Finance
by Michael Lewis
Who saw 2008 coming, and how?
In the mid-2000s a handful of oddballs started betting that American home loans would go bad. Wall Street happily took the other side. Michael Lewis tells the crash through the few who saw it early, and asks why almost nobody would listen to them.
Hear a sample · read by Laura
Lenders handed mortgages to people who couldn't afford them, often with a low teaser rate for two years and a jump after that. The loans only worked if house prices kept rising so borrowers could refinance. The lenders sold them on, so they barely cared.
Banks took the riskiest slices of mortgage bonds, the ones rated BBB, and bundled them into a new security called a CDO. The ratings agencies then stamped most of it AAA, as if piling risky loans together had made them safe.
The agencies' models looked at borrowers' average credit score. So the banks mixed very low scores with high ones, and the average passed. Lewis shows Wall Street learning exactly what the models checked and feeding them what they wanted.
Lewis traces the rot back to the day Wall Street firms stopped being partnerships. Once Salomon Brothers went public in 1981, traders were risking shareholders' money instead of their own, and the partners' old caution went with it.
Bad loans
Banks lent huge sums to people who clearly could never pay the money back.
AAA
Wall Street piled those shaky loans into bonds, and the rating agencies still stamped them AAA.
Outsiders
The few who saw the crash coming were misfits who actually read the loan details.
The bet
A few investors bought insurance against the mortgage bonds failing, called credit default swaps, and paid for it while they waited.
Too early
For months the losses piled up, and being right too early felt just like being wrong.
A story from the book
Michael Burry was a doctor who taught himself investing and ran a small fund in California. He read the prospectuses of mortgage bonds that almost nobody read, saw how bad the loans were, and talked banks into selling him credit default swaps, insurance that paid out if the bonds failed.
Hot take · true or myth?
The people who bet on the crash felt triumphant when it came.
Myth. Lewis describes them as uneasy, even sick about it. Being right meant the system really was as rotten as they'd feared, and ordinary homeowners were paying for it.
One thing to try
Pick one thing you've signed and never read properly, such as a mortgage offer or a pension statement. Read it through this week and write down one thing that surprised you. Burry's edge was reading what everyone else skipped.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. The Big Short comes with a Hot Take round and a Spot the Trap case to make it stick.
Get the whole book on KnotdOpen in the appWho saw 2008 coming, and how? In the mid-2000s a handful of oddballs started betting that American home loans would go bad. Wall Street happily took the other side. Michael Lewis tells the crash through the few who saw it early, and asks why almost nobody would listen to them.
Loans built to fail; Turning BBB into AAA; The raters were gamed; The end of the partnerships.
Pick one thing you've signed and never read properly, such as a mortgage offer or a pension statement. Read it through this week and write down one thing that surprised you. Burry's edge was reading what everyone else skipped.
Yes. Knotd has the key ideas from The Big Short in a few minutes, in plain words, plus a Hot Take round and a Spot the Trap case to test them. It's one of 250+ non-fiction books in the app.
The Intelligent InvestorBenjamin Graham