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The Big Short

August 18th, 2010 Leave a comment Go to comments

I just read a terrific book about how we got into this financial mess, The Big Short, by Michael Lewis.  Hardly anyone expected these subprime loans to be paid back and they didn’t care because that wasn’t how people in the financial sector were making money.  They made their money selling the loans, trading the securities that made up the loans and betting against those securities, in other words betting that they were worthless.  When the amount of loans weren’t sufficient to fuel the market, they created “synthetic collateral debt obligations” that bore some relationship to the loans but weren’t made up of them (don’t ask me, they didn’t even understand them).  Some people are still making money off of the mess.  One investor is buying up loans at a discount and then turning around and offering to reduce the principle of the loans to the homeowners for a modest markup, thereby reducing the amount of their monthly payments.  It’s an interesting approach which you can read about at http://online.wsj.com/article/SB10001424052748704720004575377022447064474.html?mod=WSJ_hpp_MIDDLETopStories

What struck me in learning about all of this was how incompetent most major players were on Wall Street. There was no relationship between the money they raked in and their smarts. The only value was greed.

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