After reading the “Liar’s Poker,” I was anxious to read this book. It was not disappointing, in fact, the book reads like a thriller and yet it’s a real life non-fiction narrative. The scary thing is that the bad guys (the ones caused the biggest subprime mortgage failures) are still out there with the 10’s and 100’s of millions of bonus they managed to extract along the way without suffering any penalty. Doomsday machine it was. Created by Wall Street firms motivated by greed to sucker the banks and investors into purchasing all the AAA and BBB high-grade CDO’s. The rating agency, whose rating algorithm somehow got gamed by the conspirators, contributed significantly to the calamity by rating the bonds much higher than they should have been. The inefficiency of the rating agencies’ models to treat all events as a statistics and normal distribution were simply wrong and fraud. These types of Black Swan events happen more often than we thought. All it took is one or two of these events to wipe out trillions from the economy.
I remember the house bubble started around 2005 when my house was purchased by a buyer with almost zero down payment. I was shocked how easy the credit was and I knew a house bubble was in the making when a renter can easily buy a home than renting/leasing an apartment. Why the bubble lasted as long as it did was beyond me. Who are to blame? Allan Greenspan? Or just the rampant greed on Wall Street?
Unfortunately, the bad guys were not any worse off. Many banks and firms collapsed as a result. Ultimately, the victims were 10’s and 100’s of thousands of the poor who got suckered into the subprime conspiracy and lost their homes. Because of the economic collapse, millions lost their jobs and the middle class and poor will bear the tax burden of the bail outs by the government. It’s an all around disaster that hurt the majority of the people and benefit very few people.
From the book, I have learned a lot about how the asset-backed bonds (CDO = Collateralized debt obligations) work and some of the derivative vehicles (Credit default swap) used to hedge the downside of the bonds but were used to short a CDO. Also, the work of the hedge fund manager is less than glorious. The constant need to justify their actions when things are going south was as unbearable to Michael Burry as I can imagine.
The unlikely heroes (Michael Burry, Steve Eisman, and the garage-band hedge fund managers) in the story, who had the wisdom to see the stupidity of the subprime mortgage and managed to short the market with courage and determination came out very wealthy. The author did a great job in narrating several people’s stories interesting enough and simultaneously that the readers don’t get bogged down by the gory details the financial instruments and the their tradings. Michael Lewis is a master to making a seemingly mundane theme like this subprime mortgage fiasco rather interesting. And it took a master like the author to tie the story back to the Liar’s Poker with the lunch with ex-Saloman Brother boss. This is a must read for anyone who wants to know how a civilization can be brought down by just a few greedy and selfish people who know very little about what they’re doing in building a doomsday machine.