I finally finished up The Big Short. If you haven’t heard about the book, it’s an inside look at a handful of the characters who saw the market crash coming before the rest of us. The author, Michael Lewis, has a phenomenal knack for taking dry topics – like trading exceedingly complex derivatives – and making it absolutely riveting. Lewis has never let me down with a book.
I remember thinking something along these lines back in the stock market fall of 2008: “The market is crashing, millions of jobs will be lost, and there are a handful of scumbags out there profiting from this disaster.”
While I’m still fairly certain there were some dirt bags who made millions out of the market collapse, The Big Short help me realize something kind of profound: On some levels, the “shorts” (those who shorted the market) were the heroes – or at least as close as you get to heroes in the world of finance. In reality, the scumbags were the ones who created the ridiculous run in the subprime mortgage market in all those years leading up to the crash. Those respected, well-dressed, articulate, educated financial moguls built a house of cards; the shorts just saw the lack of structural integrity before the rest of us.
Here are some of the take-away lessons from the whole fiasco – at least the ones I see through my lens.
People’s status can mask what they’re really involved in. Those who breathe the rarified air are sometimes merely a degree or two of separation from – and inextricably tied to -- the sycophants and lowlifes of the world who take advantage of the poor and downtrodden. Wall Street mortgage bond dealers were the perfect example of this. For years, they outsourced their dirty work to subprime lenders. Wall Street essentially invented and continued to feed the market for creating loans to people who could never possibly afford them (case in point: the migrant worker who was given a loan for a $700,000 home, which he didn’t need to make a single payment on for the first two years). The Wall Street magicians provided the incentives to fly-by-night lenders to lend to whoever would sign their lives away, then sliced and diced the loans into something virtually nobody – certainly not their own CEOs – understood. These Wall Street folks, of course, made millions while creating the underpinnings of a financial crisis, then got bailed out by the government when things collapsed.
Peer pressure persists far beyond high school. As we look back situation that was created throughout the first 7 years of the 2000s, it was patently absurd. $400,000 loans made to people making $15,000 a year. People getting mortgages with no proof of income. Strippers and janitors buying a half-dozen investment houses. Ostensibly, the financial market is full of smart people. One would expect that at least some smattering of these sophisticated financial types would have seen the inevitability of a financial collapse and rung the bell. But there was enough pressure within those circles to let the good times roll that these smart folks somehow managed to either miss the wrecking ball hurling towards them or saw it and bit their tongues.
The path of conviction can be a lonely and dark. The book tells the tales of the small handful of people who really understood the charade – and who tried to benefit from shorting mortgage bond market. For years, these men spoke truth to power while the insanity of the mortgage market continued to be hidden through obfuscation by unspeakably complex collateralized debt obligations. It was as though they were screaming at the top of their lungs, yet nobody could hear. It was a very dark experience for this handful of men. One of them started to feel as though he was losing his mind. Ultimately, this small cadre were proven right, but it certainly took its toll on them.
The Big Short is a tremendous read for anyone who wants a glimpse into how we got ourselves into such a very bad place in the financial markets, and how much it could have been prevented had more people had moral strength. As complex as the problem became, it was rooted in the same basic human weaknesses that create so many problems – greed, fear and the human tendency to follow rather than question.