IGX

Ostensibly, it's about three guys who called the sub-prime mess years ahead of time. Interesting guys: one, for instance, is a one eyed hermit medical doctor turned investment guru who has Aspberger's and communicates solely by email.

But in following the thinking of these guys, you begin to understand the whole mess. I've read three books on this subject, including "Too Big To Fail" and couldn't really say I got a handle on what happened.

In this book, I think I finally got a sense of the meltdown. Toward the end of the book, I knew exactly what he was talking about when Lewis wrote:

"He was seeking a buyer of $205 milllion in credit default swaps on the double A tranches of mezzanine subprime CDOs."

I heard the author on NPR and it was fascinating. While the three main subjects positioned themselves to win a ton of money in the meltdown, they all came to the conclusion that the dam was about to burst via different methods and screamed that the system was on the road to disaster. No one that mattered would listen.

I'm not sure if its an example of how even elites get caught in group think, or how incompetent our regulators are, or how the powerful politicos and financiers can control things, or some mix of the above. I do know that after the interview, my hate for the RepugliDumbocrats that manage this fine land increased.

There are a lot of lessons, but one that Lewis traces from the 80s is when Solomon Brothers went public. When it was a bank actually controlled by people named Solomon, the directors were concerned about the future of the bank, about the name Solomon. If the bank lost money, people named Solomon lost money. When the bank went public --- and the other big investment banks followed along very quickly --- losses were passed on the shareholders. This freed the banks to jack up their leverage. They wouldn't personally lose if their bets went bad.

So they invented various financial instruments --- derivatives --- with which to jack up their leverage. Lewis says that, at the time of the meltdown, most of the big investment banks where leveraged from 27 to 1 (Goldman Sachs) to some over 40 to 1. That is, a million dollar loss on a bad bet costs the bank 40 million.

Only a very few people in the world understood subprime mortgage bonds, which were a money printing device for the banks. CDOs --- repackaged recycled mortgage bonds of the worst quality --- were rated "triple A" investment grade by the rating agency, Moodys, mainly because the analysts there didn't fully understand CDOs.

Lewis shows that the CEOs probably didn't understand CDOs and one of the top traders, ,the guy from Bear Sterns, made trades losing the company 8 or 9 billion, because he thought the high rated parts of a subprime CDO (the triple A rated stuff) was actually, well investment grade. He didn't understand what was going on, even as the Street was exploding...

Interesting stuff...

Uh, every time a bank makes a loan, it is expanding the money supply (ie printing money).