• Lisa Simpson
• Jun 28,2010
• In: Foreclosure

Anecdotal Recount of the Great Recession

The Big Short by Michael Lewis is a disturbing tale of avarice, foolishness and total incompetence of those who handle finances in USA – in the markets and in the government. The book is rich in anecdotes catering to human interest in stories about the few who had anticipated the crash of the market that was followed by the Great Recession stretching from 2007 to 2010; accordingly they had wagered bets predicting its happening.

The style of Lewis is the same captivating one that he employed in the 80s to write Liar’s Poker. He had penned the first book after joining Solomon Brothers in 1985. He had little money and nil experience that would enable him to bet with money belonging to others as a way to getting rich. Within three years he submitted his resignation. In his description he referred to the entire business to be unsustainable because the executives did not know what the doings of the bond traders were. Later he was surprised beyond words to discover that others reading his book took it as a model for making dollars.

In this book, The Big Short, Lewis recounts the bond market in mortgages operating with owners with dubitable credit who contracted loans on the equity of their houses – whatever there was of it. The second mortgages were bought off at 7% instead of what was the norm – 12%. The rate was attractive for two to three years prior to increasing again.

The sub-prime lending mortgage firms claimed they were taking clients from credit card debts of high interest to mortgage debts of lower interest rate. But what they failed to disclose was the delinquency numbers of these loans that they were doling out – it being abnormally high. The loans were then sold off to other firms who made packages of them as mortgage bonds. These companies did not have any real earnings. They required more capital and as the need was endless they pushed through these loans with aggressive force.

It was way back in 1997 that these operations were unveiled but none was given punishment; neither was the lower and middle groups given any protection.  2005 saw the sub-prime mortgages restarting on a massive scale. Losses were not transferred to the books but sold on to the investment bankers. The latter packaged them as bonds prior to peddling them to investors. This dubitable business became the most important operation of Wall Street.

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