A financial book that’s written like a thriller, but we all know the ending. Before reading its tempting to wonder if this is just another book about the financial crisis. But its not – its the first book I’ve read from the perspective of people who not only claim they saw it coming, but put their money where their mouth is and made fortunes in the process. Along the way it tells us something about how economics works in the real world.
Lewis’s central characters are a misanthropic bunch, perhaps inevitably as those who fitted in with the crowd got swept along with the mortgage market. Even if those involved had doubts, the money was good enough for them to put them to one side. So our stars are a man who social skill leave much to be desired, another with a glass eye and Asperger’s and a couple of guys who worked out of a shed and were so unconvincing they didn’t raise a cent in client money. Yet they managed to see what almost everyone else didn’t.
Apart from the book being tremendous fun to read, it does give a fascinating insight into how disfunctional markets can become. It is written with the benefit of hindsight, but when things are spelt out the way Lewis describes them you do wonder how things came to pass. His description of how BBB slices of highly correlated CDOs got swept up into other CDOs and miraculously became mostly AAA again defies logic. Yet this was common practice. Perhaps the most worryingly is that you could almost understand if the investment banks packaged these things up and sold them on. But they (mostly) believed their own models too and fell into the trap too, incentivised to take risks not defray them.
I have a small pet hypothesis about modelling – most business inevitably gets written where the modelling works worst. And that was the case here. The sad thing is that all the information needed to see what was happening was there, but almost noone was looking. Hopefully the lesson has been learnt, but somehow I doubt it.