Summary The Big Short by Michael Lewis

the big short by Michaels Lewis

Today’s book, The Big Short, is recommended by Sheryl Sandberg. You can read a 15 minute summary of this book here or you can watch the movie here. Here are ten popular highlights from people that have read this book.

1. How do you make poor people feel wealthy when wages are stagnant? You give them cheap loans.
2. The accounting rules allowed them to assume the loans would be repaid, and not prematurely. This assumption became the engine of their doom.
3. The CDO was, in effect, a credit laundering service for the residents of Lower Middle Class America. For Wall Street it was a machine that turned lead into gold.
4. If you wanted to predict how people would behave, Munger said, you only had to look at their incentives.
5. In Bakersfield, California, a Mexican strawberry picker with an income of $ 14,000 and no English was lent every penny he needed to buy a house for $ 724,000.
6. The triple-A ratings gave everyone an excuse to ignore the risks they were running.
7. In the process, Goldman Sachs created a security so opaque and complex that it would remain forever misunderstood by investors and rating agencies: the synthetic subprime mortgage bond– backed CDO, or collateralized debt obligation.
8. Financial options were systematically mispriced. The market often underestimated the likelihood of extreme moves in prices. The options market also tended to presuppose that the distant future would look more like the present than it usually did. Finally, the price of an option was a function of the volatility of the underlying stock or currency or commodity, and the options market tended to rely on the recent past to determine how volatile a stock or currency or commodity might be.
9. This was yet another consequence of turning Wall Street partnerships into public corporations: It turned them into objects of speculation. It was no longer the social and economic relevance of a bank that rendered it too big to fail, but the number of side bets that had been made upon it.
10. The big fear of the 1980s mortgage bond investor was that he would be repaid too quickly, not that he would fail to be repaid at all.

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