Henk's Reviews > The Big Short: Inside the Doomsday Machine

A fascinating story of greed, hubris and willful ignorance. I think the movie is more compelling but still a great read
It’s really hard to know when you’re lucky or you’re smart

The system basically was fuck the poor one of the main characters of The Big Short: Inside the Doomsday Machine notes quite early in the book, and that seems an apt description of the failings in the subprime market. While well known now, the level callousness in ninja loans (no income, no job, no assets) and other mortgages for people who never would get money if not for the assumption that the residential real estate market couldn't possibly fall, is still breathtaking.

Some people saw the risks, but even a fund manager who made 242% returns in 5 years versus the S&P500 dropping by 6% in the same period, has a hard time convincing his investors that conventional wisdom doesn't hold.

Human inventiveness, figuring out how to bet against AIG for instance, is well portrayed. AIG accepted risks without being required to hold capital for Credit Default Swaps, using its AAA rating to profit of a nascent market where it trusted upon credit ratings and the illusion of ever rising housing prizes. Models of AIG assumed 10% subprime loans in the portfolio's its insured, versus 95% in reality, with the insurance giant getting only 12bps of insurance revenue in exchange for assuming 50 billion of risk.

Here is a strange but true fact: The closer you were to the market the harder it was to see it’s folly, and many who want to bet against the folly of the market via event driven investments, are first seen as idiots by Goldman Sachs, Lehman Brothers or Deutsche Bank staff.
Long options being missed-priced by the Black Scholes model, and Morgan Stanley betting both short and long on RMBS’s and losing $9billion, while paying the fund manager more than $25m in 2006, show the fragility and the complex tangle the financial system got itself into.
The line between gambling and investing is thin and artificial and It’s laissez faire until you are in deep shit seem true indictments, certainly when just this week there was an FT article on how the large Wallstreet banks made $1.000b profit over the last ten years.

I missed Arianna Grande and Richard Thaler (the movie is excellent!) but Michael Lewis depicts a sobering view of the financial sector, which still feels relevant today.