Monday, May 17, 2010

The Big Short

I just finished reading Michael Lewis's "The Big Short" and thought it was great fun. He exaggerates for color, I'm sure, but I think the core is true.

Some reactions:

1. It's amazing how long bubbles can go. I thought we were in a real estate bubble back in 03/04 and my brilliant strategy was to not buy.

Wrong on multiple counts. The bubble, then about 4 years old, had another 4 years to go before it finally popped (and even now, in some areas houses have not budged off their peak). Those who did not jump in left a lot of money on the table.

Secondly, I had no idea what a CDS was, and had no idea I could short the bubble in different ways. I might have shorted REITS, but I'm not sure I knew what those were either, or if I could short them.

Thirdly, even if I had shorted REITs, I would have been cleaned out. In The Big Short, Lewis describes experts in 05, 06, 07 sweating bullets because their short positions were being tested and the bubble still had no burst.

It's like buying AAPL when the first generation iPod came out. You'd need to wait 3 years before getting any appreciation.

2. At a certain point, one of the characters in the book talks about the lowly place of the ratings agencies. He remarks that they should be the superstars of the financial world, and are instead the no talent hacks in bad suits.

This gets to the central role of finance -- credit assessment. The public purpose of banks is to make loans that get paid back. Nothing more, nothing less.

The only actor on Wall Street who seems to actually be in the credit assessment business doesn't get paid based on the accuracy of their forecast. I see nothing being done in the regulatory realm to address this. I think this explains the entirity of our financial system.

3. Lewis ends the chapter sort of certiain, sort of not, that the theft and fraud perpetrated by the sector 30 years ago was about to end. I don't know what time frame he had in mind, but the system seems to still be robust. It will take harder times than we have for Glass–Steagall 2.0 to come to pass.


Blogger Unknown said...

I thoroughly enjoyed The Big Short and particularly the insider quips like the bad suits, etc. This was definitely his best book since Moneyball, which was his best book since Liar's Poker (which I read in my late teens).

4:04 AM  
Blogger Larry Staton Jr. said...

Point 1 reminds of the old Keynes quip: "The market can stay irrational longer than you can stay solvent."

4:59 PM  

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