The Big Short

If there’s ever been a book that I’ve reviewed on The Fedora Chronicles that needs to be visited again and again, this is one of them. It’s perhaps the best book on the topic of recent events that lead to the Financial Crisis. It’s a book that I might be referring to over the next couple of months or years on The Electric Speakeasy and various social media outlets.

When people start complaining about how we – The American Tax Payers – somehow “owed” AIG billions of dollars to keep “The American Economy” afloat and don’t understand how that could happen, I can point to this book and tell the folks that Michael Lewis’s book explains it all in a way that all of you can easily understand.

When and if folks ever start blaming one political party or another and how they are responsible for this scandal, all one has to do is point to this book and where it explains how this is a crap-sandwich that was made by both political parties.

When anyone says “I don’t understand how the bond market works!” I can point to the first three or four chapters of this book and show you how this book’s author not only explains The Bond Market, but what the phrases “Credit Default Swap,” “Collateralized Debt Obligation” and “Financial Products” mean.

This book divulges the inner-workings of the modern banking system and how everything is built upon lies and deception. Some of the deception on the part of the banking community and how they deceive themselves and each other with the belief that “this is going to last forever” and why “we need to ignore the ‘Chicken Little’s of the world, the sky can’t fall on this market.” Many of the players involved on Wall Street and the top floors of many of these financial institutions were lying to themselves and ignoring vital information about inherent flaws in the lending industry.

There was a handful of people who were taking advantage of this with “bank products” like the aforementioned “credit default swaps” and other “bets” that few institutions were making via bonds.

Let me reiterate what Buisness Insurance in the form of Bonds might look like...

Imagine that there are some institutions like “AIG” that offer a “bank product” that’s essentially business insurance. One business owner like myself – owner and operator of The Fedora Chronicles – is making plans with for a business merger with another company that we’ll call “Retro-X.” It’s going to cost me time and money to make this deal go through and if it fails, then I could face some serious problem.

Now, I can go to AIG and buy insurance with them (or, place a bet with them…) that this deal won’t go through. AIG and I create this business insurance via a bond that I pay $100,000 for. If the deal goes through, they keep my hundred grand but I still make millions through this merger with “Retro X.” But if the deal fails, AIG pays me whatever the insurance is worth… in this hypothetical situation a million dollars.

Granted, it seems sketchy, especially because what I did was “short” my own business. I betted with AIG that this was going to fail by buying a million dollars’ worth of insurance with only $100,000. A hundred grand is pretty cheap peace price to pay of mind in the event that this venture fails for reasonable reasons.

Things get even sketchier when there are folks who are outside of The Fedora Chronicles and “Retro X” who ‘short’ this merger. There are plenty of times when people make bets – or create bonds – that say that if our merger fails, then AIG owes these bond holders whatever that bond’s worth at maturity is worth.

Anyone can read about a business venture in the news and call up their “Business Insurance Manager” and ‘short’ that business venture.

Another example is that I’ll give my Bondsman $10 that the next iPhone from Apple won’t outperform sales from this current version of the iPhone, and if I’m wrong my Bondsman keeps my ten dollars but if I’m right, my bondsman owes me ten or a hundred times whatever this bond is worth.

This makes sense if I’m an Apple stock holder so that I will cover my losses if the stock goes down because the next iPhone underperforms. But if I own no Apple stock, and I have nothing to do with the Apple cooperation, this is called “speculating.”

This is perfectly legal. It gets into illegal or immoral territory if I have insider information given to me by someone who works inside The Apple Corporation who tells me there’s something wrong with the next batch of phones.

If I read about problems in the news... it’s legal. If someone who is on ‘the inside’ then it’s illegal. This is the easiest explanation of ‘insider trading’ I can think of today.

This has been going on for almost a decade in the housing market; people have been buying insurance on the housing market. People have been buying a specific type of insurance betting that specific “mortgage backed securities” were going to fail. For anyone with half a brain looked at the whole situation of the Mortgage Industry during the early to mid-2000’s and you could tell something was wrong.

When you were watching commercials for “Bank Products” that included ‘Teaser Rates’ in ‘Smart Choice’ loans that reset after two years, with no income verification, no credit history, and no money down… it should have been obvious to everyone that this was the making of a crisis. Those who didn’t see this and thought this was ‘a great deal!’ are exactly the people the mortgage companies targeted.

Since there were no regulations on lending practices, nothing to prevent mortgage companies from bundling bad mortgages with good mortgages to create bonds with make-believe Triple-A ratings, and nothing to prevent commercial and investment banking from intermingling (Google the phrase “Repeal of Glass-Steagall…”) the financial collapse was not only inevitable but it was also obvious.

When you saw and heard news items about bank mergers in the 1990’s – and your car loan switched three times over the course of the loan thanks to bank mergers happening faster than you thought possible, thus creating banks that were “too big to fail,” you were witnessing the birth of the financial crisis and experiencing the events that caused it firsthand.

This book illustrates how the media purposely lied about the economy leading up the crashes in the late 2000’s; the fact that anyone can read this book and not get angry when an idiot in a suit or skirt on MSNBC or FOX News says ‘nobody saw this coming’ means that the reader is either an illiterate or delusional. There were people who saw this crisis coming and bet towards it via “Credit Default Swaps” that I mentioned earlier in this review.

There were more than a few who saw this coming and prepared for the collapse while others profited from it. There were also plenty of people who were in the media who said this was going to happen, how it was going to happen, and why… that it, there were those in the media that warned us until they were shunned and mocked for being pessimistic.

This book’s focus is the specific recent history, The Big Short only goes as far back as a decade or so. If this book does has a short coming, it’s that it doesn’t divulge too much detail of how and why “Big Shorts” were allowed to happen in the first place. There is nothing about the 1990's when there were cat-calls from the republicans and democrats in Congress to repeal Glass-Steagall, how the democrats said that repealing Glass-Steagall was going to be great for poor people and allowed them to “participate in the American Dream of Home Ownership” and how Republicans said that repealing Glass-Steagall was great for everyone who wanted to play with The Big Boys in The Stock Market.

This book doesn’t even bother to explain what the Glass-Steagall Law was and why it was important, that it was put in place after The Great Depression Crash on Wall Street. Hence… many of my friends who are history aficionados who studied the Stock Market Crash of 1929 also saw the Financial Crisis of 2008. That’s not important since there are many other works that explain why the banking system needed a separation of commercial and investment banking, and how the inflated market of the 1920’s and 2000’s were in such parody of each other.

To this author’s credit, leaving most of that out made for a faster-passed book. Despite the very dry subject matter, this is a very entertaining book that reads like a true crime novel.

It’s a book that’s an anatomy of a disaster, like the most horrible train wreck anyone could possibly imagine and you can’t keep your eyes off it. The reader knows that it’s going to happen since it’s an event that occurred in the past and affected everyone, you know that these two trains are heading in the wrong direction and the collision will be spectacular, the author makes every mundane aspect of this crash captivating.

As with countless other books about the 1929 stock crash, this book should be set aside for people to read in the near future when another crisis like this occurs again. I'm sure that when this happens again between 75 and 80 years in the future, I'm sure this book will be purposely forgotten as another crisis will surely be in the making. It's human nature to relive the history we tend to forget, especially when some are losing trillions and a smart few are making billions.