I recently finished reading Michael Lewis’ excellent book The Big Short, and I’m left with two emotions: surprise at how long the party lasted for securities with no underlying value, and shock at the lack of questions we all had (all of us borrowers) for a market that seemed to have no end in sight. Clearly, hindsight is 20/20.

Lewis uses the story of a few traders who bet against the market for subprime mortgages as a broad brush to suggest that the financial industry is a machine for making and destroying bubbles, and that the contrarian point of view can often be a very lucrative one. The mechanics of the trading aside (in retrospect, the mechanics of taking a junk bond, slicing it into pieces, and then repackaging it as AAA-rated bond at the same time as the same bank might be selling a bet that the same bond would fall is somewhat staggering), the key insight I get from this book is that traders on Wall Street were selling snake oil.

Continue reading “The Big Short – Michael Lewis on Why We Looked the Other Way” →