Michael Lewis' "The Big Short' unpacks the recent financial crisis from the perspective of the lucky few who foresaw it - i.e. those who 'shorted' the mortgage bonds, investment banks and other companies involved in the housing buble. The book moves the story along at a good pace and does not bog down into a lot of the technical detail. Indeed it makes the claim that the technical jargon is intended to obfuscate and confuse the average person, and this works in the favor of Wall Street.
What I learned from this book: mortgage bonds were created by Salomon Brothers in the mid-90s. These bonds gathered mortgages together and then divided them into 'tranches', with each tranche representing a group of loans that were rated similarly.
The subprime mortgage market grew quickly and reflects those loans that are not insured by Freddie Mac or Fannie Mae. These loans are less likely to be repaid, however when converted into bonds they were rated as highly as those that Freddie Mac or Fannie Mae did insure. This is a prime failure of the ratings agencies, Moodys and S&P. Institutional investors took the ratings at face value - a AAA rated bond NEVER fails right? But these bonds should have been rated as junk. Insurance was created to insure against these bonds defaulting too - this is the credit-default swap - and much of this insurance was sold by AIG. When the mortgages started to go bad, the insurance had to pay out, AIG paid dearly and without government intervention would have been bankrupt.
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