Saturday, June 04, 2011

The Big Short

The name "Michael Lewis" is always a draw when it comes to 'storybooks' about the finance industry, particularly the bond markets. I first read him in 'Liar's Poker', perhaps his most famous, and hilarious, book on the goings on in the now defunct Saloman Brothers. Since then Mr Lewis has gone on to write more books, the latest of which is "The Big Short", which is billed as a  true story. Unlike many books on the Financial Crisis that plagued the world in the 2007-2008 period, Lewis writes intimately about the people caught up in the maelstrom. He is a good story teller, which is why his books are popular. "The Big Short" tells the stories of several protagonists - investors and small time fund managers, who placed bets against the prevailing sentiment that the sub-prime mortgage market would never crash. Their stories were about a search for information, for clarification, for understanding the behaviour of the markets that had basically malfunctioned. That is the polite way of putting it. In fact, as our protagonists were to discover, the entire financial system had gone to the dogs. Nobody in the big Wall Street Investment Banks (including Citigroup, Merrill Lynch, Bear Stearns, and yes, Lehman Brothers) cared that what they were doing, selling 'crappy bonds' to unsuspecting investors, was anything but ethical. The abuse of trust and the greed has been documented widely since then.

In the telling of the stories of individuals' search for truth about the innovative investment products coming out of Wall Street, Lewis points the finger straight at the ratings agencies, Standard & Poor and Moody's, for facilitating the widespread fraud that culminated in the eventual collapse of such names as Bear Stearns and Lehman Brothers, with hallowed institutions such as AIG and Citigroup needing vast infusion of cash from the US government to stay afloat. All these are the stuff of legends now.

The Big Short relates how a few investors, would be fund managers, decided that the sub-prime mortgage market, which spawned the now notorious CDOs (Collaterised Debt Obligations), was bound to fail one day, when people start to default on their mortgage loans which they could not afford in the first place. When this would happen in a Wall Street flushed with CDOs was the great unknown. By conventional wisdom, mortgage repayments carried little risk of defaulting, so any investment product based on these mortgages would also carry little risk. And the ratings agencies gave them their stamp of approval, without understanding the complexity of the CDOs.

True enough, our protagonists were proven correct at the end, which netted them not a small sum of money. The book can be heavy going at some points as Lewis tries to explain the more technical aspects of investments in bonds. He readily admits that the subject is not simple, and this perhaps has taken the enjoyment out of reading Lewis this time around. Perseverance is needed, but at the end of it, it is still a good story.

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