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).

7 comments:

zman said...

I like it better when you blog about your kids peeing in old diapers.

Al DePantsdowno said...

There are so many things wrong with your commentary on this, but i will only comment on two. First, the idea of creating a greater variety of mortgage options had absolutely nothing to do with allowing "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". Your man Barney Frank, and company, under the ruse of giving less fortunate people the opportunity to participate in the American Dream, pushed the banks to make ridiculous loans, which were then bought by Fannie and Freddie (you and me). I remind you of the renter mentality and the behavior of those who do not own their property for the benefits associated with home ownership. The purpose of these loans was to line the pockets of those involved (government officials, mortgage brokers, bankers, speculators etc…) and had nothing to do with helping out the “folks”.

Second, to infer that somehow the spill in the Gulf has anything to do with my driving habits is ludicrous. The facts are that BP made numerous mistakes when drilling this well so they could maximize profits. The government was complicit in allowing this “accident” to happen. You only have to look at your hero Hugo Chaves to see that oil company profits can be distributed more fairly through government intervention in order to maximize societal benefits. And gas costs about $.20 a gallon in Caracas.

Stacey said...

Bravo sir. You have written a 636 word sentence.

Kevin M. Brady said...

wait dave, can you tell me tomorrow, in a longer sentence, exactly what a synthetic sub-prime mortgage bond-backed C.D.O. means to me?

T.J. said...

You fell 63 words short. Jam yourself.

Dave said...

wow-- you all raise great points . . . i'm just impressed that anyone read this behemoth.

it's funny thinking of how to respond to al's comments, considering have to review my sentence to even remember my points. normally i blog about kids peeing in old diapers.

Dave said...

i wasn't inferring that the spill in the gulf was based on your driving habits! (i reviewed my sentence) i was just saying that we can't complain THAT much about the oil spill because we WANT oil and BUY oil and we all participate in the market (unless you bike everywhere) but we weren't allowed to play in the sub-prime market. you can short oil if you buy an electric car but we had no way to short housing (maybe renting?)

A New Sentence Every Day, Hand Crafted from the Finest Corinthian Leather.