k.flay

Nov
2

book report: HALLOWEEN EDITION Tweet

this wednesday’s book report is special not only because it is halloween themed, but because i talk about TWO COUNT EM TWO books. it’s also kinda long but then again so is santa’s beard. check it.

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In The Big Short, author Michael Lewis delves into the insanely convoluted world of subprime mortgage bonds, a landscape populated by theoretical money, incompetent executives, and a handful of inventively crooked – and, as it turned out, tragically myopic – men at Wall Street investment firms. The book is alternately horrifying and absurd, as Lewis outlines the ways in which seemingly infinite breeds of derivative assets (e.g. futures, options, swaps) were literally pulled out of thin air. Lewis does an impressive job of detailing the evolution of the subprime mortgage market while weaving a compelling narrative about the dozen or so prescient individuals who wisely bet against the major Wall Street firms. As someone who formerly understood only the broad strokes of financial greed in the wake of the 2007-2008 meltdown, I took a shit ton of notes while reading The Big Short in hopes of being able to summarize the madness. Here’s what I came up with:

(1) When most of us think of bonds, we think of corporate bonds: you invest $10,000 in Ford Motor Company, and in exchange for your money, Ford Motor Company builds a bunch of retro-looking Mustangs and pays you interest on a semi-annual basis until the bond’s maturity date, at which point you get your $10,000 back. So long as the company stays in business, your investment is safe. Beginning in the early 2000’s, consumer bonds came onto the scene. Consumer bonds are collections of things like auto loans, mortgages, and student loans. In theory, these consumer bonds were supposed to make the market more efficient by reducing interest rates for consumers – and because the forces that impact auto loans, mortgages, and student loans seemed sufficiently diverse, consumer bonds were considered a safe bet. So far, so good.

(2) Around 2004, lenders and banks began approving thousands of financially unqualified Americans for mortgage loans on homes wildly beyond their means. These mortgages were usually floating-rate, meaning that interest rates on payments would be fixed for the first two years and then shoot up drastically – not a good thing for folks already struggling to make ends meet. In an effort to drum up revenue, Wall Street firms began creating consumer bonds that consisted ENTIRELY of these subprime mortgage loans.

(3) Unlike the stock market, which has to maintain a degree of government-mandated transparency, the fixed-asset (bond) market is largely unregulated, a fact that gives Wall Street dudes the freedom to do shady, irresponsible things. One of those shady, irresponsible things was to begin selling credit default swaps – a fancy term for insurance – on those subprime mortgage bonds. In The Big Short, Michael Lewis aptly likens this to selling fire insurance on a burning house. With credit default swaps, Wall Street firms slyly transferred the financial risk of subprime mortgage bonds to a third party insurance provider. They got a company called AIG to do it. You might have heard of them.

(4) Because there is no end to derivative assets and hypothetical money, Wall Street firms created yet another security to sell to their customers: collateralized debt obligations (CDOs). CDOs were collections of the very worst – meaning riskiest, most likely to default, and hardest to sell – subprime mortgages, repackaged into shiny new bonds. Because of corrupt practices at rating institutions like Moody’s and S&P, these very risky bonds, when rearranged, were given AAA ratings, the highest that any investment can receive. In this manner, people and corporations were systemically misled to believe that these CDOs were safe bets. And since plain old CDOs weren’t complicated enough, Wall Street firms came up with things called synthetic CDOs, CDOs comprised of nothing but credit default swaps! Are you confused? Me too!! At this point, the original mortgages were merely vehicles for a veritable bevy of investment ploys.

(5) Once housing prices stagnated and homeowners began defaulting on their mortgages in 2007, shit hit the fan. Not only had millions of ordinary Americans invested their entire savings in a house of cards, but Wall Street firms had poured staggering amounts of money into the subprime market, a market that most people foolishly believed would never collapse. What made the meltdown so devastating was the fact that for each subprime mortgage, innumerable investments – mortgage bonds, credit default swaps, CDOs, synthetic CDOs, etc. – had been made, meaning that debts were multiplied many times over. Instead of being satisfied with a reasonable amount of money earned from mortgage bonds, Wall Street fund managers developed all kinds of crazy ways to turn those single bonds into a host of derivative assets, each of which earned them revenue. The fatal assumption, however, was that housing prices would continue to rise indefinitely. Which, unfortunately for us regular folk, was not the case.

At the end of the day, it all boils down to unchecked greed. Humans are awesome, but they are notorious for wanting stuff. And then wanting even more stuff. A government that coddles legitimate criminals and refuses to regulate an inherently corrupt financial system is a government that is begging to fall apart. Which leads me to my next book….

Super Sad True Love Story is a novel that chronicles the sometimes sweet, sometimes cringe-worthy romance between Lenny Abramov (a Jewish bookworm desperately afraid to die) and Eunice Park (an emaciated Korean-American college grad with an abusive podiatrist father). Their relationship is set against the backdrop of an economically crippled, vaguely dystopian, and disturbingly believable America. China has become the dominant world power and the United States government is run by a bunch of incompetent, reactionary warmongers. It was totally random that I read this book right after The Big Short, but the parallels were uncanny. Gary Shteyngart, the author of Super Sad True Love Story, began writing his eerily prophetic tale before the financial meltdown of 2008, which leads me to believe that HE IS MISS CLEO.

The book is organized into two kinds of chapters: Lenny’s journal entries and transcripts of Eunice’s online communications. Lenny, ten years Eunice’s senior, is a man clinging to the remnants of a non-digitized society. He collects and (gasp!) actually reads books, which in Shteyngart’s America, are regarded as smelly, archaic, obsolete. Eunice on the other hand, lives her life through her apparati (basically an iPhone on crack), constantly attuned to minor vicissitudes in fashion trends and credit scores. What I loved about the book was how Shteyngart managed to create a deeply troubling version of America that felt so natural. I don’t know if that means we’re on the brink of collapse or that I’m just a cynical bastard, but either way, America’s demise kinda feels like the next logical step in the history of the world.

Throughout my childhood, I was inculcated with a sense of inherent American superiority, the inevitability of our nation’s dominance. We are inventive, resourceful, resilient! We put a man on the moon! We invented Cheetos! But it probably won’t be like that forever. Soon the gears of world power will shift and it will be someone else’s turn. And maybe that’s ok, so long as our government doesn’t morph into a bizarro-conservative theocracy that trades corn for bibles.

At least Times Square would be less crowded.

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