Michael Lewis’s ‘The Big Short’? Read the Harvard Thesis Instead(blogs.wsj.com)
blogs.wsj.com
Michael Lewis’s ‘The Big Short’? Read the Harvard Thesis Instead
http://blogs.wsj.com/deals/2010/03/15/michael-lewiss-the-big-short-read-the-harvard-thesis-instead/
10 comments
Thank you for posting this.
Weird. Wonder why my submission didn't get caught by the duplicate check? Looks like both have the same URLs.
I believe that there is a time limit on the duplicate check, that way items can be re-posted after some time has passed. I'd guess it's probably 30 days.
For those wondering, here is the original: http://news.ycombinator.com/item?id=1201079
For those wondering, here is the original: http://news.ycombinator.com/item?id=1201079
You were just ahead of your time (but only by a month, that's better than missing by centuries like some people).
Thanks, thought it looked familiar. I downloaded the thesis at the time, and forgot to read it.
> Ah, the innocence of youth.
Ah, the smug certainty of a Wall Street Reporter. Let's not forget how miserably the WSJ (and all other media) have failed to pick up on the gross fiscal abuse on wall street. Some modesty would be in order here!
Besides, the student's suggestions are rather uncontroversial. She merely suggests that "to change wall street you have to change the incentives". How can any sensible person disagree with that?
The attitude that... "of course the people at Wall Street are going to screw everybody over for profit; what did you expect?" oozes from those last remarks. Urgh!
Ah, the smug certainty of a Wall Street Reporter. Let's not forget how miserably the WSJ (and all other media) have failed to pick up on the gross fiscal abuse on wall street. Some modesty would be in order here!
Besides, the student's suggestions are rather uncontroversial. She merely suggests that "to change wall street you have to change the incentives". How can any sensible person disagree with that?
The attitude that... "of course the people at Wall Street are going to screw everybody over for profit; what did you expect?" oozes from those last remarks. Urgh!
I hardly disagree about the WSJ in general but I read the end of this article differently. The author's final question is a good one: why on earth did she take a job working for the very people whose irresponsibility her research exposed? Her answer, assuming it's sincere and not quoted out of context, is indeed naive: she's doing it to change the culture of Wall Street. Well, I agree with what I imagine the author's implicit points to be: (1) the odds that Wall Street culture will change because she took an analyst job are infinitesimal, it doesn't matter how brilliant and well-intentioned she is; (2) this is the kind of grandiose fantasy you have at that age.
Sadly, many young people overestimate how resilient they will be to a culture they abhor, which is how they get sucked in and assimilated. The risks to the beast are negligible compared to the risks to her soul (if this were a movie we'd all be yelling Nooooooooo...) and she's not unusual in underestimating this.
On the other hand, it's easy to understand why any "large New York investment bank" would want to hire her: anyone who can figure out what they do that masterfully will be useful in doing more of it.
Sadly, many young people overestimate how resilient they will be to a culture they abhor, which is how they get sucked in and assimilated. The risks to the beast are negligible compared to the risks to her soul (if this were a movie we'd all be yelling Nooooooooo...) and she's not unusual in underestimating this.
On the other hand, it's easy to understand why any "large New York investment bank" would want to hire her: anyone who can figure out what they do that masterfully will be useful in doing more of it.
>Sadly, many young people overestimate how resilient they will be to a culture they abhor, which is how they get sucked in and assimilated. The risks to the beast are negligible compared to the risks to her soul (if this were a movie we'd all be yelling Nooooooooo...) and she's not unusual in underestimating this.
http://en.wikipedia.org/wiki/Heart_of_Darkness :-)
http://en.wikipedia.org/wiki/Heart_of_Darkness :-)
I hadn't considered that interpretation earlier (not until it was pointed out in another comment) and I agree that it's completely possible the author meant it like that -- so my attitude was not justified.
It was because of the way the author put "their irresponsible underwriting practices" in quotes in the just before the conclusion that set the tone for me, but once again, I should not have jumped to conclusions.
It was because of the way the author put "their irresponsible underwriting practices" in quotes in the just before the conclusion that set the tone for me, but once again, I should not have jumped to conclusions.
"The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man."
-George Bernard Shaw
-George Bernard Shaw
As much as I used to love this quote, I now see it as a non-sequitur.
Interesting you should say that. I wrote a comment last night (and then decided not to post it) that went like this:
That's one of those lines, like the opening sentence of Anna Karenina, that is written so authoritatively that you just take it for granted when you read it, but when you stop and think, there's no reason to believe is true.
(The reason I didn't post it is because I don't accept that the quote, even if true, invalidates what I said about naive people getting sucked into the beast. Disputing whether the quote is true makes it seem like I'm conceding that point, which I ain't. I'm the last person to defend the "reasonable man".)
Edit: Shaw was great though. "Animals are my friends and I don't eat my friends" is Wilde-worthy.
That's one of those lines, like the opening sentence of Anna Karenina, that is written so authoritatively that you just take it for granted when you read it, but when you stop and think, there's no reason to believe is true.
(The reason I didn't post it is because I don't accept that the quote, even if true, invalidates what I said about naive people getting sucked into the beast. Disputing whether the quote is true makes it seem like I'm conceding that point, which I ain't. I'm the last person to defend the "reasonable man".)
Edit: Shaw was great though. "Animals are my friends and I don't eat my friends" is Wilde-worthy.
Thanks for the great reply. Love that last quote especially. :)
I don't think that comment is a slam on the idea, just the likelihood of it coming to pass. I expect Wall Street to screw everybody for profit, and I expect most businesses everywhere do it to the best of their ability. Wall Street is just more able.
I read that as the author longing for that fresh optimism to think that Wall Street could be changed.
I agree that if it ever were to change, it would be because (shareholders, the SEC, Congress) changed the incentives. For instance, bonuses and commissions held in escrow and then normalized based on actual vs advertised performance. Rating agencies may only accept payment from sellers or buyers but not both. Etc.
I read that as the author longing for that fresh optimism to think that Wall Street could be changed.
I agree that if it ever were to change, it would be because (shareholders, the SEC, Congress) changed the incentives. For instance, bonuses and commissions held in escrow and then normalized based on actual vs advertised performance. Rating agencies may only accept payment from sellers or buyers but not both. Etc.
You may be right, it is plausible the author refers to her decision to work on Wall Street to change it from the inside as the product of the innocence of youth.
I should have given the author the benefit of the doubt.
I should have given the author the benefit of the doubt.
The WSJ is mainly concerned with Wall Street. Most of Wallstreet makes out very well with their current culture. She is right, short term gains are rewarded, as they are in most industries. The difference if you can make millions on WS in a very small amount of time. And, if given the chance, most people would as well.
You seem to want to blame WS, but as an engineer, should I be overly concerned if the fashion industry fails, or the building industry? Sure, I hate seeing people lose their jobs, but am I going to change how I live? People on WS are no different.
Damn, I mean we hear all this talk of environmental problems, but the majority in the US still drive to work, a large number of those in huge trucks.
The People on WS are going to do what everybody else is going to do. It is just they have an opportunity to make so much more than most poeple.
You seem to want to blame WS, but as an engineer, should I be overly concerned if the fashion industry fails, or the building industry? Sure, I hate seeing people lose their jobs, but am I going to change how I live? People on WS are no different.
Damn, I mean we hear all this talk of environmental problems, but the majority in the US still drive to work, a large number of those in huge trucks.
The People on WS are going to do what everybody else is going to do. It is just they have an opportunity to make so much more than most poeple.
Hey dont kill the messanger, I bet in 10 years she will laugh at her vision of people on business, if her vision were right the world would be a fairy tale.
I hope she or anyone can change it, but the more I understand of people the more corruption I see, at least were big money its involved. Sad but true.
I hope she or anyone can change it, but the more I understand of people the more corruption I see, at least were big money its involved. Sad but true.
Just finished Big Short and it's good - like anything by Michael Lewis. It's the only thing I've read that completely tied together the hedge funds, the investment banks and AIG for me.
It's not the most complete book on the financial crisis, but it's not trying to be. It is certainly the most entertaining though.
Here's how to turn the Big Short into a bunch of little shorts and save us all a lot of trouble in the future:
Require the banks to report each and every line item that they are long and short. A line item is simply there aggregate position in any security, loan or derivative.
The banks already have this information, obviously. All they need to do is publish it--daily. In the past this would have been "infeasible". Now it would cost them little to release it electronically and it would be feasible for a small shop to analyze the risk for an entire bank. If available, the information would lead to an industry of small analyst/investors buying and selling bank stocks, eventually providing better information about the bank's risk than the banks themselves. Under this regime, the regulators can go back to sleep or continue surfing the web.
Until now many would claim this information is the banks' by right and not ours. Is it? You and I effectively disclose this information for our houses and loans. It is deemed necessary for credit markets to function. We have no inherent right to keep it a secret. Banks are just bigger versions of us with thousands of assets and liabilities, playing with taxpayers' money it turns out. Their rights are determined by us and not nature.
The banks already have this information, obviously. All they need to do is publish it--daily. In the past this would have been "infeasible". Now it would cost them little to release it electronically and it would be feasible for a small shop to analyze the risk for an entire bank. If available, the information would lead to an industry of small analyst/investors buying and selling bank stocks, eventually providing better information about the bank's risk than the banks themselves. Under this regime, the regulators can go back to sleep or continue surfing the web.
Until now many would claim this information is the banks' by right and not ours. Is it? You and I effectively disclose this information for our houses and loans. It is deemed necessary for credit markets to function. We have no inherent right to keep it a secret. Banks are just bigger versions of us with thousands of assets and liabilities, playing with taxpayers' money it turns out. Their rights are determined by us and not nature.
There are a couple of companies that already do this for the banks. They get all the information on longs and short trades throughout the day, from all the big investment firms, and produce a market snaphshot. One of these companies is called Dataexplorers.
You can pay money to get this data now.
I am not sure how this would stop anything?
You can pay money to get this data now.
I am not sure how this would stop anything?
Banks take risk through their positions. I am arguing that they should disclose what they own to the public--not disclose aggregated risk to a sleepy regulator.
Banks would take less risk if required to do so.
Banks would take less risk if required to do so.
Dataexplorers appears to be focused on the securities lending business, which is a tiny segment of the market compared to what the parent is proposing. Also, I see nowhere on the site where they claim to "get all the information on longs and short trades throughout the day, from all the big investment firms, and produce a market snapshot", can you please provide a reference to the place where this claim, or a similar one, is made? Most likely they are simply analyzing all long and short trades in the market on a given day to provide information about expected lending fees, which is a far cry from being able to assemble an accurate picture of the securities held by various financial institutions for their own accounts.
I used to work for them. We would recieve a huge list of the millions of trades that the big investment houses did, every single day. They only show a market snapshot, and try to make it impossible to determine what any individual company was doing - that was very important, for obvious reasons.
This suggestion would be the equivalent of requiring that all software firms provide all of their source code for free public viewing. The information about the aggregate positions that a bank holds for its own account can be used by a trading firm to make tremendous amounts of money at the bank's expense. In fact, Goldman was basically accused of doing this to Long Term Capital management in the book "When Genius Failed".
Not exactly. It would require them to release the terms of every deal. The methodology to evaluate these would not be required. In many sectors of the markets such services are alrady provided to the banks by vendors so the bank would merely have disclose the name of the security and just a few other bits.
And yes, this would have a profound effect on proprietary trading. That's the whole point. It would disperse prop trading to smaller entities not subject to disclosure.
And yes, this would have a profound effect on proprietary trading. That's the whole point. It would disperse prop trading to smaller entities not subject to disclosure.
You can read most of the Prologue to the book, which sort of ties this article together on Amazon -- http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0...
I think it's great that she investigated the issue and wrote a well put together article, but the heart of the problem has been known for a while:
* No money down loans
* No proof of jobs required
* Fannie & Freddie bought this junk
* Repeal of Glass Steagal
All the talk in the world won't change the fact that the solution requires legislators and law enforcers to have a strong backbone and prosecute those who committed fraud.
* No money down loans
* No proof of jobs required
* Fannie & Freddie bought this junk
* Repeal of Glass Steagal
All the talk in the world won't change the fact that the solution requires legislators and law enforcers to have a strong backbone and prosecute those who committed fraud.
Fannie and Freddie actually lost market share as the bubble really got going. They were prohibited from getting into most subprime, and tried to get around their regulations.
Wall Street was the driver in buying up these shitty mortgages to put into MBS/CDOs -- and quite a few big banks bought mortage originators so they could get bigger margin on these deals. Unfortunately for them Wall Street couldn't find buyers for all of this toxic crap and/or were too dumb to realize how bad some of this stuff was (ie Citigroup). That's why you had a bank run on Bear Stearns, once people realized the collateral they were using in the repo market was effectively worthless.
Wall Street was the driver in buying up these shitty mortgages to put into MBS/CDOs -- and quite a few big banks bought mortage originators so they could get bigger margin on these deals. Unfortunately for them Wall Street couldn't find buyers for all of this toxic crap and/or were too dumb to realize how bad some of this stuff was (ie Citigroup). That's why you had a bank run on Bear Stearns, once people realized the collateral they were using in the repo market was effectively worthless.
Fannie and Freddie bought a lot of subprime. I had friends that worked there and told me so and I've read about it. Over the long term Fannie made a lot of people rich. Read Beating the Street by Peter Lynch. He made a fortune off Fannie. Taxpayers will pay, unfortunately.
http://www.washingtonpost.com/wp-dyn/content/article/2008/08...
Without Fannie and Freddie and the backing by the US taxpayer Wall Street would not have taken as much risk.
http://www.washingtonpost.com/wp-dyn/content/article/2008/08...
Without Fannie and Freddie and the backing by the US taxpayer Wall Street would not have taken as much risk.
Maybe, but the underlying problems were the bad ratings assignments, shady conflicts of interest, and companies figuring out they could drive demand while betting against that demand.
The market shares involved with this dynamic is irrelevant.
What mattered was the implicit guarantee provide by the government through Fannie & Freddy's involvement.
You might have notice that became explicit guarantee at the end.
What mattered was the implicit guarantee provide by the government through Fannie & Freddy's involvement.
You might have notice that became explicit guarantee at the end.
From Michael Blum's letter to Bernanke: "CDOs are like love. When they're good, they're great, but when they're bad, watch out."
The linked paper itself is quite easy to read, though at 115 pages I didn't make it through the whole thing and resorted to skipping around. I'd love to see the tables of results put in perspective with a better visualization.
The linked paper itself is quite easy to read, though at 115 pages I didn't make it through the whole thing and resorted to skipping around. I'd love to see the tables of results put in perspective with a better visualization.
Were there any good CDOs? An interesting aspect (in retrospect) of The Big Short is that some people spent huge effort determining which ones were worth shorting and other people seemed to make just as much money indiscriminately shorting all of them.
From the thesis:
J.P. Morgan’s CDOs consistently underperformed, while those from Goldman Sachs were among the top performers
Also:
CDOs rated by Fitch generally had less defaults than those without a Fitch rating. However, this result is not conclusive, as a number of other factors could be responsible for the lower level of defaults in Fitch-rated CDOs.
J.P. Morgan’s CDOs consistently underperformed, while those from Goldman Sachs were among the top performers
Also:
CDOs rated by Fitch generally had less defaults than those without a Fitch rating. However, this result is not conclusive, as a number of other factors could be responsible for the lower level of defaults in Fitch-rated CDOs.
What an inspiration this young woman is!
This is sure to get down-voted, but the first thing I noticed after reading about her supposed brilliance was -- she's very pretty.
And a world-class amateur violinist. And apparently something of an idealist.
I hope she continues to do good work with her many gifts. While the cynic can argue she'll get crushed by the system, occasionally good people can get in and make positive change happen.
I hope she continues to do good work with her many gifts. While the cynic can argue she'll get crushed by the system, occasionally good people can get in and make positive change happen.
She could kick ass as a quant, but I don't see her moving up the ranks in IBD or M&A. She's (1) very intelligent, which works against you in that sort of conformist environment, (2) a woman, and (3) not from the "right kind of family" (I know nothing about her background, but she actually worked in college). In other words, she's just too good to be an investment banker.
I got about 10 pages into the paper and then that there's a good reason that I didn't get into Harvard.
Anybody up for compiling a summary?
Anybody up for compiling a summary?
Go listen to the "This American Life" pieces about Magnetar and about the financial collapse. They are enjoyable and make good snapshots to get some of the same information/ideas.
http://www.thisamericanlife.org/radio-archives/episode/355/T...
http://www.thisamericanlife.org/radio-archives/episode/405/i...
http://www.thisamericanlife.org/radio-archives/episode/355/T...
http://www.thisamericanlife.org/radio-archives/episode/405/i...
The interesting part is the data itself. There’s really no shortcut to just marveling the tables directly.
It's really sad that someone as talented as she is ended up at an investment bank.
If she's an analyst, instead of a direct promote to associate at the very least, I think I'm going to barf blood.
If she's an analyst, instead of a direct promote to associate at the very least, I think I'm going to barf blood.
it's a standard, socially acceptable, not-very-risky-if-you-come-from-the-right-pedigree path to wealth/power.
"The Story of the CDO Market Meltdown: An Empirical Analysis." - http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOme...