Monday, April 19, 2010

The Big Short

In the rarefied world of the bond traders on Wall Street they were the outsiders, oddballs even.

It included an incredibly smart and gifted man with one working eye and an undiagnosed case of Asperger syndrome who didn’t like to deal with people. In fact, you could say he didn’t like people at all. He gave up a career as a neurologist in order to spend untold hours each day sitting alone in an office staring cockeyed into a computer screen following the financial markets.

The group also included two men in their early thirties with no real ambition or direction who teamed up with a man who was a derivative trader but quit because he feared that the world was headed to a path of self destruction and he wanted to be prepared.

Then there was a former bond trader who had an amazing ability to outlandishly insult the “Masters of the Universe” at anytime or anyplace when he felt the person was either: wrong, a liar, or corrupt. He not only couldn’t help himself but he enjoyed it. He along with two other persons, with their own quirks who understood how “The Street” operated and wanted no part of it, joined forces.

None of these people knew one another or even knew of each others existence. But in addition to being outsiders, they had a few other things in common: They all started hedge funds. They all saw the insanity and breakdown of the home mortgage market and how the subsequent repackaging of these worthless pieces of paper into new investment "instruments" was taking down the financial markets around the world. And they bet against it and won.

Their stories are told by Michael Lewis in the book, The Big Short: Inside the Doomsday Machine. With Friday’s announcement by the U.S. Security and Exchange Commission that it has filed a civil fraud suit against Goldman Sachs, I couldn’t think of a better time to recommend the book.

The book combined a character-driven narrative with analysis of how the bond market nearly took down the world’s economy. It’s funny and sad. But for me it mostly induced anger at how innocent Americans were conned into buying mortgages they could never pay off, how the Wall Street investment banks bundled these mortgages into bonds and repackaged them again into collateralized debt obligations (CDOs), and how the risk of these investment vehicles was hidden from those who bought them.

It would have been one hell of a tale, except that it’s all true.

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