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.

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

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.

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

https://priceonomics.com/the-trade-of-the-century-when-georg...

Did you see/read "The Big Short?"

https://en.m.wikipedia.org/wiki/The_Big_Short_(film)

http://www.amazon.com/dp/0393072231

http://www.motherjones.com/mojo/2010/05/steve-eisman-big-sho...

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).

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.

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?

  I genuinely believed it until I read "The Short"

[1]
http://www.goodreads.com/book/show/26889576-the-big-short

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

http://www.economist.com/node/15955490

http://nymag.com/daily/intelligencer/2015/12/big-short-geniu...

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.

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

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

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.

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".

Anathem - Neal Stephenson

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

The Big Short - Michael Lewis

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.

Edit:
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.

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.)

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.

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.

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...

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.

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.

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.

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).

Examples:

- 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.

http://en.wikipedia.org/wiki/Sergey_Brin

- 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...

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]

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.

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.

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. “

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.

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.

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...

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.

- 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.

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

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.

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.

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.

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.

http://graphics8.nytimes.com/images/2005/06/15/business/arm3...

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.

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)

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.’”

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."

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.

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

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.

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 ...

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.

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:
http://www.propublica.org/ion/podcast/item/bernstein-and-eis...

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

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.

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.

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.

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).

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.

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.

http://www.reuters.com/article/2011/10/24/usa-states-debt-id...

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

http://news.sky.com/home/world-news/article/16135233

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.

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:

http://www.bloombergview.com/articles/2014-03-31/michael-lew...

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).

"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'.

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.

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.

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.

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).

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.)

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.

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.

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.

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.

"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."

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.

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

http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOme...

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

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

http://graphics8.nytimes.com/images/2005/06/15/business/arm3...

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.

* 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.

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

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.
http://www.amazon.com/Garden-Beasts-Terror-American-Hitlers/...

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.

Wow, use some periods maybe?

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.

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."

http://www.gatsby.ucl.ac.uk/~pel/misc/The-End-of-Wall-Street...
https://danwang.co/liars-poker-by-michael-lewis/

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