Thursday, December 30, 2010

The Big Short

The Big Short is a book about the financial crisis and how it came to occur. It follows a number of people who were basically bit players in the financial system; we trail the lives and activities of outsiders and loners who were able to see what was happening in the market and able to take advantage of it. The decision to base the book around these people was a very good one. It gave the book a narrative flow that helped make an incredibly complicated subject a lot easier to understand. Unlike with any news story or article I've ever read of the financial crisis and its roots, I actually feel as if I understand precisely what caused it now, a feeling that had been missing before. For that reason, if nothing else, this book is amazing and succeeds at what it set out to do.

Following the Threads

The people who the author chose to examine and follow throughout the book's story are really interesting people. There is the one who, disgusted with the financial system, creates his own company precisely so he can screw over the fat cats who profit from it. There is another who, through his own unique hermit-like personality and approach to life, is able to discover the fault lines of the crisis long before anyone else. Putting this explanation of the crisis into a chronology like this and making it feel like an unwinding story instead of a dry examination was genius. I don't think I would have been able to understand it any other way.

From what I understand, the crisis was caused by the creation and trade of subprime loans and mortgages. What these were, essentially, were loans given out to people who couldn't afford to repay them. No, it doesn't make any sense. Why would banks give out loans to people who wouldn't be able to give them back? The reason is this: so that the banks, hedge funds, and various finance companies could shuffle them around and take out insurance on them (credit default swaps) when they inevitably failed. They expected them to fail, and thus sought to profit off of the homeowner's failure. They managed to do this for years because, with the seemingly endless boom in housing prices, those who failed were hidden by the successes of those who had not yet done so.

So the system was basically designed to give out loans to those who couldn't afford them in order to profit from their loss. Sounds like a con, doesn't it? Well, it was, but the system was explicitly designed so that it would not be noticed. This, I think, is a huge reason why finance seems so damned complicated. If this book is to be believed, it was made intentionally so in order to conceal the profits that the financial market was making. It was also done so that banks who hadn't caught on to it continued to be hoodwinked so that they would be put under when the crisis finally came, and not those who profited from the crash.

The Absence of Morality

What the book did most effectively was convince me that, while the shenanigans people pull with trading assets about on the financial market is interesting, the system itself doesn't make any moral sense. The atmosphere and incentives of the market make it advantageous to be as greedy and uncaring as possible. In reading about the lives of those who participated in it, I found myself wondering what these people in these careers offer to society? All they do is shuffle money about; buy low, sell high. None of it actually contributes to anyone but themselves. A construction worker builds places that people use. A lawyer helps to keep the justice system working and providing people a voice. Researchers and technicians interact with and repair things that help the average Joe. But financiers? The only argument I can think of is that they help the economy, and that is an argument that can apply to any job ever. Isn't it strange that those who seem to contribute the least to society are those who are the richest for it?

This sort of mentality, I think, is what made the financial crisis possible. Even those who seemed outsiders to it (the people one follows in the book) inexplicably made very little effort to let the government or anyone know about how the convoluted system was making it possible for people to be lied to and taken advantage of. Instead, they used their knowledge to make sure that they were able to escape unscathed from the crisis that followed, even becoming rich in the process. To my eyes, the fact that this was possible would suggest that we need the government or even a private entity to help make the system more transparent. One should be able to trust that every bank isn't out to con them. The financial system should be made less complex; the only reason it is was because people deliberately made it so to conceal their actions.


However, the government's way of fixing it was tragic. What they basically did was throw money at the failing loans so that those banks who bore the brunt of it were essentially rewarded for making the impossible-to-repay loans in the first place. So, in the end, everyone who participated in the system profited from abusing it; those who bet on the loans failing won giant insurance payouts and those who carried the loans were guaranteed the money they should have lost. Therefore, nobody has any incentive to change how things work because no punishment was involved. If the banks had had losses, maybe they would've done their best to make the system more transparent themselves, so that they wouldn't have been taken advantage of by smarter financiers. Instead, it seems the only people to suffer from this were those who were conned into taking the loans in the first place, the people of the United States. And, while one would think that they should have known better, I can't help but feel that they didn't have any option to. Banks had every incentive to make the subprime loans sound magnificent when they weren't, the loan rating system was rife with corruption and thus untrustworthy, and the entire system was made as obtuse as possible in order to throw off those trying to figure things out. Is any of that fair?

Anyways, I would highly recommend this book to anyone who doesn't know how the financial crisis came to pass and would like to know why. The author keeps the book interesting by following the stories of some of those people who were involved in it. And as they foresaw it happening, so will you understand right as they did. However, it got a bit repetitive closer to the end, as one can talk about the evils of subprime mortgages for only so long before repeating one's self. But, overall, it was quite good, readable, and informative.


+ 10 for a great, readable book that does exactly what it set out to do
- .5 because nothing is perfect
- .5 for occasional repetitiveness
- .5 for difficult subject material that still gets confusing despite a good explanation

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