The Big Short
Posted on April 5, 2010
One of the great things about going on a vacation is that you get the chance to catch up on some reading. For some reason, I picked Michael Lewis’s book, “The Big Short”, and Hank Paulson’s “On the Brink” for my light reading.Lewis, of course, is an easy read, but not a light read. If you want to get your blood pressure sky-rocketing, read this book.
It basically a story about how Wall Street screwed America.
The villains, in order of calumny:
- The ratings agencies and their second-class employees. If you really want to know why we had this huge problem with sub-prime loans, you can find the chief antagonists in those agencies, like Moody’s and Standard and Poor’s, who decided, somehow, that it was smart policy to give a AAA rating (the strongest rating) to a bunch of bonds that weren’t worth the paper they were written on. The theory used by these second-rate financial analysts was that most people were going to pay back their mortgage loans. And that might be true in most cases. But in the case of subprime loans, when most of those loans were given to people who didn’t have much of a track-record or the ability to pay them back, that was not the case. The ratings agencies refused to distinguish between the two and now we are all paying the price.
- Goldman-Sachs: Lewis doesn’t like Goldman-Sachs, and he makes the case that Goldman was probably behind much of the speculation behind the market run-up, and then was double-dealing when it became clear that the market was going to tank.
- Wall Street: Lewis believes that Wall Street is populated by a bunch of sharks who would sell their grandmother if it helped their bottom-line.
- Loan originators: While he doesn’t go into too many details, he mentions some great stories about the quality of people who got loans (a Mexican migrant worker who got a loan for close to $800,000; a stripper who was able to get 5 mortgages, etc).
- The political leadership, especially at the Fed: Lewis is not kind to either Greenspan or Bernanke, who he blames for not stopping the madness before it was too late).
In the Lewis account, the heroes are short-sellers who uncovered the stunning stupidity of the American financial system, and sought to make a buck in uncovering it. Steve Eisman, Michael Burry, Greg Lippmann were three unique characters who saw the financial acopolypse coming, and sought to do everything they could to make some money off of it.
The irony, of course, is that was when the meltdown happened, the government did everything it could to stop the short-sellers from making their money. Nobody likes a short-seller. They bet that the market is not going to go up. They bet that the market is going to go down. They aren’t optimists. They are pessimists. They are the ones who are betting that the dice are going to crap out in craps. They are a buzz-kill. But without them, irrational exuberance rules the market-place.
Lewis’s book is unique because it makes the buzz-killer the hero.
I supported TARP because I didn’t want the whole financial marketplace to completely collapse. But that doesn’t mean that I have any great faith in the essential honesty of Wall Street or of the Bond Market, for that matter.
Republicans should read this book. If they don’t think they need that Wall Street needs more regulation, they are crazy. As Lewis points out, this story is not about how the rich got richer and the poor got poorer. This is a story about how the rich got richer, the poor had some fun for a while, and the middle-class got whacked with a financial crisis that will hit them for a long time to come.
Next, comes Hank Paulson’s side of the story. Should be interesting…