Bringing subprime sexy back, a review of Michael Lewis' much anticipated book The Big Short, a follow-up to his wonderful Liar's Poker. Before I get started here, let me say that I think Michael Lewis is great—I have quoted him here at DOTE—and I'm usually OK with Andrew Leonard too.

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Weapons of Mass Destruction

Salon's Andrew Leonard has just published Bringing subprime sexy back, a review of Michael Lewis' much anticipated book The Big Short, a follow-up to his wonderful Liar's Poker. Before I get started here, let me say that I think Michael Lewis is great—I have quoted him here at DOTE—and I'm usually OK with Andrew Leonard too.

That said, I have some problems with Leonard's review—

Near the end of The Big Short, Michael Lewis' much-anticipated stab at explaining what just happened to the global economy, the author unloads a dump truck worth of jargon while describing a dilemma facing one of his protagonists.

"How do you explain to an innocent citizen of the free world the importance of a credit default swap on a double-A tranche of a subprime collateralized debt obligation?" writes Lewis.

I'm betting Lewis was grinning as he wrote that sentence, because if you wanted to summarize The Big Short in just one line, it might be: the most lucid explanation yet offered to readers as to the importance of a credit default swap on a double-A tranche of a subprime collateralized debt obligation. Which might not sound like a whole lot of fun, but turns out to be a blast...

But then I made the mistake of glancing at the first chapter and literally could not put "The Big Short" down. Lewis achieves what I previously imagined impossible: He makes subprime sexy all over again.

Let me be blunt. I'm sorry to curb Leonard's childish enthusiasm, but there is nothing sexy about a credit default swap (CDS) on a double-A tranche of a subprime mortgage-backed collateralized debt obligation (CDO). Placed in the wrong hands—Goldman Sachs, Morgan Stanley, Merrill Lynch, Deutsche Bank, Bear Stearns, Lehman Brothers—and with buyer or seller risks backed by You The Taxpayer, there is certainly something lethal about it. Not to mention criminal.

Here is Warren Buffet speaking in 2002

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

Of course we now know that Buffet was right. Here's Leonard waxing eloquent again—

"The Big Short" tells the stories of an odd collection of brilliant misfits who recognize that Wall Street is wearing no clothes, become convinced a massive calamity is nigh, and seek feverishly to profit off of their understanding. They are, in Wall Street parlance, the "shorts" -- speculators who bet that the price of a given stock or bond or commodity or any derivative thereof will fall, rather than rise. Most shorts pick on a single company, or have a dour view of the direction of the price of corn or pork bellies. "The Big Short" is a little more ambitious: It's a bet on financial sector collapse.

That's the strategy. Today you can find plenty of people who claim to have seen financial disaster looming, but in "The Big Short" Lewis captures protagonists who put their money on the line. That they did so by employing Wall Street's latest financial innovations against itself makes the story all the more fascinating...

... But the loner-against-the-crowd mentality delivers a dynamic sense of tension that propels "The Big Short" merrily along. We know, as readers, exactly what will happen at the end, and yet still the ride feels nail-biting...

Sorry again to be a spoil sport, but did I just read that these protagonists were making bets that the financial sector would collapse? Did I just read that they were working feverishly to profit from it? Well, it did, and they did. John Maynard Keynes said "when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." That's right, and that's what you need to know.

Your life does not need to revolve around understanding the insane complexity of these so-called financial products. They are a swindler's road to riches. To understand a con man's tricks, you have to think like a con man. These financial instruments are designed to obscure what's really going on to make it that much easier to take advantage of suckers. And as P.T. Barnum said, there is no shortage of suckers.

During the Housing Bubble, which was itself a Ponzi scheme, these derivatives products were designed to promote & enable gambling in a rigged game. As in Las Vegas casinos, and taking Goldman Sachs to be the House, the general rule of thumb is that in the end, The House Always Wins. Therefore, Don't Bet Against The House. Lewis' heroic "Big Shorts" (in Leonard's characterization) had some insider knowledge that it was all a scam, so they were able to beat the system. Unfortunately, your pension fund was not in on the game.

The time has come for Americans to stop acting & thinking as though the whole world revolves around Finance. Sadly, gambling seems to be America's favorite pastime. See Charlie Munger's pessimistic take on this tragedy in Basically, It's Over.

I'm happy for Andrew Leonard, who now knows what a credit default swap is. To give him some credit, near the end of his review Leonard sobers up, reawakens to the fact that we are all truly screwed. For those of you with a burning desire to understand exactly how we were fucked over by Wall Street, I'm sure Michael Lewis' book is among the best ones out there. He's very, very good at unraveling these get-rich-quick schemes, and I'm glad he's there to give us the real scoop. If that's what floats your boat, read his book.

I will conclude with the "great" Gordon Gekko, who couldn't have been more wrong, which was Oliver Stone's point way back in 1987—unfettered, parasitic, unproductive greed is not good. You don't need to know what a credit default swap (CDS) on a double-A tranche of a subprime mortgage-backed collateralized debt obligation (CDO) is to understand that.

Greed did not save this "malfunctioning corporation called the USA."

What do you think? Leave a comment below.

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