I just returned from vacation. It is one of the few times during the year that I turn off the cellphone, email and fax. Instead, I spend time “enjoying” my family (they seem to act like it’s a burden) and we all perform an ancient ritual called “reading.”
In my case, I read fictional war thrillers and an occasional book related to my profession. While at the library, I came across “The Big Short”, written by Michael Lewis. For those of you that remember when music came in a form other than CD, he also wrote “Liar’s Poker.” I was fascinated by the simple analysis that ultimate resulted in some people making a ton of money due to the greed and/or stupidity of others.
Basically, Mr. Lewis described several investors, none of whom were big firm Wall Street types, who figured out those teaser rates, and loans that didn’t require any payments, that suckered in countless homebuyers would ultimately crash and burn. Their analysis told them that it would happen in mid to late 2007 or early 2008. And they were right.
These people did not “bet” against the homeowners. They bought Credit Default Swaps and other pieces of garbage that Wall Street devised as a means to make more money. Wall Street did not expect the CDSes and other derivative instruments to blow up in their collective faces. All that these investors did was buy the insurance, for about a 2% premium, on pools of mortgages that had the worst of the worst in them, negative amortization mortgages, teaser low-interest ARMS and teaser rate interest-only ARMs among them.
And these investors just waited for things to blow up. Which they did. Mr. Lewis also describes how the garbage loans were packaged together and, amazingly, the ratings services would give them Triple-A ratings. Somehow, the ratings services believed that if you assembled enough garbage into one can, it smelled like a rose. Hmmmm.
Reading this book reminded me of a situation shortly before the tech market crash in 2000. I was talking to a brokerage executive and we discussed how a fireman in New York had quit his job to write a mutual fund newsletter. We agreed that this was the first indication that the world would collapse. And it did collapse within about 18 months of this discussion.
Lewis serves as a good historian in “The Big Short.” And remember what they say – If you don’t learn about history, you are doomed to repeat it.” Unfortunately, most people don’t remember the saying. Read the book. I can’t say enough good things about it.
That’s the mortgaged, but not underwater, view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.