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The Big Short: Inside the Doomsday Machine

Michael Lewis · 9 HN comments
HN Books has aggregated all Hacker News stories and comments that mention "The Big Short: Inside the Doomsday Machine" by Michael Lewis.
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The #1 New York Times bestseller: "It is the work of our greatest financial journalist, at the top of his game. And it's essential reading."―Graydon Carter, Vanity Fair The real story of the crash began in bizarre feeder markets where the sun doesn't shine and the SEC doesn't dare, or bother, to tread: the bond and real estate derivative markets where geeks invent impenetrable securities to profit from the misery of lower- and middle-class Americans who can't pay their debts. The smart people who understood what was or might be happening were paralyzed by hope and fear; in any case, they weren't talking. Michael Lewis creates a fresh, character-driven narrative brimming with indignation and dark humor, a fitting sequel to his #1 bestseller Liar's Poker. Out of a handful of unlikely-really unlikely-heroes, Lewis fashions a story as compelling and unusual as any of his earlier bestsellers, proving yet again that he is the finest and funniest chronicler of our time.
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Yeah what you're describing is a well known phenomenon in financial markets called counterparty risk[1]. Those betting against the subprime mortgage bubble prior to 2007 for example feared that those institutions accepting their exotic CDS bets would actually go out of business when the subprime bubble popped[2], and the bets wouldn't be realised.

It's a sign of immaturity of the bitcoin economy that there's no trustworthy effective bitcoin shorting options- even if you don't wish to speculate, but because you wish to hedge your exposure to bitcoin volatility (say you're a large ecommerce player, with significant bitcoin holdings- you're effectively long bitcoin - and you don't want those holdings to halve in value overnight).

[1] http://www.investopedia.com/terms/c/counterpartyrisk.asp

[2] http://www.amazon.com/The-Big-Short-Doomsday-Machine/dp/0393...

Umm..ok. But the point of Black Swan is that certain are unpredictable. Yet plenty of people saw the crisis coming [2,3]. Taleb was not one of them - please see [0]

If you are a Taleb fan (or just curious), check out this critique of his work:

[0] http://quixoticfinance.com/tag/nassim-taleb/

[1] http://unpleasantfacts.com/falken-on-taleb

People who actually predicted the crisis

[2] http://www.amazon.com/Greatest-Trade-Ever-Behind-Scenes/dp/0...

[3] http://www.amazon.com/The-Big-Short-Doomsday-Machine/dp/0393...

zurn
At any given moment there are "plenty" of people who think the sky is falling. How do you account for survivor bias.
omonra
You know, in billiards (pool) you have to actually point to the hole in which you plan to sink the bal. So that if the ball ends up in some hole (but not the one you anticipated), you don't get credit for it.

Same here - if you read the piece (http://quixoticfinance.com/tag/nassim-taleb/) it exlains in detail how Taleb's claim to predicting the crisis is 100% off the mark (and the said thing is that he knows it, which makes him a poseur).

Two more words: research facts

Yes, there was/is blame to be placed at the feet of corporations. That is probably undeniable. However, it is important to understand root causes here. The truth is hard to stomach for anyone who pro-big-government. The single gating element or decision that opened the doors to what would become the financial meltdown of the century was the US government's decision that everyone should be able to buy a house. Facts and qualifications be damned. Congress wanted everyone to buy a home. So, they loosened all the controls and actually pushed Fannie Mae and Freddie Mac to facilitate lending. It was: Go! Go! Go!

That, and that alone, enabled what followed. Without this gate being opened it would have been imposiible. --as in absolutley fucking no-way impossible-- for masses of bullshit mortgages to be issued and CDO's to follow.

Blame executives all you want for playing within the framework given to them by legislators but, please, be sure to take to task the true monsters who got us here.

BTW, this is not partisan. Both sides of the isle have blood on their hands on this one.

Suggested reading:

http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0...

EDIT: My guess as to why nobody has been prosecuted is that a lot of politicians would be exposed through these actions. And, of course, they want to be as far removed from that kind of exposure as possible. The truth is not what they are after. They want votes. None of this would gain them votes and, in fact, might land some of them on the street or in jail.

SupremumLimit
So... you're saying there wasn't enough government control then.
robomartin
Nice try. I was waiting for someone to pop this question.

Nope. That's not what I am saying.

I am saying that government is usually an ass trying to control things it does not understand. If we are lucky the collateral damage is absorbable without much pain. Every so often the consequences of their attempts at central control go off the rails and things get really ugly. This was one monumental case.

This wasn't about government regulating less but rather about government actively driving an agenda: reason be damned, everyone ought to be able to obtain a mortgage to buy a house.

That's how you got people making $35K per year buying homes for $500K with no down payment and no income verification. They enabled something unthinkably stupid.

Now, let's look at the same situation without any government regulation at all. In other words, the government does not create any mechanisms through which a lender is coerced to lend money to those not able to repay it.

And, let's make it personal. Let's say you are the lender. You have a million dollars. You'd like to make money by lending it to people who will use it to buy homes. You get to charge interest. Over thirty years you'll earn a profit if all goes well. This means that everyone pays you on time and everyone pays off their loans.

Two people come to you for money.

The first makes $120K a year, has an advanced university degree and has been working in the same industry and job for ten years with a history of advancement. She also has very low personal debt, credit cards are paid off every month and her car is fully paid.

The second is a guy who works at a fast food joint. Didn't go to college. Makes $35K per year. Has never worked anywhere longer than a year. Has credit card debt and a car loan.

Both come to you to buy the same $500K home. The first person has also saved $100K for a down payment and only needs $400K. The second has no money and needs you to finance 100% of the home or $500K.

Would you lend money to the guy making $35K or the woman with a solid history of responsible behavior as well as a solid earning history?

There is no need to pull out a calculator to figure this one out. Nobody with barely two functioning neurons would loan the $35K guy a dime. Not one lender. That's what would happen in a free market devoid of government manipulation.

What would happen if government decides that everyone must be able to buy a home? Let's say they create a set of organizations that will actually guarantee loans up to a certain amount so as to artificially remove risk? And, let's also imagine that they create a mechanism through which lenders are also able to package-up loans, slice up these packages and sell them to each other, even to investors.

What would you do then? Well, that's a different situation. You are in business to make money. Now government has removed nearly all risk from the equation. Now Mr. fast-food worker who couldn't possibly even imagine in any prior scenario being able to afford a half million dollar home is given a loan. In order to make this loan "pass" we make it interest only, reduce the interest to damn-near zero for five years and require no down payment nor income verification.

Off go millions of people who should have never been able to purchase homes and, playing along, jump into these ridiculous homes. The market goes insane. Home prices take off. They quickly more than double in price. They quadruple in price. You have people buying million dollar homes. The whole thing is absolutely insane.

Now, you, the lender, are not stupid. You understand mathematics, statistics and market forces far better than the senators and representatives that popped the cork to let out the genie. You know this is a huge house of cards. But, hey, Congress actually WANTS YOU to do this and they fully support it.

Any bank who does not play along stands to die because there is absolutely no way to close normal loans with normal metrics. The market is so inflated that all but a few people are simply not qualified to buy homes. Whole neighborhoods go from $150K homes to the same homes being priced at $700K. Salaries don't keep pace with home price inflation, therefore, as prices skyrocket, the only way a bank can make loans is to play along or else shut-down their lending business. For most banks that's where the make their money. Everyone plays along.

Now, of course, banks have to mitigate risk. This is where the CDO [0] (Collateralized Debt Obligation) comes into play. They know this whole thing is a huge house of cards that is going to explode and crumble. The CDO mechanism allows them to package-up mortgages, slice them up and trade them as investments. There are also new mechanism that actually allow others to buy insurance against credit packages defaulting (in other words, if loans go bad). A few people realize this before others and buy these CDS's (Credit Default Swaps) [1] ahead of the bubble popping and stand to make a ton of money as a result.

Now lenders can write loans as fast as they can push out CDO's. The system is so convoluted and complex that nobody knows what the hell is going on or when the music will stop. People are going insane, "buying" homes they can't possibly afford and also engaging in the dangerous-but-lucrative game of flipping real estate[2]. The pressure cooker has no relief valve. It's only option is to explode.

And it did.

It's been a few years since I read a few books [4] on the subject so the above timeline and details might not be absolutely on point. What is accurate is that nearly 100% of the genesis of the problem was due to government fucking with free markets. They just don't know what they are doing. Most of them can barely add and subtract, much less understand complex economic and mathematical models. It's a pity we don't have a mechanism to prevent the ignoramus from passing laws that affect massive economies world-wide without first having to prove that they have the scientific background (math, statistics, economics, etc.) to model and understand what they are doing.

We are now seeing a degree of this all over again with Obamacare. The Senate and the House have exempted themselves from living by the same law they are imposing on all of us. The very unions that supported the law are now rioting 'cause someone got out a fucking calculator and figured out what's going on. Large corporations are pressuring, and I understand some have been granted, exceptions. Again, you have a bunch of lawyers and other morons passing laws without understanding what they are doing because, through them they pander to the masses and buy votes.

Blame CEO's if you must, but the playground was created by government meddling. Nobody else can own that part.

[0] http://en.wikipedia.org/wiki/Collateralized_debt_obligation [1] http://en.wikipedia.org/wiki/Credit_default_swap [2] http://en.wikipedia.org/wiki/Flipping [4] http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0...

http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0...
confluence
None of them were amateurs.
encoderer
BS. http://en.wikipedia.org/wiki/Cornwall_Capital

They started with $100k pooled together from 3 guys' life savings. How much did they make?

Exactly.

The wikipedia article, short as it is, covers through 2010 when that $100k grew to "100 to 300 Million." Read the latest write-up of them in FT. It's a billion dollar venture now.

The Big Short: Inside the Doomsday Machine - Michael Lewis. A highly-entertaining insider's view of the mortgage/financial debacle. http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0...

In the Garden of Beasts: Love, Terror, and an American Family in Hitler's Berlin - Erik Larson Highly entertaining non-fiction that reads like fiction. Accounts of the build-up to hitler's Germany like you're actually there. http://www.amazon.com/Garden-Beasts-Terror-American-Hitlers/...

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