I don't think I've been paying enough attention to non-fiction, so I think I'm going to start off with a few books of that genre, before I get back into some more literature. So without further ado, lets kick this off.
Book 01 - The Big Short - Michael Lewis
When I reviewed The Ascent of Money last year, I think I mentioned that in a previous life I worked developing software applications to model financial transactions called securitizations. These transactions take loans such as mortgages and turn them into securities, which can be sold to investors. This type of financial instrument initially created unprecedented liquidity in the mortgage market, allowing easier access to mortgage credit and making it possible for many hard-working Americans to realize the dream of home ownership. It was of course ultimately twisted by greed: greed of potential homeowners wanting houses they could not afford; greed of mortgage originators that took no responsibility for the creditworthiness of the people they loaned money to; greed of the investment banks, who packaged loans of decreasing quality, and sold them to investors; greed of the so-called rating agencies, who in a massive conflict of interest were paid by the banks issuing the securities, and therefore granted investment grade status to these securities to keep the gravy train rolling; and the greed of the investors, whose insatiable appetite for these supposedly safe securities and their high yields fed this financial mess. It was this cycle of greed, combined with some other factors that ultimately brought about a financial crisis of such magnitude as to rival The Great Depression, and which left waves of economic turmoil that are still being felt many years later.
Michael Lewis' book, The Big Short is not really about any of these players - at least not directly. Instead, Lewis turns his attention to those who saw the impending crash, and positioned themselves to capitalize on it. These people saw that these instruments were growing so complex that not even the banks and the rating agencies could understand them, much less the investors, and that the Triple-A ratings the agencies were handing out like candy to Trick-or-Treaters were basically meaningless. They saw that the financial engineers who designed these transactions used this complexity to obfuscate the true risks involved in the quality of the underlying loans, and that the continued health of these transactions hung on two suppositions: housing prices will always go up, and defaults will be manageable and localized. What the banks and investors seemingly didn't realize, was that it wasn't necessary for housing prices to go down, or even to completely flatten out. A simple slow down in the rise of prices was enough to bring this money machine to its knees.
Lewis profiles several of these supposed visionaries who saw this impending crisis when the rest of Wall Street did not. He chooses for the most part to romanticize them for their foresight and for the trials they faced by going against the common wisdom, rather than demonize them for being bottom feeders preying off the economic collapse of the United States for their own financial gain. In some ways he may be right to do so. Some of them were indeed trying to shine sunlight on this dark Ponzi scheme, but others were just quietly gaming the system, and all of them walked away rich. They used Credit Default Swaps, "insurance" policies that trade relatively small premiums for large payouts in the event of default, in order to "short" or bet against securities backed by sub-prime mortgages. Many of these contrarian investors also shorted the stocks of banks that were heavily engaged in these transactions, and made money when the bank stocks collapsed as well.
While my background makes this book particularly interesting to me, I think it can be enjoyed by anyone who wishes to better understand one of the principal causes of the current economic crisis. Lewis does an excellent job of explaining these transactions and the underlying motives for engaging in them, and therefore makes an extremely complex subject very accessible to the casual reader. Lewis is also a former Wall Street bond salesman, who chronicled that time of his life in the book Liar's Poker, so he has a personal insight which lends to his telling of the story. FYI - he also wrote The Blind Side, from which one of the story threads was used for the recent Sandra Bullock movie of the same name.
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