Michael Lewis, needs no introduction . His previous works have been best-sellers. When he writes a book about subprime crisis, I was expecting a dot-com esque narration of subprime mess with all the ingredients of a thriller movie ride.It turned out to be exactly what I expected.This book is essentially a collection of articles, essays by various people before panics, be it the 1987 crash | asian currency crisis | dot-com bust | the recent sub-prime bust. Reading this book is like bringing old newspaper articles, magazines from your attic to go over what people said about various crisis situations.

The book talks about four panics

Oct 20, 1987 Panic – Black Monday

The more I read about Oct 1987 crash in various books, the more I think that nobody knew why it happened. Even though 6Billion USD of the total sales of 40 Billion USD (Stocks + Futures) on the day of crash was represented with portfolio insurance selling, it could be hypothesized that portfolio insurance was the effect rather than the cause. Michael Lewis in the first part of the book presents various articles appearing in NYTimes, WSJ ,research reports to take the reader back to 1987 environment. There are articles which blame Program trading in the form of index arb or portfolio insurance for the crisis. Some feel that synthetic option creation itself was a flawed concept. If you want to manufacture an option on the market, you cannot do that by selling and buying the market as the market will not allow you to do it.

Facts are : Index arb saw that the futures were going through a free fall and stock market was trading at a huge premium. Most of the trades knew that the stock index was calculated using Friday’s closing prices but still chose to believe that they were updated. They shorted the index and waited for the futures to fall to close the other leg of the arb. Meanwhile large fund houses who could not short the stock, shorted futures instead. However when the stocks finally opened on Monday, the cash futures spread was not juicy and index arb ran amuck trying to close the other leg of the transaction thus buying futures for a brief period of time. Meanwhile stocks were dumped by everyone and thus futures continued the free fall.

After the fact analysis :

  • There should have been circuit breakers
  • Futures trading is dangerous
  • Portfolio Insurance is crap
  • Dynamic option manufacturing is a sham
  • Coordination problems between Futures and Spot market regulators
  • One thing to fear is “FEAR”
  • Margin requirement should be drastically increased in futures market
  • Uptick rule should be applied to futures market
  • Shorting restriction in futures market

As any after the fact analysis appears, they appear correct in hindsight but nobody said anything before crash. ! Is it age-old willingness to suspend one’s critical judgement when lots of money is made ?

A gem of a statement in this part of the book is :
Best animal behavioral experts don’t pretend to know why antelopes panic precisely when they do.

Can we know why humans panic? Very unlikely

Asian Currency Panic

Well, the gory details of the currency crisis is known to all. Foreigners lend large amounts of money as short term capital and South east asian countries lap them up. However the capital was short term and it was naturally difficult to fund long term projects, irrespective of whether the countries intended. The currency panic is combined with LTCM failure. One thing I feel about reading these panics is that it gives some numbers about the sheer volume of mess that was created. Here are a few numbers

  • 175 Billion of Short term debt was lapped by South east asian countries
  • Russian Treasury Bills were offering 50% interest rate
  • LTCM blew away 4 Billion in 6 weeks
  • LTCM lost $120M in one day and lost $500 M on one trade, selling put options on index
  • Partners put in $1.9B of the total $4.4 B fund Panic

A classic recount of dot com crisis. Again numbers are something which hits me , every time I read about dot com mania. Here are some numbers and quotes from the book
  • Dumbest Dot-com , All Advantage raise 175 Million USD and spent 40 Million USD in the first quarter . Their model , pay users to surf. It was valued at 700 Million USD by the venture capitalist !
  • Theglobe stock rose 600% on the first day of its IPO. Their model, replicate society on the net !
  • spent 60% of its initial funding on 90 second Superbowl Ad.
  • In 2000, 371 Internet companies were value at $1.3 Trillion , 8% of the entire US Stock market
  • NASDAQ peaked on March 10th 2000 and 10 days later, an article in Barrons, “Burning Up”, changed the world of dotcom
  • Dotcom era : Instead of stock price reflecting the fundamentals of the company, it started affecting the fundamentals of the company
  • Investors doled out $78 Billion to the employees of 100 start up companies
  • Bill Gross 1000 page article on GE Capital financing made the stock tank by 25%
  • A boom with out crooks is like a dog with out fleas. It does not happen.
  • When some one talks badly about a boon, turn back to him and ask him,”Where were you during the boom time” ?.

Subprime Panic


Any numbers reported for this panic will be incorrect as we are still living through that crisis. I remember reading a book titled ” Trillion Dollar Meltdown”. With in a few months, the same author came up with another book . “Two Trillion Dollar Meltdown”. By Feb 08, there were numbers being quoted as high as 7 Trillion Dollars as the global impact. Is this really a panic ? When I hear the word panic, I have a mental image of an event happening very quickly. Subprime mess keeps telling us that there is more to come.

In any case, the good part of the book is that you don’t have to read it sequentially. Since it has articles and independent views from various people, one can start reading from any page….So, I guess, the book can be a good subway read/ office commute read..