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The Big Short

December 30th, 2010 Leave a comment Go to comments

I just finished reading a terrific book about the economic crisis which I’m recommending to everyone who wants to understand why we’re in such bad shape.  It’s The Big Short by Michael Lewis.  It helped me understand why such terrible housing loans were made by the financial sector.  The lenders never expected to be paid back on these subprime loans.  The way to make money was to sell them, trade them, bet against them, and then, when there weren’t enough loans to do that with, create “synthetic collaterial debt obligations” to sell, trade and bet against.  It seems like hardly anyone expected to make money collecting payments from homeowners.  It also showed me how there’s no correlation between the huge amounts of money made by people on Wall Street and their competence.  People are still making money off of the crisis and in one article I read, the investor is actually helping homeowners. http://online.wsj.com/article/SB10001424052748704720004575377022447064474.html?mod=WSJ_hpp_MIDDLETopStories The investor buys loans for a cheap price and he then offers the homeowners a reduction of the principle on their loans so they can remain in their homes.  He can afford to do so because he’s buying loans for 50 cents on dollar and then charging the homeowners 70 cents on the dollar. One can only hope that 2011 will be a better year where people use all of their creative ability for good and not for greed.

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