One line plot of the book is – “ How side bets accumulate and go on to become a BIG bet ?”
If you have read any of John Grisham books , you will be aware that he has the gift to turn any boring law suit in to a thriller ride for you.
Michael Lewis weaves one such story of the financial markets, where the protagonists , unlike fiction books, are very much real life characters, who go on make tons of money in the subprime crisis. The nice thing about this book is that it talks about people who DID something. I mean, you tend to read about people who saw it coming, people who predicted, etc. Well , may be.So what ? But there were very few people who had the guts to actually believe in what they predicted and took bets. Were they just lucky ? May be, But if you look at the massive bets these few people took and the way they took it calculatedly, it seems very likely they saw that “Emperor had no clothes” and actually did something about it , take positions so that , by the time everyone knew and aired out the opinion that emperor had no clothes, they would benefit immensely.
The first story in the book is about Steven Eisman
The first story in the book is about Steven Eisman, an analyst at Oppenheimer & Co who saw that subprime mortgage market had been immensely polluted by low credit quality ARM loans. He floated a fund and managed to somehow get $50M to start off. He brought on Vincent Daniel who sifted through tons of dodgy loans and scouted for companies who were in this business. Basically all they wanted was to short such companies. Somehow in 2005 he realizes that instead of playing with stocks and shorting stocks, the action was in the bond markets, the toxic MBS that were being issued was the place to be and probably short them. But there was no instrument to short such specific bonds that easily. All you could do was short companies . There was no means to short housing basically. Here is where the story of Michael Burry comes and Greg Lippmann comes in.
Michael Burry, a doctor by profession was fascinated by markets. He had the ability to do intense company specific research and post his positions on a website. Soon, there were a lot of people following his positions and recommendations. Burry starts a fund and profits by taking stock specific views and positions. However Burry soon realized the insanity of the housing market and desperately wants a way to short housing market and there was no way he could do it as there was no instrument. One day while reading a history book on bond markets, he gets the idea of using credit default swap. He goes to Deustche bank and buys a CDS for $60M and slowly increases the amount by buying in lots of $10M. The day he gets a call from Goldman that he could buy $100M is he realized that the game has become different. Goldman would never take a naked position.. So what was going on ? Well, the events that were going on in the market was nothing short of madness. Investment banks realizing that CDS supply is limited, create CDOs on the crappy bottom most portion of Mortgage Pools , get it stamped as AAA instruments and start making money on these CDOs in the process. With CDOs , came CDS on CDOs , which had a greater probability of payoff by owning them. So, as the market churned out instruments which looked like Russian Dolls, with a layer after layer of complexity, it was clear that the guy who hold the CDS on the most riskiest instrument was a certain winner. Well it was not clear for most of them except a very few people. How did these small set of people get to know about it.? Here the author tells the story of Greg Lippmann
Greg Lippmann a bond trader at Deustche Bank was the key person who left no stone unturned in launching a mega investment pitch for CDS instruments. The author states in the book that almost all the hedge funds which profited from subprime had heard the initial story from Greg Lippmann somehow or the other.
The fourth story in the book is about Cornwall capital, a fund started with 110k in a Schwab account by two never heard before guys , who basically saw what’s going on and DID what any shrewd money manager would do. They bought CDS, bought CDS on CDOs , shorted companies which were exposed to subprime crisis and in the end profit hundreds of millions of dollars. They ended up managing 135B dollars from their humble beginnings of 110k dollars.
Each one of these stories are made very interesting by Michael Lewis , who brings out little know facts about the main characters. Their thinking, their idiosyncrasies, their actions , which ultimately makes this book a great read.
Well , you can get much more info about the crisis by reading some numbers based report , but no numbers report can replicate the intensity of the crisis brought out by the author through the four stories.