Virtually everyone agrees that the blame for the financial crash in 2008 lay at the feet of the investment banks. Few people know exactly what went on in these massive institutions in the lead up to it. If you can explain what a Collateralized Debt Obligation is, you’re in an elite minority. But it is these ‘CDOs’ – complex financial instruments essentially designed to hide mortgage loans that were highly likely to default and make them appear a good investment – that caused the boom and bust.
The practice of repackaging ‘sub-prime’ loans in CDOs, which the rating agencies then stamped with ‘Triple A’ status (highly unlikely to default), became a massive money-spinner for investment banks, and everyone wanted the gravy train to keep chugging along. Except… there were certain individuals with a sharp sense of curiosity, like stock market investor Michael Burry who scratched beneath the surface; saw the true worth (or lack thereof) of the loans and decided to ‘short’ them (place a bet on their worth decreasing).
Author Michael Lewis makes Mike Burry and certain other shrewd individuals the protagonists in a story that reads like a detective novel and builds to a disastrous crescendo. Some of the financial jargon is hard to decipher, but Lewis does as best as can be expected to explain financial instruments that were purposely designed to confound and bewilder. You feel the tension build, like a game of Jenga, waiting for the moment when everything comes tumbling down. The book is punctuated with humour to break up the paragraphs of dense text, and Lewis has a knack of making you care about the predicaments Mike Burry, Steve Eisman, Vincent Daniel and a handful of other finance guys find themselves in as they work to prove the corruption at the heart of Wall Street. (I should also point out; these maverick investors were also ‘in it for the money’ – they stood to make a killing out of the doomsday scenario they envisioned).
The question rattling around in my head after putting the book down was ‘how can such clever people act so dumb?’ The answer, I’ve since concluded is simple: Greed. I come away from the book feeling differently about those involved in the debacle. At the time of the crash, I would have opined that it’s mainly the fault of stupid individuals taking out mortgage loans they couldn’t afford to repay. But after reading how sub-prime lenders duped the folk they were lending to, and how these ‘shitty’ loans (as they are often referred to in the book) were polished-up and sold to ill-informed investors, my opinion as to who was culpable has swayed to those on the selling side rather than the buyers.
I’ll just leave this staggering fact for your consideration: One investment banker lost $9,000,000,000 (billion) dollars, the single largest trading loss in the history of Wall Street, and still walked away from the carnage with millions of dollars in remuneration in his pocket…