Thursday, April 1, 2010

Financial Meltdown: They Really Were That Stupid

If you liked the story line of the movie “The Blind Side”, the “football” movie which is really a unique family story – for which Sandra Bullock won the best acting Oscar, and are curious about how the economic meltdown happened, you might want to pick up the book “The Big Short”. Michael Lewis wrote the book the movie is based on, and he’s uniquely qualified to do financial writing.

Lewis actually worked on Wall Street for years, as a bond trader for Salomon Brothers. He has a Master’s Degree from the London School of Economics. But his real talent is telling stories, and his approach to explaining the financial meltdown is from a story-teller’s perspective, which means he actually makes it interesting.

In the news reports about the aftermath of the meltdown and bailouts, you probably heard terms like “credit default swap” and “collateralized debt obligation” – CDS’s and CDO’s. You don’t have to have anything but a basic understanding of what they are – and Lewis is a good “explainer” – to follow the story.

There’s another “common man” element that keeps the book interesting. Have you ever had a job where you were pretty sure the boss had no idea how to do your job, or even really what it is that you did for the company? There was a lot of that going on in the financial world prior to the meltdown. The biggest bosses at the biggest financial institutions, at least the way Lewis tells it, really did not know what their people were doing, and almost certainly didn’t understand it.

Maybe Ken Lay was telling the truth when he said he had no idea what they were really doing on the trading floor at Enron. And even though the Enron story is very different than the subprime mortgage market meltdown that put the world of finance on its knees, it’s a similar scenario. Both involved “short selling” - hence, the title of the book: The Big Short.

There are at least two sides to every bet. If you bet your pal five bucks that the Packers will beat the Bears, the two sides are obvious. Your side is the Pack; his side is the Bears. If you both agree the Packers will win, you might make a bet on the point spread: by how many points will the Pack beat the Bears. And any number of people could do the same, with a lot of other possibilities, like instead of betting on the game or point spread, you could even bet on which guy will win the wager. (Derivatives.)

You can place bets, through a broker, if you think a stock is going to go up – which is called a “long” position; or, bet that it will go down, which is a “short” position. The essence of Lewis’s story is that a very small group of investors figured out just how rotten the subprime mortgage market really was, that there was absolutely no effective oversight, that the risk evaluators (like Standard and Poor’s, and Moody’s Investor Services) had NO clue how risky the market was, and that the bigwigs had no clue whatsoever about what their traders were doing.

This small group of people “shorted” the subprime mortgage market and all the derivative investments associated with it, and made a fortune when the market collapsed.

Lewis’s narrative is fast-paced, with very interesting characters (not unlike the big football player, the precocious little brother, and the dynamic mom in “Blind Side”), and he explains the technical terms in a way that’s easy to understand.

A great story with great characters told by a great storyteller makes for a great book.

No comments:

Post a Comment