Book review

The Big Short
The film ‘The Big Short’ is currently getting excellent reviews, it is taken from the book with the same title written by Michael Lewis. Michael Lewis wrote a best selling book on the 1980s share market crash and being intrigued that the same thing could repeat so soon decided to investigate the 2008 crash. His book Big Short is the result.

The genesis of the problem had been the American government’s scheme to guarantee loans to lower income families to allow them buy a house. The idea being to give the ailing house building industry a boost. On the face of it an excellent idea.
However unscrupulous operators in the major finance companies saw this as being able to loan to people who clearly didn’t have the ability to finance the loan, the government would cover it. Soon there was a huge business in making these so called Sub-prime mortgage loans. That they were bound to fail was disguised by bundling them up and on-selling in a convoluted series of transfers so opaque that the ratings agencies Moodys and S&P could not understand them. The rating agencies rated these as from triple A to B+.

In the first pages of the book Lewis describes how the loans real value were disguised. On page 77 he writes ‘ if you are still with me you deserve a medal’ and then goes on to explain that the reader is not alone; neither the CEOs of these major companies ( Goldman Sachs, J P Morgan, Deutsche Bank etc.) nor the ratings agencies understood either.
Curiously three men, totally unrelated in any way, had studied the loans and realised that they were simply a huge fraud which would one day collapse in a big way. Gregg Lippman was selling them for Deutsche Bank and became intrigued by the total lack of information available with what he was selling. Dr Mike Burry was a neurologist who followed the market as a hobby. Steve Eisman was a market analyst.
They each tumbled on the truth and the fact that some of the bundles of loans were bound to fail. While on paper they were hugely over valued on the market some of the worst were changing hands quite cheaply. The three men realised that there was money to be made in buying these up and then insuring them for their face value and then claiming when they fell over.

They took out insurance offered at ridiculously low rates by AIG ( the company which is an All Black’s major sponsor) who, assured by the triple A ratings, thought the men mad.
The inevitable happened, the American government paid out seven hundred billion dollars cleaning up the mess, and the men with 500% profit on their short term investment became multi millionaires.
This was fraud pure and simple on a grand scale. Were the company CEOs involved? were they crooks or just stupid? Like wise with the rating agencies? Lewis makes cases for both for both.
A great read for anybody interested in business, the share market or how fraudsters work. Sometimes a bit repetitive as he describes each man’s journey of discovery, but this is a minor quibble.