I have just finished reading the The Big Short by Michael Lewis. While not as good as Liar’s Poker it is still a good read. The first half of the book is quite challenging as Michael explains the intricacies of the sub-prime mortgage market, collateralised debt obligations and credit default swaps. Because the Wall Street banks and mortgage providers were making so much money from these instruments (which were effectively giving a migrant worker the ability to own a portfolio of properties even though there was no chance of that person ever paying back even one mortgage) they had generated a market so large that by 2007 (only 15 years after the market had started) the annual conference in Las Vegas had over 7,000 attendees! At the same time Lewis introduces the four or five various characters who take up a contrary short position in the sub-prime mortgage market.
I worked in the financial markets for over 25 years and can personally attest the difficulties of taking a contrarian position to market. You really need to be stubborn and beat to a different drum, ie you need some of the Artist component. All the fund managers taking short positions in the book have some of this component but the best example is Dr. Michael Burry. At the age of two, Burry had cancer which caused the loss of his left eye. The replacement glass eye was used as an explanation for his introversion in that he did not like face-to-face contact. He was a loner; he disliked team sports and preferred swimming. He would also become obsessive about topics. Lewis describes Burry’s mind as having no temperate zone. Burry was first diagnosed by psychiatrist as bi-polar but he himself knew it was wrong because he was never depressed. After studying medicine, Burry became interested in investing and became a fund manager in 2001, and because of the rise of the internet and blogs relished the ability to manage funds without having face-to-face contact with his clients. He was a brilliant investor and in four years he had grown his Scion fund to $600 million and was turning away investors. During that period the market had fallen 6.42 percent and yet his fund had returned 242 percent!
During the next two years Burry gradually started building up a short position in the subprime mortgage market. In 2007, his son was being rejected by kindergartens, and a psychologist diagnosed the child as a classic case of Asperger’s syndrome. Burry started reading the about Asperger’s and realised that it was not just child who had the syndrome but himself. He ticked all the boxes: insularity, obsessive interests, lack of social empathy, etc. Suddenly Burry had achieved the first stage of Emotional Intelligence: self-awareness.
His Asperger personality then enabled him to survive the next period. As the sub-prime market began to implode in early 2007 there were desperate attempts by Wall Street to keep it going by falsely marking the prices of the swaps. His investors started to get cold feet and ask for their money back. Burry refused by side pocketing his “shorts” causing his investors to start legal action. Then in June 2007 two sub-prime mortgage bond funds managed by Bear Stears went belly-up and market rout started. Burry made his investors 426 percent on their money but no-one rang up and congratulated him. In November 2008, Burry in true Artist style closed the Scion fund and left the industry.
As a coda Lewis describes a lunch with John Gutfreund, former CEO of Salomons, who Lewis had lampooned in Liar’s Poker and who has been described as one of the great psychopaths of Wall Street. As a true Hustler, Gutfreund ordered the most expensive dish on the menu. Lewis concludes the book by saying the real problem was that the Wall Street banks had been allowed to go public, so shifting the risk from the firm’s partners to the public and this had become disaster for the US taxpayer and since the GFC nothing had changed.
If you want to get a taste of Michael Lewis his recent Vanity Fair article Beware of Greeks Bearing Bonds is very humorous yet very insightful.
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