A Really LONG Sentence About a Really BIG SHORT
I just finished the new Michael Lewis book, The Big Short: Inside the Doomsday Machine, and I've probably got a three day window to explain what a "synthetic sub-prime mortgage bond-backed C.D.O." is-- but I guarantee no one will ask me this (thus the purpose of the blog) and I can also explain tranches (both senior and mezzanine) and credit default swaps and the corruption in the AAA ratings of these bonds and lots of other good stuff . . . I had to read many paragraphs two or three times, but Lewis intersperses financial analysis with the story of a group of investors that were "in the know" and it's these characters that propel the plot of the book: caustic and gritty insider Steve Eisman-- who was on a mission to get back at all the people who foisted the terrible no-doc sub-prime mortgages on the working poor--and the one eyed medical doctor with Asperger's, Dr. Steve Burry, who became obsessed with sub-prime mortgage bonds and CDO's and actually read the prospectuses and realized that the whole trillion dollar house of cards was bound to collapse, even if the housing market didn't fall, even if it just stopped rising as quickly as it did in the years past, and then there's the "garage band" hedge fund started by Jamie Mai and Charles Hedley to short the housing bond market, and that helps explain just how difficult it is for regular people to invest in the same markets that the big brokerages firms are controlling; I've read a few good books on this theme, including House of Cards and The Black Swan (and also Michael Lewis's last collection of essays Panic: The Story of Modern Financial Insanity) but this new book really explains the exponential nature of this dilemma . . . we all know some wacky mortgages were issued (and some with good intentions, the initial reason for a greater variety of mortgage types was to allow people with weaker credit to purchase homes, in the hopes that they would then be able to save money in the form of real estate) and I think everyone knows now that the bonds that were based on slices of these mortgages failed, but Lewis really gets into how CDO's multiplied these loans exponentially into more and more nested products which only contained more of themselves, and how the ratings agencies saw this as "diversification" even though many of these funds contained pieces of each other and even though they were ALL based on the price of housing (unlike earlier derivatives, which were based on a wide variety of weird loans: credit cards, airplane leases, etc.) and he explained just how opaque this market was, and how "inside" and how difficult it was to even obtain the shorts (the credit default swaps) on these products, and how even after housing prices started to fall and everyone was defaulting on their mortgages, the insurance on these CDO's still didn't sky-rocket in price because the funds were being propped up even though the reality beneath them was caving in-- and it makes you feel really out of the loop as a regular person, even rich people didn't have access to these markets (but we all had access to the information!) and the ending is sad in a way, because everyone involved in the crash walked away with money, even the investors who went long with the sub-prime loans, everyone got paid and the government bailed out the banks and brokerages (except Bear Sterns and Lehman Brothers) and though we, the people, couldn't get in on the party, we will pay for the clean-up (at least with the oil spill, though we are paying for the clean-up, we've been in on the party, driving around like lunatics all our life).