Thursday, October 07, 2010

Great Reading - Michael Lewis - THE BIG SHORT

Just read it:

THE BIG SHORT - Inside The Doomsday Machine

By Michael Lewis.

Whoever wants to start understanding the state of the Real Estate in the US and also in the wide world, is at a loss if he thinks he can interpret the catastrophic debacle in traditional terms and historical data.

It is evident that this is not one of the regular cycles of capitalism.

Manipulation, indifference,  greed and plain ignorance from many of the players in the infamous game that brought to their knees many of this country's small investors; drove out of their homes a large percentage of American middle and lower class citizens, is the theme of this book.

Standard & Poor, Moody's rating agencies' pitiful (or reckless?)  job at guiding the public in general, mutual funds and hedge funds in particular, is a main factor. Goldman Sachs, Bear Stearns, Citigroup, Deutsche Bank, UBS, Wachovia, Bank of America are some of the names that pop up  even though they still are for some of us the symbol of finances at their highest.

The open ignoring of the principles of banking and mortgage lending by most banks, Fannie, and Feddie, the Feds,  the SEC, are still unanswered questions.

Welcome to the world of CDO's and CDS.

Read how TRILLIONS of dollars of worthless packages of sub-prime mortgages were assembled in AAA bonds, and put on the market during these "boom" years of 2005, 2006 and 2007.

CDO is a Collatelarized Debt Obligation, supposedly an" investment-grade"  security backed by a pool of mortgages. If you didn't read too much about it, it means in reality a bunch of crappy loans with very low expectations of being ever collected, that are put together, graded by Moody's as AAA and sold as first class investment securities.

Read about how the CDS (Credit Defaut Swaps), which are a kind of insurance on the CDO's , were often bought by the same "institutions" which had issued these rotten CDO bonds in the first place.
Example:  You issue a CDS in favor of an investor who is betting that  your trashy AAA CDO's will eventually have a high grade of delinquency which will drive their value to Zero or close to it.
This investor can be a hedge fund, a group of investor, another bank, or the same bank who issued the CDO's in the first place. Incredible? A Lottery? Las Vegas? I would like to believe it if most of these "elite" guys hadn't ended with hundreds of billions of dollars in salaries and bonuses.

A fascinating and exhausting reading.

And an example on how quickly we forget and how corruption, "bubbles"  and evil can perpetuate, revive, and multiply.

Michael Lewis, famous for the Liar's Poker, about the 80's (an era where at least some of the crooks went to jail), gives the reader a fascinating rough draft of this whole new era that (sorry guys)  we are still living.
The era when, instead of sending the bad guys to jail, we give them new liberties to freely  lobby our Congress, and increase at will their campaigns contributions.   

Why real estate is what it is today?

Perhaps you'll get a less clouded idea with Michael Lewis penetrating view on this "roaring decade".