| Michael Lewis, 2010, Allen Lane, 264 pages, £25.00. |
| Michael Lewis’s 1989 bestseller Liars Poker portrayed Wall Street in
the 1980s, exposing the greed and carnage, and much more. Following the
world’s greatest financial meltdown to date, Michael Lewis’s new book
The Big Short traces the origins and path of the present crisis in a
riveting tale. |
| The people who saw it coming, and thus ran their businesses
successfully, are painted in great detail with unusually deep
cooperation from his subjects. These included Steve Eisman, Michael
Burry, Charlie Ledbury, Jamie Mai, Vincent Daniel and others. The people
who did not understand what was happening, did not see or want to see
the crisis coming, and who were driving off the proverbial cliff, are
closely interwoven into the drama. |
| As early as 1997, in the middle of what seemed to be an economic
boom in the US, Eisman published a report denigrating the sub-prime
originators and exposing deceptions. He was one of the few investors who
really understood what was going on. By 2002 there were no public
sub-prime companies in the USA. However Household Finance Corporation
built up a huge portfolio of sub-prime loans and surprisingly sold
itself to HSBC for $15.5 billion in 2003. The sub-prime message was to
keep on making loans, but don’t keep them on your books – sell them off
to the fixed income departments of big banks. The fixed-income world
began to dwarf the equity world. |
| Mike Burry devised a system for picking the worst credit default
swaps, those that were likely to explode in two to three years. Banks,
not realising the different levels of risk involved, sold him insurance
for these as cheaply as for less risky swaps. His anxious investors had
to wait for the two years, when the low teaser interest rates expired
and his system was proved correct. He made enormous amounts money for
himself and his investors. He was not liked for proving many other
people wrong – being right does not always make one popular! |
| No one seemed to know that some 95% of credit default swaps were
sub-prime. People at the rating agencies did not evaluate individual
loans, nor did they re-rate, believing that house prices would continue
to rise. However house prices started to fall in 2006 and the loans
started to go bad as interest rates rose. The sub-prime money machine
was effectively a bet that house prices would not fall. When that
happened, inevitably a number of organisations failed: Bear Stearns
(bought out), Fanny Mae and Freddie Mac (nationalised), Lehman Brothers
bankrupt – and so on. |
| This book is a frightening but enlightening tale of the recent
financial meltdown and an enthralling insight into the lives of a number
of fascinating characters. Read it. It is most instructive. |
| Rosemary Connell |
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