book review: The Big Short

This served as light reading while in San Diego last month. Lewis was a bond trader for a time with Salomon Brothers in 80's. He knows the financial world. Since leaving that life, he has become a successful author of a number of books.

He turned his attention and acumen to the financial collapse that began a few years ago asking who knew what and when did they know it. He manages to make credit default swaps and colateralized debt obligations somewhat understandable, all the while illustrating that the folks using and selling these devices a few years ago didn't themselves have a clue what they were doing. They also didn't care as long as they made money quickly.

During the tour of Wall Street players, we learn that the push to increase homeownership and make it accessible to everyone was really a get-rich scheme for financial houses. They offered folks with little or no credit and fewer assets outrageous amounts of money with which to buy homes (for instance, a seasonal produce picker who made $14,000/year qualified for a loan of $750,000 for a house in CA). This 1)inflated home prices, 2)made the lenders money through fees and 3)almost bankrupted the country when the whole thing fell apart. As lending standards were relaxed--and our federal government bears blame for this too (in a non-partisan way as this happened under D's and R's)--loans went to folks unable to pay those loans back. The loans usually started with very low rates that were manageable; but by years 3-5, those rates exploded upward thus resulting in defaults. This stopped the upward ascent of home prices, increased vacant housing inventory and has depressed the housing market. The bubble burst in a big way.

Why didn't the financial services industry foresee the defaults? There are a couple of reasons. They were consumed by their consumption of loan fees. These folks made millions personally and billions professionally by selling loans. The short term gain kept them from recognizing the long term cost.

Also, they foolishly expected housing prices to continue climbing, thus enabling overburdened mortgage holders to acquire home equity loans to pay back the original loan, continuing a trend ad infinitum. But housing prices increased at a rate far outpacing wage growth. An economist will tell you that this model just doesn't work over time.

Third, the financial devices created to generate short-term profits (for financial service employees and their employers) were so complex and new that no one, from the crafters to the seller to the buyers to the CEO's, knew what they were, how they worked or their potential for crashing.

Lewis does a good job in telling stories of folks who did recognize the coming storm. While these folks made a boatload betting on the coming crash, they also sought to raise the warning flag that danger was fast approaching. Those garnering commission fees and looking at fat bottom lines, while holding in the shadows toxic assets, did not pay attention.

It's an interesting read and allows one to see the societal ramifications of what some on Wall Street did to Main Streets everywhere. The disappointing aspect to the tale is that those who caused this mess got paid and continue to make boatloads of money while those suffer are ordinary citizens. In the end, for the average person Wall St. is no better than a casino. The odds are always in favor of Wall Street, its employees and institutions.