Understanding the Sub Prime Crisis
May 1, 2010 by Tom Schieber
Filed under Blog, Featured Posts, Foreclosures
Vacation is always a great opportunity to do the things we never have time for in our day-to-day lives. One of those things, for me, is to read a book straight through – cover-to-cover. This past week I took that opportunity to read a fascinating new book by Michael Lewis (Moneyball, The Blind Side).
Lewis’ new book is called The Big Short: Inside the Doomsday Machine. It is an unbelievable story of the handful of investors, none of them typical Wall Street types, who both anticipated and got rich off of the sub-prime mortgage crisis.
The story paints those Ivy-League Wall Street Execs in a less than complimentary light, throws the sub-prime lenders completely under the bus, and as for the rating agencies (S&P/Moody’s) – they’re the buffoons. It’s an entertaining read for sure, in typical Lewis style (I read Moneyball in a weekend – couldn’t put it down), but I’ll admit that my understanding of the complex financial derivatives described in the story is still a bit cloudy.
But the most fascinating part of the story is how close to home it hits. The fundamental transaction at the heart of the biggest financial crisis in the history of the country (the world?) was the sub-prime mortgage loan – the kind of loans that we all saw being made day-in and day-out throughout the early part of the decade. That no-doc, stated income, two-year teaser rate loan that Realtors and lenders used to get ordinary people into ordinary homes right here in Brentwood, and throughout the East Bay.
Yes, we all knew it couldn’t last. We could see the folly in the system. But what we didn’t know was how big the sub-prime machine had become on Wall Street, and the trillions of dollars of exposures that the world’s biggest financial institutions had to these ridiculous loans.
And for all the “told ya so’s” out there, it was a small group of rogue investors who figured out how to put their money where their mouth was, and bet against the system. Read the book – it’s amazing.
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