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nlonJan 15, 2016

They were hiding the risk, both from the purchases and the ratings agencies.

BUT - and this is pretty important - the ratings agencies were negligent in their rating methodology. Intelligent buyers could see the problems.

The book The Big Short covers this in some detail.

tsunamifuryonMay 9, 2016

The Big Short (Book) is the easiest way to be introduced to these concepts of contracts and risk.

'Margin Call' is an excellent and thrilling film that dramatizes these concepts and shows how they can play out on the trading floor.

elionSep 17, 2013

Michael Lewis talks about how students used Liar's Poker as a how-to guide in the preface to The Big Short. (Both are excellent books; he's a talented writer.)

mslateonJan 2, 2019

What would you say was the trigger?

That was actually my favorite thing about The Big Short—the author did a good job of showing how the traders first to short the market earned the least and experienced the most distress.

va_coderonFeb 16, 2011

I read the Big Short. Awesome book. Michael Lewis is a great author.

Cyber_squadonJan 29, 2021

I don't want to make false statement but "The Big Short" movie really helped me better understand what's going on in those days.
I know that maybe reading some book is better but i'm not in to market and economics and the movie was nice

willturmanonFeb 25, 2021

Michael Lewis, author of the Big Short, also wrote Liar's Poker about his experience at Solomon Brothers in the mid-eighties where things like mortgage backed securities were invented. It's captivating.

jayfluxonMar 14, 2020

The big short is a great book, but not sure it’s a good primer on how the financial system works for someone learning.

selectodudeonAug 30, 2019

The Big Short is a fantastic read due to watching somebody who you know is right, and knows that he's right, almost get wiped out because the market teetered on the edge of the precipice for over a year.

arethuzaonSep 2, 2011

I remember reading, it was probably in "The Big Short", that FICO scores are actually a pretty awful measure of whether someone is a good risk for a mortgage.

enjoonJuly 8, 2016

The book/movie "The Big Short" dramatizes this really nicely.

LargeWuonMar 3, 2021

It's happened before. Watch or read 'The Big Short'. Both the film and book are fantastic.

mellingonAug 17, 2016

Investors short all the time. Your comment seems to be irrelevant to the discussion.

How about this famous short? Soros made a billion dollars.


Did you see/read "The Big Short?"


portmanonApr 4, 2010

If this article piqued your interest, please PLEASE read The Big Short by Michael Lewis, in which he tells the entire, fascinating story of Michael Burry, the one-eyed genius with Asburger's who fought against the entire Wall Street establishment.


akadienonApr 28, 2010

It's more likely underpaid raters at Moody's and S&P being intimidated by overpaid traders at Goldman Sachs and Deutsche Bank. I'm reading "The Big Short" (highly recommended), and it puts all of this and the current GS hearings in the right perspective.

kyleblarsononJan 29, 2014

"Steve Eisman, the outspoken investor whose huge wager against the subprime mortgage market was chronicled by author Michael Lewis in his bestselling book The Big Short, has set sights on a new target: for-profit colleges"


dna_polymeraseonMay 25, 2017

Have a look at "The Big Short" (the book, not the movie). Reading how clueless those idiots at those Rating Agencys were is fascinating. The had no idea, basically just rating every pile of horseshit AAA because they are dumb and have no idea what they are doing.

RimpinthsonJan 25, 2013

If you're really interested in this topic, Michael Lewis's book "The Big Short" covers this in detail. Great book.

lawnonOct 2, 2019

The assets were always risky, way before the panic set in.

I recommend the books After the Music Stopped or The Big Short for background on the crisis. (Also the movie The Big Short is excellent).

klbarryonDec 5, 2010

"The Big Short", wait until 2008 and pocket a pretty penny.

Real answer, I can't think of better books to have read than what I did then, unless I could force myself to memorize a language book or something.

rpgmakeronFeb 14, 2016

Most people have never heard of him, but Michael Lewis' The New, New Thing immortalises Jim Clark, the most interesting billionaire on the planet.

Thanks to The Big Short I've been made aware of this book but is it worth a read in 2016? What does the HN crowd think?

tptacekonDec 11, 2020

Oh, lord, no. His best book, by far, is Moneyball, and then The Blind Side, The Big Short, and then Liar's Poker --- though I trust The Big Short less after Flash Boys.

wtvanhestonApr 25, 2013

The first book on the list, The Big Short is an easy read that is interesting and will get you started. Start there and move down the list.

URSpider94onMar 8, 2021

The book “The Big Short” is a documentary. The movie is based reasonably closely on the book. The movie is a fictional re-telling, but the people are real and their motivations and actions are accurate.

wozniackionApr 25, 2017

  I genuinely believed it until I read "The Short"

You mean Michael Lewis' "The Big Short: Inside the Doomsday Machine"? [1]


samdbonSep 22, 2014

Another Lewis book, The Big Short, is also a good introduction to the events leading up to the 2008 crash.

gdubsonOct 9, 2018

I’ve read the Big Short, not sure I get your point?

eckmLJEonMay 17, 2021

And Burry is intimately familiar with this, brushing close to that reality as illustrated in The Big Short.

damian2000onFeb 23, 2012

A better book is "The Big Short" (http://en.wikipedia.org/wiki/The_Big_Short) its got some incredible stories regarding the market for CDOs and the GFC. A few people in the know actually saw it happening, bet against the whole system, and won.

scott_sonSep 22, 2014

Agreed on "Liar's Poker". I read it after "The Big Short", and I was surprised at how disjointed it was. It was Lewis' first book after leaving finance, and it showed. But I just added "When Genius Failed" to my wish list, based on your all's recommendation.

docdeekonMar 14, 2020

You can't go wrong with 'The Big Short'. I saw the film a few times before I ever bought the book, and it's still enlightening.

arethuzaonSep 29, 2010

After reading "The Big Short" and "The Quants" and having worked on the extreme periphery of investment banking I am also moderately interested in how these folks actually get started.

sulamonNov 29, 2016

Before you short, read the Big Short and imagine yourself as Michael Burry. Very often you can be short, right, and lose your pants because markets are slow to recognize things that they are paid to ignore.

jfoutzonJan 11, 2017

Dr. Michael Burry is a pretty good example. Wrote more and more detailed and excellent analysis of stocks on forums. Wound up getting enough attention he started a hedge fund, Scion Capital. Was possibly the first to recognize the CDO disaster. He's a main character in The Big Short. The book has a fair amount of detail about the guy.

chany2onDec 27, 2013

Rework by 37Signals ^ is good.

Personal favorite are:

1) As a Man Thinketh by James Allen

2) Outliers by Malcolm Gladwell

3) 2nd half of Steve Jobs Bio

4) Maximum Achievement by Brian Tracy

5) The Big Short by Michael Lewis

6) The Four Steps to the Epiphany by Steve Blank

nlonJan 11, 2016

Read "The Big Short" to see exactly how true this is.

sprachspielonDec 19, 2010

The Big Short: Inside the Doomsday Machine is a very good book on the crisis. The Economist calls it "One of the best books on the recent crisis". I very much agree with this assessment. It's written by the former investment banker Michael Lewis who is the author of Liar's Poker and Moneyball.

dgellowonMar 19, 2017

You might be interested by the book (or the movie) The Big Short:

rmanochaonDec 6, 2010

I just got done reading "The Big Short" by Michael Lewis. Well written, does a good job explaining what bond traders were doing before 2008 and why this downturn started. Well worth the read, IMO (I was recommended the book by a hedge fund manager when I met him at my school).

the_watcheronOct 28, 2019

I read The Big Short when it was first released, when I was 20. Maybe I should read it again, now.

TomK32onOct 9, 2018

Early? Read The Big Short and you'll change your opinion about when that crisis started.

bentlegenonJan 17, 2011

Reminds me of a chapter from Michael Lewis's "The Big Short: Inside the Doomsday Machine" (a book about the recent financial crisis) in which one trader asks "who's buying these?" [toxic housing assets], and the other replies "Dusseldorf. Stupid Germans."


philipkielyonMar 22, 2019

"One of the hallmarks of mania is the rapid rise in the complexity and rates of fraud." -- Michael Burry, The Big Short (Film)

gdubsonApr 11, 2016

Lots of comments here regarding 'blame'. On that subject, I found this interview with Michael Burry (featured in the book and movie "The Big Short") to be worth reading:


throw_awayonAug 3, 2010

logicomix - a graphical novel about bertrand russell, logic and the history of computation.

diary of a very bad year: interviews with an anonymous hedge fund manager/the big short: inside the doomsday machine - two books about the financial crisis.

dash2onSep 23, 2016

Academic economist(ish) speaking here. Be aware of the distinction between books of economics (the discipline) and books about economics by non-economists. Both can be great - I loved The Big Short.

Strongly recommend Keynes, and surprised nobody has mentioned Minsky or Kindleberger - outsiders now receiving recognition.

dlp211onMar 1, 2014

That is not at all what drove what happened in 2007-2008. I suggest you read The Big Short by Michael Lewis.

cconceptsonDec 29, 2015

Currently reading The Big Short and struggling to get my head around what actually happened - now its supposedly happening again?

EDIT: I came back from reading the article a second time and was relieved to see that the speculative title had been changed.

joezydecoonAug 8, 2011

AIG's Exhibit 1 on trial should one copy of "The Big Short" by Michael Lewis. You'll never trust any bank ever again after reading that book.

untogonSep 29, 2011

I think the thing that really annoys me about these kind of moves is that they're clearly targeting the less fortunate out there. If I want to avoid the $5 that's easy- I'll just switch to my credit card. But people who don't have enough credit to get a credit card now get punished twice.

I read a fascinating passage in The Big Short (an excellent book on the financial crisis by Michael Lewis) that told the story of a top banking exec boasting about the amount of money they made on "Free Checking" accounts. Far more than they made on the accounts they charged for, because the "free" accounts came with dozens of catches and fines that ended up costing the customer more.

What a foul way of doing business.

arethuzaonJune 4, 2010

The FLOSS Weekly podcast is excellent http://twit.tv/FLOSS

This Week in Tech can be good - even if it is often dominated by talk about Twitter and Facebook.

For non tech podcasts I can also recommend:

- The History of Rome (http://thehistoryofrome.typepad.com/)

- 12 Byzantine Rulers (http://www.12byzantinerulers.com/)

However, for driving I find that nothing beats unabridged books from Audible - just finished "The Big Short".

arethuzaonAug 2, 2010

Recent favorites of mine:

Anathem - Neal Stephenson

A People's Tragedy: Russian Revolution, 1891-1924 - Orlando Figes

The Big Short - Michael Lewis

encodereronMar 12, 2015

HFT is not bad. Technology is democratized now. The best trading tech is available to consumers. The professional edge lies in their unlimited, low-cost leverage not in their technology. As a consumer, HFT is not my competition it is my order facilitator. A huge share of equity trades get their price IMPROVED by the market makers in order to capture the trade flow.

I love Michael Lewis. The Big Short was a very enjoyable read. I've read all of his stuff. I've run into the guy at the grocery store. But Flash Boys was just silly. Even if you believe it, the guy getting "disrupted" was not a retail trader but a broker crying that HFT was making it hard for him to dump orders on the market in 10,000 share lots.

I won't respond to every critic, I respect your views but I've given it thought and have reached a different conclusion. You can quantify that orders are filled today more quickly, at better prices, with far lower commissions, and we have tighter bid-ask spreads, more penny-wide markets than ever before, and an explosion of ETFs that give retail traders access to something that they otherwise would need a futures contract ($100k in notional value) to trade. And of course in the world of algorithmic trading, there is technology not available to consumers. But a consumer today can have a setup at home that is as sophisticated as a professional trader's setup. That never used to be the case. But the software is commoditized now. The trading platforms available to consumers, like Thinkorswim and Interactive Brokers, are top-shelf.

hnnewguyonFeb 8, 2015

Pretty much everything he writes is a good read. He takes his liberties here and there (especially with Flash boys), but he is an intelligent man with a knack for story-telling. Very easy reading.

So add Moneyball, Liar's Poker, The Big Short (good telling of the 2007 financial crisis), Panic (contrasts before and after news articles around financial crises) and The Blind Side to the list.

(Don't let The Blind Side motion picture scare you off. The book has a lot of on-and-off-the field football strategy that I found interesting.)

elechionNov 3, 2010

The Big Short - Michael Lewis

jzwinckonApr 8, 2016

> If someone (or some company) is claiming to be better than me at using my money to make money, surely they'd agree to put skin in the game, and only profit when I do?

Imagine you believe that mail order companies are poised for rapid growth in coming years. You don't know which ones specifically, and there are thousands. So you buy a mutual fund which holds hundreds of these companies. This gives you some diversification and lets you make your bet with only a single commission to buy and sell.

But the fund manager may disagree with your investment thesis. She may be fully convinced that online shopping has already destroyed the mail order business permanently. She would therefore gladly run a fund for you, but she would not bet on its performance herself.

For a somewhat more real-life example of this, watch or read "The Big Short." The protagonist wants to buy something that the banks think will lose money.

SyneRyderonSep 10, 2016

> Between those six and my university's copy of Harris' Trading and Exchanges, I learned quite a bit. I bailed out on the AVR challenges though.

I really enjoyed the Stockfighter levels too, and reading The Big Short / Flash Boys / Moneyball in preparation. The levels had the right level of difficulty & I kept feeling I levelled up (especially when optimizing levels, I'm still proud of my Level 5 score). I didn't enjoy the AVR levels the same way & bailed quickly on those.

I got spooked after someone posted on HN that their Starfighter referral had only bypassed the CV screen of the job interview, not programming or whiteboard challenges. That made me question the time I'd spent on Starfighter - I kept a time log in Harvest along the way, and it's about the same amount of time I'd spend on developing a new product to sell online.

I still enjoyed playing Stockfighter though, and it helped me sharpen my Golang skills.

sgerrishonApr 26, 2018

I am 100% convinced that there are people doing this. I know an ex-Google engineer who's doing it for stock options. I think, however, that to be successful, you'd need to have some comparative advantage, e.g. one or more of the following:

1. access to a data source others don't have easy access to;

2. a reasonably deep understanding of statistics and, particularly, a deep skepticism and conservatism about any
data you look at; or

3. time to invest in looking for oddities in the market.

(3) is probably the "easiest" for a newbie, although it's not as conducive to algorithmic trading, since it requires manual research (though, if you were clever, you could probably come up with something to make this algorithmic). Here the example that comes to mind is the two guys Ledley and Mai mentioned in this chapter of the Big Short: http://www.bookcaps.com/the-big-short-chapter-summaries---ch...

dogman144onMar 14, 2020

Random Walk and Black Swan are two good reads. Even if you end up not agreeing with the two's takes, they'll make you sufficiently skeptical of how well a book claims to explain the industry, which is a good position to approach it from.

My bias will show, but the industry routinely blows itself on sometimes small or sometimes very large scales, sometimes or often through devices of its own creation. It's important to know that the system is entirely capable of doing this to itself, and therefore the system, and those in it, may not be able to explain itself well.

Edit: another thing worth reading is Too Big to Fail, The Big Short, and Greatest Trade Ever. All are engaging books, and really walk through how 2008 started and ended through different perspectives of the system. TBtF will cover the Fed and Tier 1. BS/GTE cover the sell side. And then when you pair GTE with what happened to it's focus, John Paulson, after 2008, in that he didn't really have a repeat 'win,' it's a good anecdote for what I said above.

semicolonandsononMar 4, 2020

I just finished listening to an engaging series of podcasts by Michael Lewis (author of Flash Boys, The Big Short etc.) about the loss of referees in our society. It's called Against the Rules: https://atrpodcast.com/

Much of reddit still has functioning referees in the form of its moderators, but I'm seeing signs of it cracking — e.g. when I researched the backgrounds of certain moderators I found out that they produced content in some space and would allow their own stuff to get posted while blocking other people's submissions.

scarejunbaonMar 2, 2019

In The Big Short you read about how the guy in the baseball cap and jeans is probably a fund manager doing really well. The guy in the suit is about to go ask for more money because he's not doing so hot.

It's the same principle in Silicon Valley.

The status symbol is being enough of a hot shot to not have to play by the rules of status.

patrickkonJune 30, 2010

I didn't mean to appear to disparage college, I myself am a recent graduate.

The point I was making was that some people, in order to be highly successful, have to do things that seem weird, risky or downright crazy in order to get ahead (things that their friends, family, business partners, investors etc wouldn't approve of or don't see the reason for).


- Sergey Brin is on leave from his PhD studies in Stanford. If the price of me not having to use Yahoo or MSN to find stuff online is the knowledge that one of Google's co-founders doesn't have his PhD yet because he dropped out of his studies to co-found Google, then that's a price I'm willing to pay ;-). Apparently his parents still aren't happy that he doesn't have it, even though he's the 24th richest man in the world.


- A guy called Michael Burry was the first man to 'predict' the housing market collapse in the US. Author Michael Lewis profiled him in his book, 'The Big Short'. His investors criticized him for years that such a stance was insane, un-American, impossible etc. Mr. Burry didn't listen to any of them, and stuck to his guns because his own research and insight told him he was right. He made millions in a short space of time when things went pear-shaped near the end of 2008. Others copied his strategy also, and made out like bandits.

See: http://www.vanityfair.com/business/features/2010/04/wall-str...

samizdisonSep 13, 2020

There's also a nicely written Forbes piece [1] from January, which focuses on the then-current Tesla situation, but which also references the Bill Ackman v Herbalife short battle.

Another, perhaps ultimate, persuader of the value to markets/investors of short-selling would be Michael Lewis's book, The Big Short [2]. An often overlooked point about short-selling is that it is frequently done, and it was certainly so in this case, in demonstration of utter conviction that the masses are being duped; rather than as some calculated bet against a single company.

[1] https://www.forbes.com/sites/amiyatoshpurnanandam/2020/01/13...

[2] https://en.wikipedia.org/wiki/The_Big_Short

[slight edit for grammar/readability]

raiyuonJuly 23, 2019

So this isn't about moving the market itself with the orders. There are numerous exchanges on which shares are bought and sold. They aren't just traded on the NYSE and NASDAQ. In fact most large investor institutions have their own Dark Pool exchanges.

What Robin Hood does is sell the orders to high frequency traders, which then front run these orders and can great a small incremental disparity per trade. It's not even .01 per trade.

However, the benefit is that every trade is done at a profit to the high frequency trader, because they are simply fulfilling an order, and not holding the stock.

And to the regular small investor, the price movement is inperceptible.

The actual work of high frequency traders was discovered by large institutions because their order volumes were much higher and because they were much more price sensitive, and they saw a much larger swing in their price from which they were closing transactions.

This was all detailed in Michael Lewis' book "Flash Boys". So if you liked "The Big Short", this one is a must read as well. So in this case they are giving from the poor to the rich, but it's really a small imperceptible amount and because of the vagueness of what's happening most retail investors are completely unaware nor that much interested in what's happening here.

You are getting a zero commission trade, which may cost you $7 somewhere else, do you really care if someone tacks on a $0.50 cent charge? You are still up $6.50.

shostackonMay 9, 2016

Saw The Big Short movie--does the book go into much more realistic (ie. non-Hollywood) technical detail?

Will check out Margin Call.

What about outside of huge industry shifts like The Big Short portrayed? I'm most interested in how this plays out in the day-to-day when there isn't a huge industry-wide scandal at play.

cconceptsonJan 25, 2016

After reading The Big Short and discussing its contents with people who know a lot more about the financial industry than I do, I was surprised to find how much the book stood up under their scrutiny. So many popular books seem to lead me down a deceptive rabbit-hole of semi truths and poetic license given for the sake of sensationalism whereas Michael Lewis just seems to have a knack for telling the facts as a compelling story.

Also, this quote from the article struck a chord with a lot of the internal dialogue I have about doing what I know is important as opposed to doing what is profitable:

>> "They had been so transformed by the rates of pay and the needs it had created in them, they couldn’t escape from it. “

liber8onJan 25, 2013

It's not that a special somebody wouldn't have listened. This wasn't as big an information problem as most people make it out to be. As this, and many other articles explain, bankers and underwriters knew bank fraud was widespread. The general public, who took out the loans, knew they were defrauding banks. Wall Street knew the rating agencies were full of shit. But everybody was making a killing as long as real property kept appreciating, so nobody cared. They all thought they'd be out before the pop.

Lots of people saw this coming. Peter Schiff, among other Austrians, were ringing alarm bells for years. That's part of the problem. People think, "How big a problem can it really be if you're on year number four of telling us what a problem this will be? Surely if it was as bad as you say, it would have happened already/we wouldn't be making all this money." If you read Michael Lewis' The Big Short, you'll get a nice profile of five or six guys who not only saw this coming, but actually timed it perfectly and made fortunes.

You can't solve problems like these by convincing one "important" person of anything, even if its the truth.

AaronFrielonJune 23, 2015

This is very dangerous advice indeed. You got lucky, you got out in 2007: for every person like you, there are many more who thought they had the answer too (and knew when to get out) and did so too late. This is the irrational exuberance of markets, as documented in every cycle in history.

Don't read Mises.org, or at least not only. Read John Kenneth Galbraith's work: "A Short History of Financial Euphoria", "The Great Crash". Read Michael Lewis' work: "Boomerang", "The Big Short". Read even the pop economics works that expand on how people think, versus how they act: "Nudge", "Thinking: Fast and Slow".

Read Nate Silver's "The Signal and the Noise", and you'll see that predicting the market has improved no more than earthquakes has. There is no "physics" of the market, there are no silver bullets and predictors who understand everything will happen. If those people existed and acted on their bets, they would be wealthy beyond reason.

Skip "The Black Swan", and go straight for "Antifragile". It's Taleb's opus, according to him, but it describes the error in trying to make these predictions. They're very fragile. Your 2007 "pulling out of the market" could have been brilliance or folly, and you just happened to get lucky.

But don't take my word for it, take this quote by Keynes:

"The market can remain irrational longer than you can remain solvent."

No one can predict the future, least of all the irrational herd mentality of the market. Anyone who says they can, or they have a formula, or that they know "when to pull out of the market" is a charlatan or lucky, or both.

hindsightbiasonApr 16, 2014

Michael Lewis said somewhere (I think the intro to The Big Short) that he never expected to write another Wall Street book after Liar's Poker. He thought it was the be-all, end-all warning to IB wanna-bees.

But he kept getting letters from college students to the effect of "I read your book, where is that kind of opportunity now?"

It wasn't just the money, or the power, it's just being more whatever than anybody else...

nikcubonDec 6, 2010

A toss between 'The Big Short' by Michael Lewis and 'Too Big To Fail' by Andrew Ross Sorkin.

Both books are about the financial crisis on Wall Street. They provide excellent insight into how smart people made very bad decisions that had repercussions around the entire world. The last time I remember getting such an insight into this important industry was Lewis' own 'Liars Poker'.

I think it is important for people to understand what went wrong with the most recent financial crisis, and these two books do an excellent job of informing us from an insiders perspective.

patrickkonDec 27, 2011

Second this. I'm a huge Michael Lewis fan. If you enjoyed this, I would recommend reading (in the following order):

- Liar's Poker. Lewis' account of how the bond market really got huge in the 80's. The book that put him on the map. He was a bond salesman in Solomon Brothers investment bank, a really interesting read with many larger than life characters. An insider account on how companies and financial institutions gorged themselves in debt.

- The Big Short. In a way this is like a "sequel" to Liar's Poker (weird to say for non-fiction I know), as the 20 year "story arc" from the grow of junk bonds, to the massive deleveraging due to the subprime mortgage collapse is examined. He also follows the stories of those canny enough to stack up massive bets in anticipation of the collapse.

Finance is a boring topic generally, but Lewis focuses on the characters and is a superb storyteller. He has a real knack for being able to explain these complex, earth-shattering events in a way that those of us without PhD's in quantitative finance can understand.

EdwardCoffinonJan 3, 2015

This is an excerpt from a longer article in The New Republic, Extreme Wealth Is Bad for Everyone—Especially the Wealthy [1], which is a review of the book Billionaires: Reflections on the Upper Crust by Darrell M. West (Brookings). The articles are by Michael Lewis (the author of Moneyball and The Big Short, among others)

[1] http://www.newrepublic.com/article/120092/billionaires-book-...

jakartaonJuly 30, 2010

Blogging has been a really positive experience for me. I started with 0 readers 2.5 years and write about a pretty specific niche within investing. I didn't really promote myself. Basically, the first 6 months of blogging I focused on just creating original content. I hated that most blogs were just links to articles by the MSM. It paid off and other well known aggregators started linking to my stuff.

Since then it's been a really wild and rewarding ride. I've had a chance to consult on stories for reporters at the Wall Street Journal and posts featured in the Financial Times, NYTimes, WSJ. I've even been contacted by some of my heroes (really great investors who've been written about in books like The Big Short).

Now, in a couple of weeks I'm being flown out to interview with a firm that I never dreamed of applying to. All because they read some of my posts and enjoyed them.

The key to me is just to start writing. Write all the time and strive to continuously improve on it. I think that if you produce good content, people will come. Most of my most popular posts are things I've worked really hard on. Some examples include me reading 5 years worth of message board posts to track down everything that person X said or visiting the library to dig up a physical copy of a report from the 1980s to scan and then post. If you create value, readers are going to keep coming.

mattdeboardonSep 15, 2016

Sure, tuition was cheaper. Doesn't mean it was cheap. And when future you is talking to a 20-year-old, they'll be lambasting you about how easy your life was when a 4-year degree from a public instituion only cost you $80,000.

If you're truly ignorant of the subprime mortgage crisis a few years back, you can check out The Big Short (book or movie, but I'm told the book is much better) for good insight into history and mechanics.

Point is that the economy has changed a LOT in the last 15 years, and lots and lots of people suffered. Generation X is not the Baby Boom generation. I think you sound a bit foolish/ignorant appropriating the "Baby Boomers ruined the economy!" rhetoric and applying it to the generation-and-a-half that followed them.

kasey_junkonSep 11, 2019

I worked in that industry during that time period and its just not true that no one came forward. As early as 2003 Warren Buffett straight up called them “weapons of financial destruction”. In 2005, the World Bank released a report suggesting that the derivatives the banks were holding could cause a financial crisis.

I remember the day the yield curve inverted in 2005 because I was working for a company that made risk assessment software for MBS. Our call center blew up as the reports started showing how risky balance sheets were.

It’s a nice story that Michael Lewis writes in “The Big Short” about how only a few people made money shorting the crisis but a) its largely not true and b) its more the fact that shorting isn’t nearly as easy as HN seems to think it is.

byrneseyeviewonAug 3, 2010

No, there were lots of people who don't explicitly predict crashes, who still called this one. Michael Lewis' The Big Short is a fun overview. The Greatest Trade Ever is also good; the protagonist of that one is a merger arb, not a doom-sayer. And of course, countless people sold when they found prices too high.

It seems very obvious to me that the establishment has to buy into it for a bubble to exist. Prices peak when optimism peaks, so you'll necessarily be able to point to people in authority who were too optimistic. The only alternative to that is a) for prices to undershoot rhetoric (arbitrage opportunity!) or b) for prices to never go down (result: buying is a safe bet, causing a bubble, leading to a crash).

What I am suggesting is simply that there is no bubble in education nor can there be. Whatever the number of people that are educated so the better it is.

This is what we call a "Bubble mentality". No P/E too high; it's the Internet! No collateral too poor; it's the ownership society! You clearly don't believe that; you would not be happy if, e.g., we were starving because every farmer decided to finish his Masters in English lit. There is a right amount of education, and it is not an arbitrarily large amount. What I'm pointing out is that by every measurable quantity, we're paying more and more for something of less and less value.

Education you see is very different to an eighteen year old than to someone who has gone through life so well perhaps and has the freedom to provide us his wisdom through the internet. That eighteen year old perhaps your have forgotten does not actually quite know yet who he is or the nature of reality. Higher education provides him a good grasp of that.

Not sure what you're trying to say. I'm 23.

Education is beneficial. That doesn't mean it's worth trading anything of value for any extra amount of it. It is precisely this kind of thinking that leads to other bubbles.

klenwellonJan 10, 2016

On this topic, I always like to point to this illustration from The New York Times:


Notice the date: 2005. That was around the time I started asking around, "How can I short the housing market?"

I felt relieved reading The Big Short because it revealed that there wasn't any way to do so at the time, especially for a little schmuck like me. And even the guy who eventually figured out how to do it, Michael Burry, ended up fantastically wealthy and, according to Michael Lewis, deeply embittered.

On this article, I agree that trying to treat the Housing Bubble and Financial Crisis as independent events seems disingenuous. (Are there really serious people trying to do this?)

Nevertheless, I question this claim:

We are supposed to feel good about this because it saved us from a Second Great Depression. But there was nothing about the collapse of these banks which would have condemned us to a decade of double-digit unemployment.

I abhor Wall St. and the industrial-finance complex it has created almost as much as any Teapartier or Wall-Street-Occupier. But I don't understand the scenario where those firms collapse and civilization as I know isn't put in, if not serious peril, then unnecessary peril.

sgorayaonApr 28, 2010

I would highly recommend the book, The big short by Michael Lewis. It really exposes how subprime-backed mortgage securities were developed and the credit default swaps that insured them. The story of Michael Burry, silicon valley founder of Scion Capital, who shorted the subprime market was very interesting.

patrickkonAug 8, 2011

Whatever about inventing a better algorithm, it's clear that the ratings agencies didn't do any kind of due diligence before slapping AAA ratings on junk mortgage securities...they were afraid of losing business from the investment banks! They should have been the ones telling the banks what was what.

Those in the know would describe the ratings agencies as "brain-dead", the lowest on the totem pole on Wall Street...traders who made money would game the credit ratings scores so S&P and Moods would rate the junk they were peddling AAA. A modern form of alchemy - turning junk into investment gold.

For a nice, easy-to-read account of those who made a fortune from the mortgage market collapse that tells you how exactly the ratings agencies were played for fools: The Big Short, by Michael Lewis (of Liar's Poker fame)

stevewepayonAug 25, 2015

This is a quote from Michael Lewis' The Big Short, I'll never forget it:

Obsessing over Household [Finance Corporation], he attended a lunch organized by a big Wall Street firm. The guest speaker was Herb Sandler, the CEO of a giant savings and loan called Golden West Financial Corporation. “Someone asked him if he believed in the free checking model,” recalls Eisman. “And he said, ‘Turn off your tape recorders.’ Everyone turned off their tape recorders. And he explained that they avoided free checking because it was really a tax on poor people — in the form of fines for overdrawing their checking accounts. And that banks that used it were really just banking on being able to rip off poor people even more than they could if they charged them for their checks.”

Eisman asked, “Are any regulators interested in this?”

“No,” said Sandler.

“That’s when I decided the system was really, ‘Fuck the poor.’”

kennethonFeb 27, 2020

As someone living in Hong Kong, it kind of blows my mind how little attention Americans have given this situation. All but a few Americans have their head in the sand on this, and the markets have not at all priced in the all but certain long term impact of this.

I've personally broken my long-time rule of no trading public markets and opened a Robinhood account to hedge against this. So far this week I'm up 5x on those hedges. Markets are starting to realize, but I don't think we're even close to having fully priced in the impact of this.

Everybody remembers the 2008 recession. A subset of people during that recession made a killing. The Big Short was a great book (and movie) about this. This is probably the first new opportunity to be a "big shorter."

steve8918onOct 26, 2011

In the book "The Big Short", Michael Lewis mentions how one CEO admitted to an audience that free checking accounts were simply a way of screwing over poor people for all these additional fees, like overdraft, etc. It's really because people with less money need to spend more time managing their money because they are closer to drawing down the account, and the banks are betting on this. It's basically predatory banking, and I guess based on the numbers, extremely profitable.

It's the exact type of behavior I would expect from a bank. But let's not swallow everything that the article said. It's not like banks of yesteryear were so magnanimous. Back in the Great Depression, it was the banks that screwed over so many farmers and home-owners that many states, including California, made mortgages non-recourse meaning that banks could only take back the house in the case of foreclosure, something that many people took advantage of during the latest housing boom.

ank_the_elderonJan 18, 2016

Not directly related to the article, but in case someone is interested, Salomon Brothers went through some brutal scandals before imploding. See https://en.wikipedia.org/wiki/Salomon_Brothers#1990s_treasur...

Some of this is documented in the book "Liar's Poker" by Michael Lewis, who went on to write "Moneyball" and "The Big Short."

mywittynameonJan 28, 2021

Wait, I thought Goldman came out ahead from the crisis.

They had the, "we didn't avoid the mortgage mess, we just made more money on shorts than we lost" and "we are very well positioned" emails that became evidence in the Senate investigation into the GFC. The ones are the namesake for the book/movie The Big Short.

rocken7onJune 4, 2012

I had a great time reading the following group of related books.

How To Beat the Dealer by Ed Thorp.

You might think this is lame and outdated, but it will clue you into how bond traders think. In fact, Bill Gross of pimco was so inspired by the book that he went to Vegas and became a gambler (before pimco but OTW). That book also is the holy grail for card counting. It will up your blackjack at least, and prepare you for the next book.

Liars Poker by M.Lewis

Lewis actually mentions Thorp, b/c Thorp went on to become a wildly successful trader throughout the 90s: he even called out B.Madoff as a crook in the early 90s (dude knew his finance games and clearly the SEC did not), and Thorp developed a lot of arbitrage trade strategies that are common today. All of this and more as M.Lewis clues you into wallstreet cronies and big bond trading, insider talk about salmon smith barney, and just how sketchy that industry really is ...

Ok now you know a few things about wallstreet and trading, now go to:

The Big Short by M.Lewis

Lewis again with an awesome breakdown of how/what of the credit bubble and various characters betting against that massive momentum as it builds. Really this book is about personal fortitude: having a vision as a trader and sticking to it, even when the rest of the world is betting against you, even when your vision implies the rest of the world is d0000med in an almost end-of-money kind of way :)

Now move into an interesting layer of finance, which all of us Hackers will enjoy ...

The Quants by S. Patterson

This has the making of a great movie if only hacking were interesting on film (too bad its not really like Hugh Jackman in Swordfish!). Buffet: "beware of geeks bearing formulas" ... exactly and this book is all about the buildup of these trading systems and the people behind them, the little bill gates (relative to bank-account) characters that run those giant quant funds ... And just questions on layering probability and the feasibility of trading into this complexity.

Read on ...

HoneyDaPoohonMar 31, 2014

FYI, all Michael Lewis books are must-read for those interested in Finance and especially useful to understand some important Wall Street psychological features and possibly explain why some bubbles have gone bust in the past decade. These books are also technically pretty sound. In order of personal preference: The Big Short, Liar's Poker and Boomerang. Lowenstein on LTCM is also good in the same verge with a similar technical level as Flash Boy seems to be but for 1990s Arbitrage Trading.

bobbiechenonJune 27, 2020

Similarly, the book The Big Short (Michael Lewis) notes that hedge fund manager Michael Burry read hundreds of prospectuses for mortgage bonds in the years leading up to 2008 and was "certain even then [in 2005] (and dead certain later) that he was the only human being on earth who read them, apart from the lawyers who drafted them." He ended up shorting these and profiting hundreds of millions of dollars.

nrao123onJan 25, 2016

I am a big fan of Lewis & I have read multiple accounts / variations of the sub-prime crisis. The Big Short tells only half the story but nevertheless a very important one especially by covering Michael Burry as patient zero for identifying the problem. However, the book does a big dis-service by not writing more extensively about John Paulson. He made the most amount ($15BN) shorting sub-prime mortgages & when you have a book called the Big Short but don't cover the biggest short, it seems incomplete. Gregory Zuckerman's "Greatest Trade Ever" should be read along with "Big Short" to get a more complete view of the crisis.

tptacekonDec 6, 2010

I liked both of these books --- "The Big Short" maybe a little more than "Too Big To Fail", because Lewis is just crazy!good about pacing and character development --- but had serious concerns about how accurate/unbiased they were. Particularly Sorkin's book, which I've heard negative things about.

I'm about 2/3 of the way through _All The Devils Are Here_ by Joe Nocera and feel like it's doing a brilliant job of addressing the shortcomings for Sorkin's book, which I felt maybe sacrificed some accuracy for the sake of building an enjoyable narrative. _Devils_ also has an interesting structure, different than the others; it's a catalog of sketches of the different people/forces/companies that went into the mess, so you get a chapter on the guy who started Ameriquest, and a chapter on Fannie's struggles against the Bush administration, and a chapter on how Goldman's IPO and Merrill's cultural mismatch to trading culture caused them to screw up the market. It's great reading.

PaddyCorryonMay 21, 2010

Liar's Poker was great, and I'm enjoying reading 'The Big Short' at the moment.

Although I'm not sure that the guys making money from Credit Default Swap agreements on CDOs are on morally safe ground, I disagree with Yves that Steve Eisman, Mike Burry et al were "the moving force behind otherwise inexplicable, superheated demand for the very worst sort of mortgages." Ultimately, irresponsible mortgage lending was the root cause of the crisis: it was a superheated supply scenario.

It was only when the rate of defaults on home loans dramatically increased that the CDOs dropped in value, and the Credit Default Swaps could be redeemed.

For example, in addition to the high number of defaults that occurred after an initial two year, fixed-interest period, (when the interest rate jumped in some cases from 6% to 12%) some of the loans even defaulted on their very first payment. Lewis makes the point in the book that the question is not "who defaults on their first loan repayment?", but rather "who lends to someone who can't even make a single repayment?"

As for Magnetar being undocumented, Chicago Public Radio did a great podcast about it a couple weeks ago, which was where I got the recommendation for 'The Big Short'. It's well worth a listen:

fnameonApr 14, 2011

If anyone is interested in this, I highly recommend reading "The Big Short: Inside the Doomsday Machine"[1] by Michael Lewis. It talks about Greg Lippmann (mentioned in the article) and how he and others cashed out before the impending crash in 2008.

[1] http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0...

tristan_louisonJan 27, 2012

One the thing that is missing in the discussion of whether banks are evil or not is a better dichotomy: what he describes in this entry is primarily about transaction banking (and more particularly cash management), which one can argue is not evil as it allows for the free flow of capital through the financial system.

On the other hand, when banks start trading against their own book (ie. creating financial transactions that are used to leverage the bank's own money), then things can go wrong.

Ultimately, what failed in this crisis is that
1. The risk around mortgage distribution got to be so removed from the actual mortgages that it increased carelessness.
2. Confidence in the system was shaken, leading to a "run on the bank" for broker-dealer banks, creating a substantial crisis of confidence in the banking system as a whole.

Anyone interested in how the crisis came about should read "The Big Short", by Michael Lewis, and "Too Big to Fail" by Andrew Ross Sorkin. Those two books provide a lot of perspective on what happened in the months leading up to and the days during the crisis.

cpprototypesonApr 12, 2016

99% of the blame should go to the banks and credit agency. The book The Big Short explains this well. Yes, the public participated in bad loans. But there was a natural limit to this, there's only so many people and homes. If it stopped there, the crisis would have been much more limited.

But what did banks do once they hit the limit? Invent CDO and then synthetic CDO to create "artificial" supply for the bad loans. These derivatives are what really made the crisis very bad.

leverageonSep 28, 2011

For any interested in Burry's story, pick up Michael Lewis's The Big Short. Great (if somewhat miscontrued) tale of the housing crisis, ripe with corrupt financiers and the "smartest men in the room".

Burry's lightbulb concerning the crumbling housing market was a product of a staggering amount of research on mortgages, contra to the research (mostly by rating agencies) already published. No average Joe is going to foresee a bubble about to explode.

I was thinking something more conventional. For example, contrary to what many may believe, history actually IS a good predictor of future. As an investor, I am not only limited to investing in individual companies -- I can also bet on entire markets/sectors (for example, Burry bet against the housing market). Also recall that the markets are cyclical (that is, recessions follow booms and vice versa).

With that in mind, I could, for instance, have a sector-based model hinging upon the business cycle. Certain sectors, historically, have tended to outperform during different segments of the cycle, and with well-timed bets I can always make money just by recognizing what state of the business cycle we are in.

For example, currently we are in a (if somewhat shaky) "recovery" phase. During recovery, financials and tech companies tend to outperform. I might use ETFs (IXG and IXN) to go long on these markets. I might even enhance my bet and short Consumer Staples, which are expected to underperform during recovery.

AnimatsonDec 23, 2015

I just saw the movie "The Big Short", about the guys who saw that the mortgage collapse was coming and figured out how to short it. They had to talk a bank into creating a new kind of derivative so they could short mortgages. There's an opportunity here. Someone needs to come up with a way to short startups. There are a lot of "unicorns" worth shorting.

prependonJan 28, 2021

Most buyers didn’t get mortgages from their retail bank, they got them through mortgage brokers.

Maybe there were lots of hapless old people who were misled by some bank they mistakenly trusted for years.

I don’t think so, the many examples I personally knew from that period were getting loans from specialized banks that set up mortgage shops, like Washington Mutual.

The book (and movie) The Big Short digs into this how regular people were overextending.

To clarify, the banks were bad actors by offering and participating. But reasonable people were avoiding the situation until the whole system tipped over. Someone borrowing at 40% debt to income or higher should never have done that, even if they trusted their local banker who was saying it was fine. Finance requires personal responsibility and people need education to help make these decisions (and they shouldn’t get this help from someone with a vested adversarial financial interest).

ataturkonDec 17, 2017

The financial crisis has many facets. I was deeply interested in the subject at the and in the ensuing years afterwards. I highly recommend Michael Lewis' books on the subject, especially "The Big Short." The film was decent, but didn't go into the same amount of detail as the book.

There was much fraud, especially in two places: At the ratings agencies who turned garbage bonds into A+++ good to go, never-gonna-lose investments. They should have all gone to jail for that.

The second place was at the banks doing no-doc mortgages because the bankers had huge demand for the crap bonds and the result was that lenders were both outright fabricating loans or lending money to illegal immigrants who couldn't speak any English and didn't even have jobs. Tons of un-prosecuted fraud all over the place there. A few people went to jail, not many. Look at Wachovia Bank and Countrywide as two examples.

The other place there was not fraud but enormous unethical behavior was in the sale of CDOs--the "insurance" policies that backed up all the garbage bonds with huge leverage. CDOs took down Bear Stearns and in all honesty, should have taken down all the big players including Goldman Sachs, but the Fed stepped in and bailed them out to the tune of trillions of dollars.

The American public paid the price. If you recall the $4-5+/gal gasoline from 2009 and on? That was all part of the bailout scheme. And your 401K took a huge hit, some people still haven't recovered from that time period.

Regular people paid literally out of their own pockets so that a bunch of shitbirds could stay billionaires. We allowed corrupt politicians to bail out their pals and we didn't do anything. We the people should have revolted and shot every one of those stinking crooks. Instead, we the people are treated for what we are--a bunch of doormats.

remarkEononJan 25, 2016

My father worked at one of the Hedge Funds referenced in The Big Short for about 15 years, and was there during the collapse. I've talked to him ad nauseam about these books and the only one he didn't like was Flash Boys, but calls The Big Short "sort of scary" in how accurate it was.

In reference to Flash Boys he said that the technical aspects of how HFT works were so poorly illustrated that he couldn't really take the book serious and felt that it would limit his ability to further consider future Michael Lewis books. Wish I understood more of that, but his point was, I think, that it's not as nefarious as it's often made out to be.

arethuzaonJune 24, 2012

But they do have huge pension liabilities which look like they will be pretty difficult to serve:


Also, aren't a lot of individual US cities in trouble?


Michael Lewis (author of The Big Short) in his latest book "Boomerang" takes a tour of the places involved in the ongoing financial crisis: Iceland, Greece, Ireland, Germany (as a "victim") and, last but not least, California and the city of Vallejo.

tptacekonJan 25, 2016

I liked The Big Short a lot, but Flash Boys was so bad that I found myself wondering how trustworthy The Big Short was.

You can see part of what's problematic about the latter book just from this Guardian summary of it. The summary would have us believe that HFT is a trick employed by giant Wall Street banks to screw over smaller players. But Katsuyama, the protagonist of Lewis' book, was a big-bank trader, paid exorbitant amounts of money to tax large block orders by pension and hedge funds, and outraged by his inability to compete with algorithms that were bidding that tax down.

I'm uncomfortable calling any giant financial firm "trustworthy", but if you were going to pick one firm that has come close to earning that label, it's Vanguard. Vanguard's chief investment officer has repeatedly and unequivocally stated that HFT firms have lowered Vanguard's costs and improve outcomes for its investors.

Here's Matt Levine writing entertainingly about how the "Flash Boys" in Lewis' book ought to have been, based on his previous books, the protagonists, and Katsuyama the villain:


patrickkonJune 11, 2010

Exactly. I believe that HFTs are not just unfair but do not allow the market to fulfill it's basic premise as effectively.

The market is supposed to be fair and a level playing field for all those who can afford to buy stock, but the HFTs tilt the odds in favor of the select few.

When the odds are tilted in favour of a select few, it becomes a problem for all. The bond markets are far less regulated, thereby allowing Wall Street to profit massively from confusion and a lack of regulation - Wall Street makes most of it's profits on the bond market. The result is that insane toxic assets get sold, all because the industry can supposedly self-regulate. Result: global catastrophe. (See "The Big Short" by Michael Lewis for a great read on how Wall Street caused the financial crash of 2008).

rando444onFeb 27, 2018

I read a book prior to the crash that I consider an accurate prediction of what was coming.

"The coming crash in the housing market" by John Talbott

The author used a mountain of evidence and trends to back up the books premise, and going through it all it was hard to deny. Timing such an event though is always difficult, as exemplified by other books like 'The big short'.

gillianlishonFeb 23, 2017

If you want to understand the student debt bubble, you need to understand financial bubbles. Take any commodity that "everyone knows is valuable", figure out how to turn it into a financial instrument and re-sell it to a third party investor who has no relationship with either consumer or lender and knows nothing about the product, and then you can create a speculative bubble because everyone starts trading in derivatives of the commodity without knowing anything about it, the level of risk involved, or even who ows them money. This happened with Tulips, it happened with Mortgages, and now its happening with Education. There are a lot of good books on bubbles if you dig for them. All the Devils are Here is a good one. The Big Short is good too - once you realize some of those people who got rich betting against housing bubble, are now betting against the education bubble, and have been for 8 years but nobody listened to them (again).

mryallonFeb 17, 2011

Articles like this can very rarely call out specific examples or name specific people without he risk of being sued for defamation. Besides, this is an editorial piece not a work of investigative journalism.

For a bit more background, I found Michael Lewis's book, The Big Short, enlightening about some of the dodgy actors in the subprime mortgage disaster.

sigwinch28onJuly 16, 2020

The Big Short: Inside the Doomsday Machine - Michael Lewis

An entertaining read about just how fragile and naive western financial systems can be.

Stories of the Law and How It's Broken - The Secret Barrister

Gives a (mostly anecdotal) insight about how broken the English legal system is. I had to pause several times while reading because it conflicted so much with my world view.

jbarhamonNov 27, 2011

I've just finished reading "Boomerang: Travels in the New Third World" by Michael Lewis, a follow-up to "The Big Short". It's an enlightening and sobering read as it shows how destructive the temptation of cheap money (i.e., debt) was to Iceland, Greece, Ireland, Germany and the U.S. from 2001 through 2008. More importantly, he shows how radically differently the three member countries of the Euro zone he profiles (Ireland, Greece, Germany) mis-handled that temptation, and it does not bode well for the survival of the Euro, or even the EU. My own personal belief is that the Euro zone will disintegrate within months, if not weeks, and the fallout will not be pretty. (BTW, Lewis profiles Kyle Bass, a hedge fund manager from Texas throughout Boomerang. Check out what he has to say on YouTube. It's very scary stuff.)

Financially there are really no safe havens. The U.S. is only able to run up trillion dollar annual deficits because its currency is the default reserve currency for the world and for now investors put up with sub 2% returns over 10 years (!) because they see no real alternatives.

Canada and Australia have ridden commodity booms to blow up their property markets to massive bubbles that will crash hard.

And the financial end game will play out soon for Japan as it has unsustainable debt levels. To date it has managed to fund those deficits internally, but it has almost saturated its domestic debt markets, and as soon as it has to start issuing debt on the international markets, it's game over.

Although the financial causes for this monetary crisis appear to be complex, IMO at heart the reason is very simple: You cannot expect to live beyond your means indefinitely and get away with it.

rebootthesystemonSep 2, 2015

I think the economists you are talking about become experts at some manageable and very small sub-segment of economic activity. I am speaking more about those who are quick to analyze such things as the global stock markets and, years later, they are still "CNBC contributors" and not independently wealthy.

I always go back to when I read "The Big Short" and realized that ALL of these economists missed a herd of elephants in the room. If I remember correctly, the two or three people who called it (and were yelling and screaming about the impending doom) and ultimately shorted the market and made truck-loads of money were not economists but rather intense observers and practitioners. I think one of them had Aspergers (It's been a few years since I read the book).

patio11onJan 18, 2017

Shorting BTC on a BTC exchange involves more counterparty risk than I want to take on. (Folks have asked this before; see here: https://news.ycombinator.com/item?id=6894594 )

My current best option is hoping that a) the Winklevoss ETF gets approved and b) an option chain develops for it, in which case I will buy puts consistent with my belief that the long-term FMV for the ETF's assets is zero. (Exchange-traded options in the US are guaranteed by the Options Clearinghouse Corporation, which is why -- absent global calamity -- you can be very certain that e.g. puts on Google are worth money even if Google goes out of business or the people who sold you the puts are insolvent when their broker hands them an exercise notice.)

There is theoretically a DRW subsidiary which does over-the-counter options but they have a $25k minimum trade size. It would also require a lot of due diligence for me with regards to counterparty risk; it's not clear whether their options would reliably compel performance or that they would be in a position to backstop the failure of their clients in the event of total systemic collapse of the Bitcoin markets. It's also not clear to what extent that DRW would backstop them if they were insufficiently capitalized. (For an illustration of why this matters, read The Big Short, for the amount of heartburn that various folks betting against the housing market went through when it became obvious that they were entirely right on the merits but that some of their counterparties were almost certainly going to go bankrupt due to how wrong they had been about the housing market.)

(I've spent way too much time thinking about this, since "Bitcoin will eventually fail catastrophically" is the biggest answer to "A belief about the future state of the world which I hold strongly after reflection and which doesn't match the beliefs of some of the smartest people I know", which sets off my "Either I'm wrong or I should be betting against them" antennae.)

rdm70onSep 13, 2010

There are a number of people who foresaw the problems brewing in the CDO market. The book "The Big Short" by Michael Lewis provides a detailed portrait of a number of them. As usual, even when someone knows that the generally accepted wisdom is bunk, no one listens.

Another comment that comes to mind is from Warren Buffett, who famously called derivatives "weapons of financial mass destruction" years before the recent blow up.

andrew1onApr 28, 2010

Akadien has recommended "The Big Short" already, and I'd second that. It goes into a lot of detail about this situation. The problem with trying to price these CDOs was that an individual CDO might be made up of 100 pieces of other CDOs which each might be made up of parts of another 100 CDOs, which each might be made up of parts of a bond containing thousands of individual loans. So you could go and look at the individual loans but the effort to try and price the whole thing accurately would have been phenomenal.

The most honest thing the agencies could have done was refuse to rate them. But that probably wouldn't have gone down very well with their clients.

09bjbonDec 13, 2018

Not an expert in this domain but I'll cover the basics: ecurities are a euphemism for stocks and similar. Banks have been loaning out the money you deposit since the beginning of time; it's how they make money. They don't keep all the cash that people have deposited on hand, which is why a "run on the bank" was problematic in the past. They basically keep enough cash around ("reserves") so that the average withdrawals don't get them into trouble. And yes, you are certainly not choosing the investments that the bank makes with your money. And they're not "your" investments: the bank pays you a small fee (3% in this case) and then takes risks with your money to make a higher return and keep the difference.

I'd recommend reading up on the Federal Reserve (The Creature from Jekyll Island), the modern financial system (any of Michael Lewis's books, especially Boomerang and The Big Short), and maybe the first global banking families (The Medicis: Power, Money, and Ambition in the Italian Renaissance). We're talking about the power structure of the world here and it's good to be informed on the main points.

jnsaff2onApr 3, 2017

After the disaster of Flash Boys I really don't trust what he writes anymore. I read Boomerang and The Big Short and they were fascinating but, after Flash Boys was debunked to hell I have a suspicion that he is one of the writers that is writing for big bucks and not truth. Someone who can captivate an audience but is actually harming understanding of the world instead of advancing it.

touchofevilonAug 8, 2015

I spent a few minutes posting a comment on this article only to find in the morning that the comments had been disabled. Not a great way to encourage discussion! Anyways, here's my comment that was deleted:

I really enjoyed this article, however, I think you have glossed over what really led to the 2008 banking crisis. The banks bundled subprime home loans into securities that were then sold off to investors. As I understand it, what actually put the banks at risk was that banks were selling "Credit Default Swaps" (CDSes) on those bundled mortgage assets. These CDSes were essentially unregulated insurance policies that banks sold to insure the bundled mortgages against losses. Since the CDSes were not technically insurance policies (even though they really were) the banks did not have to keep money put away to cover those insurance policy payouts if the mortgage-backed assets went bad. This resulted in the banks selling many more CDSes than they could actually cover. I'm not an economist or banker, but as I understand it, the unregulated CDS market is what really put the banks at risk in 2008. I highly recommend the book The Big Short by Michael Lewis for anyone interested in the 2008 crash.

bambaxonSep 14, 2010

Yes. From the introduction to The Big Short (page XV):

"I hoped that some bright kid at Ohio State University who really wanted to be an oceanographer would read my book [Liar's Poker], spurn the offer from Golman Sachs, and set out to sea.

Some how that message was mainly lost. Six months after Liar's Poker was published, I was kee-deep in letters from students at Ohio State University who wanted to know if I had any other secrets to share about Wall Street. They'd read my book as a how-to manual."

TangurenaonAug 6, 2010

If it is possible to predict a financial crisis, then it is possible to make a profit off of that crisis. The immediately obvious conclusion is then that it is worth provoking financial crises when it is possible to predict them.

In Michael Lewis' book The Big Short, this is exactly what several folks did when they figured out how to use credit default swaps to short CDO bonds.



overcastonAug 16, 2016

Same position as I was in 2006. My decision was either waste money renting a one bedroom, or just buy a house for a mortgage of about the same. Twenty houses, and two week later, I moved into a house, with zero money down. Granted 20% was in a HELOC, and the other was a 30 year. Five year later, refinanced to 15 year loan, and now I'm racking up $1000 equity every two months. 20% down is great if you can, but early on, I don't see how that's possible unless you're SERIOUSLY making bank.

Also side note, just got done watching The Big Short, as well as reading the book. So depressing what happened to all these people.

pitt1980onJan 25, 2013

while back I read the Big Short

what I came away with was how durable secrets are

here was this billion dollar opportunity that a bunch of people became insanely rich exploiting

and it wasn't a secret at all

a bunch of people where doing everything they could to tell people how overpriced the housing market was, and the opportunity still persisted

it seems like there is so much noise in the world, that signal becomes indistuinghable

klenwellonFeb 22, 2011

In 2005, after seeing this map in the NY Times, I tried to figure out a way and asked everyone I knew:


My excuse was: it wasn't clear how to, there's always a timing issue (it's not necessarily enough to know it's inevitable, you gotta know when), and it's hard when you don't have a lot of other people's money to play with.

The answer to how it was done is in Michael Lewis's book, The Big Short. After learning how that guy did it, I don't feel so bad for not figuring it out.

eobonNov 9, 2011

The problem was that there was an entire feedback cycle of fraud going on:

* Lenders were making outrageous loans (no money down, no payments -- just accrue more debt!) and coaxing people to sign up for them. These lenders collected transaction fees, then sold these loans to investment banks.

* Investment banks carved up these B-rated loans into fractional amounts, then repackaged them into bonds. The ratings agencies -- due to either fraud or stupidity -- would rate these bonds AAA, because their contents, despite being low rated, were diversified. The thinking was that they wouldn't all fail at once. Ratings agencies then collect a big fee for rating the bond well.

* Still more investment banks would take these bonds carve them up, and create CDOs, just another layer of abstraction using the same basic template. Whatever bad ratings couldn't be laundered away in the previous step were laundered away in this step.

* Banks would then trade these instruments.

It appears to have been a "don't ask, don't tell" atmosphere between everyone in on the game.

"The Big Short" is a great read on the whole situation.

fnameonApr 28, 2010

If anyone listened to the hearings, they quoted a part from the book, "The Big Short: Inside the Doomsday Machine" which discusses some of what the author thinks were the inner workings. I've been reading through it now and cannot recommend it enough.


NatWonDec 25, 2012

The Big Short: Inside the Doomsday Machine - Michael Lewis. A highly-entertaining insider's view of the mortgage/financial debacle.

In the Garden of Beasts: Love, Terror, and an American Family in Hitler's Berlin - Erik Larson
Highly entertaining non-fiction that reads like fiction. Accounts of the build-up to hitler's Germany like you're actually there.

firebonesonJuly 30, 2012

Interesting. The real life example of the non-journalist who took an entry level job in a field he later covered would be Michael Lewis, author of "Liar's Poker" and "The Big Short". Even though both books condemn the excesses and stupidity of his former industry, and even though "Liar's Poker" ended up having the unintended consequence of drawing new hires because of the excesses, I still wouldn't consider him a shill for the investment banks.

jedconApr 29, 2010

Reading The Big Short by Michael Lewis was illuminating.

Essentially, the ratings agencies have done pretty well over the years on corporate and government bonds. There is a lot of quality historical data, and a relatively small number of institutions involved.

Their models broke down when it came to mortgages and how thousands (millions?) of loans hang together. But that doesn't mean their models of corporate/government debt don't still hold up.

puranjayonDec 29, 2015

"If The Big Short, Adam McKay’s adaptation of Michael Lewis’s book about the 2008 financial crisis and the subject of last month’s Vulture cover story, got you all worked up over the holidays, you’re probably wondering what Michael Burry, the economic soothsayer portrayed by Christian Bale who’s always just a few steps ahead of everyone else, is up to these days"

Wow, use some periods maybe?

zhte415onJune 4, 2015

A crash in bond prices means an increase in yields.

The article doesn't mention, and acknowledges this, whether treasuries or corporate bonds are worrying people. If the former it could be back to 'normal interest rates' (or at least ones that reflect and account for economic growth), if the latter then another recession, but I think this call is 3 years too early.

The article talks about CDOs and CDSs - the book 'The Big Short' by Michael Lewis is a good read about CDOs and CDSs in the run-up to the 2007/2008 crash.

SideburnsOfDoomonMay 3, 2018

> It's because film is a visual medium,

It happened with books too: See "Liar’s Poker", by Michael Lewis. He says that he wrote it "so that fewer idealistic college kids would dream of working on Wall Street. ... Somehow that message failed to come across ... They'd read my book as a how-to manual."


Michael Lewis also wrote "Moneyball" and "The Big Short" which were made into films.

prodigal_erikonSep 6, 2011

Sounds like it'd be worth a read. I found an example I remembered from The Big Short, finance rather than tech: "Their clothes told you a lot, too. The guys who ran money dressed as if they were going to a Yankees game. Their financial performance was supposed to be all that mattered about them, and so it caused suspicion if they dressed too well. If you saw a buy-side guy in a suit, it usually meant he was in trouble, or schedule to meet with someone who had given him money, or both. Beyond that, it was hard to tell much about a buy-side person from what he was wearing. The sell side, on the other hand, might as well have been wearing their business cards: The guy in the blazer and khakis was a broker at a second-tier firm; the guy in the three-thousand-dollar suit and the hair just so was an investment banker at J.P. Morgan or someplace like that."
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