Book: The Big Short: Inside the Doomsday Machine

[Nick]

I just finished reading Michael Lewis's (The Blindside author) book on the whole subprime market and its amazing collapse. It's a great book, and it doesn't require an in-depth understanding of all the different products. He largely sticks to telling the stories of the individuals involved in shorting the various bonds which all defaulted...the few traders that actually made a ton of money.

It's all anecdotal, and he mentions only a few securities involved, but even if only half of it is true (and I haven't read anything that suggests any of it is false - and in light of today's SEC civil fraud case against Goldman Sachs, it sort of backs up many of his stories) it's a damning case against Wall Street insiders. As he puts it, there were a few crooks and a lot of stupid people betting hundreds of billions of dollars. He also tells the story of the big rating agencies and how they were duped (or even willingly complicit) in slapping AAA ratings on pools of mortgages which were issued by people with poor credit, and with terms that included huge interest rate jumps after 2 years.

The overall theme is that more people should have seen this coming. The main reason they didn't was due to the opaqueness and esoteric nature of the market. A lot of the people who were trading didn't have a clue what they were trading. They saw the AAA rating and assumed it was actually deserving of a AAA rating. It's a great book that does a good job of explaining what happened, without getting too bogged down in the details of collateralized debt obligations and credit default swaps.