investment firm who eventually became "the financial market's first socialist" (p. 20); Vinny Daniel and Danny Moses, Steve Eisman's teammates; and Greg Lippman, a bond trader for Deutsche Bank who has the dubious distinction of, in a book entirely about Wall Street high finance dudes, being the one who I remembered as "the one who's an asshole." (Lippman has some great lines, though--in one scene, he gets in an argument with another Deutsche Bank guy and tells him "Fuck you. I'm short your house."(p. 65))
While Michael Lewis' writing style is pretty conversational and witty, most of the humor in this book is either Lippman quotations or Eisman quotations, with Eisman getting noticeably more page time. If these two guys didn't say such hilarious things, and inspire other people to say hilarious things about them ("'I love Greg,' said one of his bosses at Deutsche Bank. 'I have nothing bad to say about him except that he's a fucking whack job.'" p.64), all the chummy asides and casual cursing and general David-Foster-Wallace-ian style in the world may not have been enough to make the book readable, and may in fact have just seemed inappropriate, because the rest of the subject matter kind of makes you want to bang your head repeatedly against a wall.
For example, the aforementioned "synthetic subprime mortgage-bond backed collateralized debt obligation": it is basically when you take the crappiest-rated pools of bonds (called "tranches") from a bunch of different towers of crappy bonds, put them in a big pile, and get the ones on top re-rated as triple-A because now they are at the top of a bond tower, whereas yesterday the exact same pool of bonds was rated triple-B because it was on the bottom of a bond tower. Lewis explains this all using a metaphor of actual buildings; the way I thought of it was more like if you took the kid with the lowest class rank from every class of high school seniors in the state and put them all in one class, then a bunch of kids would suddenly go from having low class ranks to having high class ranks. And then they applied for college and the colleges neglected to look at their actual transcripts or SAT scores or any other things colleges usually look at, and just went "You are in the top third of your class! Here, have a scholarship." Head, meet wall.
I, personally, enjoyed learning long euphemistic strings of vocab words that all essentially just mean "gambling," or in some cases "money laundering" (er, debt laundering?), because I am a word nerd. Michael Lewis also appears to be having a lot of fun translating the meaningless nonsense into plain, if very snarky, English. This really doesn't make it any less troubling that Wall Streeters found it necessary to come up with so many obfuscatory terms to cover up when (a) they had no idea what they were doing, (b) what they were doing was really really shady, or (c) they had no idea what they were doing but they figured it was probably pretty shady.
This book is short, being only about 250 pages, but it covers from the beginning of the subprime industry as an integral part of Wall Street (sometime in the mid nineties) up through the collapse of Bear Stearns and the government's bailout program, both TARP and the less publicized other giant bucketfuls of no-strings-attached free money. The last two chapters in this book are marked by deliciously unadulterated outrage, full of angry catchphrases like describing the "new regime" as "free money for capitalists, free markets for everyone else" (p. 262) and ripping the federal government several new ones for their failure to demand any kind of accountability from the banks they were bailing out with taxpayer money.
On a related note, The Daily Show had a couple of great jokes last night on exactly this subject, in a new segment entitled "How the F#@k Is It That Martha Stewart Went to Jail?" including explaining what "TARP" stands for: "'Troubled Assets Relief Program,' where by 'assets' we mean 'liabilities' and by 'troubled' we mean 'worthless.'" It is worth watching the segment yourself:
Anyway, this is all getting very depressing, so I'm going to go read a steampunk alternate history version of World War I which involves cross-dressing teenage girls and some flying whales. It may not fix the global economy but I am going to feel so much better.
The Big Short
Date: 2011-12-07 03:59 am (UTC)Banks, etc. made the classic error of thinking the party would go on indefinitely or that they'd be able to get out before everyone else once the lights came on. Financial market history over centuries is littered with examples of over-leveraging that turned out badly. This movie will be seen again and again. Human nature.
Congress contributed to the problem, starting in the 1990's by forcing banks to lend to lower credit-quality consumers under the Community Reinvestment Act (enacted under Carter, expanded greatly under Clinton). In the '90's, if banks wanted to merge (and the industry was going through a great consolidation in an effort to remain competitive in the US and globally), regulators said, "OK, but you have to allocate $XX million to CRA loans." Then they figured out a way to make a ton of money off of it -- as they always have and always will, for better or worse (or maybe better "and" worse).
During Bush's presidency, the administration and some in Congress saw this coming and wanted to prevent this train wreck before it happened. They were rebuffed every time by those who wanted to continue lending to lousy credits, all in the name of higher rates of homeownership. That sounds great on paper but there is a reason home ownership in America has historically maxed out around 64-65% and not 68-69%.
That difference may seem small, but when you consider that there are 112 million occupied homes, 5% of that is a very big number (5 million plus). Layer in the rampant no-doc, no income verification, no money down or even 125% loan-to-value deals and you eventually get what we saw in '07-'08. It'll take a few years to unwind the backlog of underwater homes and for consumers in general to reduce their historically high debt levels.
The credit card party has gone on too long in America (and Europe, I might add...see: current fiscal crisis in Europe) at the consumer level and the government level (state, local and federal). It's hard medicine but if we want to get our house in order, we have to take it. Putting it off, trying to squeak by with feeble half measures will only cause more pain later; significantly more. I don't have a lot of faith that politicians will get it right, which means the markets will eventually force them to do what is necessary to cure this ill.