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The Big Short: Inside the Doomsday Machine Paperback – 27 Jan 2011
|Paperback, 27 Jan 2011||
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It's time to throw another tank of petrol on the Wall Street pyre, as only Lewis can (Financial Times)
He is so good everyone else may as well pack up (Evening Standard)
No one writes with more narrative panache about money and finance than Mr. Lewis (Michiko Kakutani New York Times)
Probably the single best piece of financial journalism ever written (Reuters)
Hugely entertaining (Economist)
Terrifying and superbly told (Daily Telegraph)
Genius (Sunday Times)
Compelling and horrifying (GQ)
A more than worthy successor to Liar's Poker ... if you want to know about the origins of the credit crunch, and the extraordinary cast of misfits, visionaries and chancers who made money from the crash, there's no more readable account (Daily Telegraph)
A triumph ... riveting ... a genuine page-turner (Times)
About the Author
Michael Lewis, who established success from his debut Liar’s poker, has also authored other books such as Boomerang and Moneyball, which was later made into a Hollywood movie starring Brad Pitt.
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What is the origin of the crisis? These key reasons are magnanimous but unusual monetary policies, unwise regulations and queer & misguided housing policies. The policies distorted interest rates and asset value, which divert funds meant for loan into bad investments. This also bought the robust financial institutions into death or moribund stage. What are the events that have taken place before the crisis? It all started with concerned administration and department, related to Housing and Urban development policy of pressuring lenders to extend mortgages to borrowers. The dream has been to provide affordable homes to citizen. This new class of borrowers in picture could have never qualified for loans in conventional process, followed by lending institutions. Lending standards were degraded to accommodate these borrowers. This resulted in increase of loan volume. The loans were then sold to big Wall Street investment bank, which in turn packaged them into bonds and sold them to investors. The investment banks also got these bonds rated from reputed rating agencies. Credit default swap concept came into prominence, when other institutions offer to provide financial institutions with cover, in case borrowers default. This sounds like insurance but it is not in reality.
How these simple events then triggered the crisis? Big investment banks like Bear Sterns, Merrill Lynch, Goldman Sachs, Morgan Stanley and Lehmann Brothers were drawn towards subprime mortgage industry. In first couple of years, home owners had to pay back in a teaser rate which is usually very less than the actual. This resulted in huge inflow of money. Subprime mortgage industry, which was lying low in a corner in capital market suddenly, became an engine for profit and employment. However, the homeowners began to default in large numbers, when after few years, teaser rate cease to exist and monthly installment rate sky rocketed. Rating agencies like Moody and Standard & Poor, who were paid fat fee by the Wall Street firms rated 70 – 80% of this dicey mortgage highly. The bonds were obscure from the beginning itself and they never went into the nitty-gritty of the bonds. Even Wall Street firms knew that these bonds are over rated. Insurance giant like AIG who were suppose to guarantee mortgage backed securities never reserved capital for what was coming. What was the outcome then? The issues were pernicious at the beginning but soon snowballed, when default rates became unexpectedly high. Several major investment banks, insurance companies, and commercial banks heavily tied to real-estate lending went bankrupt or were sold for peanuts. The US economy went into lengthy recession and it is a case of fiasco in their financial history.
It’s strange that no one – financial institutions, regulators, investors, rating agencies or homeowners could anticipate the storm. However there were also people who rightly guessed what was coming and made million out of it. The author deserve appreciation for bringing murky and complicated world of subprime industry , to reading space vividly but in simple and lucid manner. It included not only the viewpoints of who & who of US financial world but also traders and salesman. It also contains opinions and predictions of market optimist and pessimist. The opinions, viewpoint, inputs, discussions and speculations are beautifully packaged through this book. Though not mentioned directly, the book takes a dig at the highly paid analyst for failing to predict the crisis. The rating agencies too are shown to employ ludicrous techniques to assess the bonds. The book confirms that not everything is hunky dory in big financial institutions. I’m glad that I laid my hand on this. I was a novice as far books on such subjects are concerned. This book at least provided me the required knowledge to pursue my interest to read something on related line. Less coverage is given on the housing policies which has been the only blemish to an otherwise brilliant book.
A little bit of research is necessary to follow what the author is saying, but once you grasp it (most of it, some of it is way too complicated for the lay reader), you will be taken on a rollercoaster ride that will grip you by the ba**s, and refuse to let go.
Who audits the Rating Agencies?
Now I am off to read his other books.
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