I’ll be on KNBR 1050 in San Francisco at 1 pm PDT today with my friend Damon Bruce. I’m sure we’ll talk about how bad AAA pitching is and why the Giants need more veteran presence.
I’m leaving for vacation on Saturday, so between now and then I’m going to try to do a few quick dish posts on books I’ve read since the draft rush began.
Michael Lewis’ The Big Short: Inside the Doomsday Machine follows three investors who foresaw the meltdown in the subprime mortgage market and each made a killing off of it, using their stories as a way to expose the lunacy of the collateralized debt obligations used to sell these destined-to-fail loans (much of which was new to me) and to do something Lewis does very well: Create villains and take them down.
Lewis has two great strengths as a writer: His prose is easy and natural, and he has a gift for finding interesting protagonists. Of the three profiled in The Big Short, none is more compelling than Michael Burry, the awkward, antisocial neurology student whose investment blog becomes so legendary that he quits medicine to raise his own value-investing fund, only to abandon that approach and bet everything on what he saw as the inevitable collapse of the subprime mortgage market. Second in interest level is Steve Eisman, the perpetually angry hedge-fund manager who spends the entire book in a state of mounting disbelief at the stupidity of nearly everyone involved in the giant Ponzi scheme of subprime mortgages. The third major winner on bets against the market, the three-man investment outfit Cornwall Capital, had an incredible run of success, turning a $100,000 initial investment into a nine-figure fund, but their stories just aren’t as compelling as Eisman’s or particularly Burry’s.
The real villains here are the ratings agencies who weren’t so much asleep at the wheel as passed-out drunk. Moody’s, S&P, and Fitch continued to give high ratings to investment vehicles they didn’t examine or even understand, and once Lewis’ protagonist investors realized what was going on, they ratcheted up their bets against the subprime market, with one going to so far as to short the stocks of the ratings agencies. Lewis does spread the blame around, vilifying the investment banks who sold CDOs while enabling bets against them, the mortgage originators who gave out loans to people who lacked the income to pay for them and which were structured to fail, and the host of people who made money from the industry and didn’t want to hear the doomsayers’ warnings about an impending collapse. But the biggest culprit of all is human nature: We respond to incentives, and the system provided incentives for almost every villain to do what he did. Originators were paid for originating but faced no consequences when their loans went bad. Ratings agencies had immunity from claims when their ratings turned out to be bogus. And nothing prevented investment banks from betting everything on black or from profiting by playing both sides of a gamble.
I listened to the audio version of The Big Short and thought the reader did an excellent job in both pacing and distinguishing between all of the while middle-aged men who populated the book.