Book Review Corner: The Big Short by Michael Lewis

The Big Short by Michael Lewis

2010. W.W. Norton & Co.

Mortgage Bankers and Brokers are pressed these days to act responsibly in favor of both their borrowers and their lenders-investors. The Federal Government has mandated it. Gone are the days of “If the Warehouse Lender will fund it, fund it.”

Bankers and Brokers are in the financial industry and their knowledge and understanding of the financial markets is more important than ever.

Each month, I will review a book that I think might be helpful to you. A good writer to begin with is Michael Lewis. He is a graduate of the London School of Economics and worked for Salomon Brothers until 1987 at which time he quit to become a financial journalist.

His book, The Big Short, written in 2010, is written about our Mortgage Industry but from the perspective of Wall Street. It gives insight to the back end of the MBS and CMO part of our Mortgage Industry.

I thought an especially interesting section of his book delved into the life of Dr. Michael Burry. Dr. Burry was one of the first hedge fund investor to understand that the Mortgage & Real Estate Markets were going to implode. He made this observation by watching home prices in San Jose, California escalate beginning in 2001-2002. He then saw that in 2005 there was an inordinate amount of low 3 year teaser rate mortgages made and that were set to re-adjust in 2008. Putting the two events together he went about to basically create an investment called a Credit Default Swap (CDS) that would allow him to short these subprime Mortgage Bonds. AIG (American International Group) took the other side of the Credit Default Swap trade and in 2008 Dr. Burry’s bet won. Dr. Burry and Scion Capital investors made millions and AIG was taken over by the Federal Government.

One of the interesting points of Michael Lewis’ book is how close Wall Street really is to us on Main Street. The mortgages that we originate and sell do make their way to Wall Street very quickly and they do very much matter. It is this interconnectivity that we on Main Street must know about and understand better. Knowledge is power and I hope this book is helpful in that regard.