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The Big Short: Inside the Doomsday Machine
The Big Short: Inside the Doomsday Machine
Price: $8.06

16 of 19 people found the following review helpful
4.0 out of 5 stars Best Written, if not Most Informative, Book about the Crisis, July 3, 2011
Verified Purchase(What's this?)
Considering that I have read just about every other book about the crisis, I am pretty late to the party in reading this book. I downloaded it last week and read it through within 24 hours.

First, I have to say Lewis provides the most entertaining account of the crisis. Lewis presents an account of a few short-sellers out of about 20 who were completely short the market. I will not go into details about the short-sellers since all the other reviewers mention them. I will say, however, what's most notable is who Lewis generally left out: John Paulson. After all, he was the biggest short-seller of them all. He made the "greatest trade ever" by buying up CDS's, an insane multi-billion dollar profit.

Paulson, however, was still a typical Wall Street actor. He happened to see the crisis coming, but he also bet on it in a typical Wall Street way. Unlike Burry, who used his investment letters to say everybody else was stupid, Paulson sold his fund as merely a hedge on extreme movements in the housing market. Many investors who may not have bought the certainty of doomsday did put money for insurance against doomsday. Lewis realized his Wall Street demeanor made Paulson uninteresting and consequently Lewis dedicates only a few pages to him.

And it's a good thing he did because the short-sellers, Burry, Cornwall Capital and Eisman, all make for fascinating characters and fascinating stories. In a field of dry business writers, Lewis is the one true story-teller. He breaks up monotony about the structuring of CDO's with more and more fascinating antidotes. He does a great service for presenting the truth about the financial crisis in a form people uninterested in finance can appreciate.

The only reason I am giving 4 stars is his Epilogue and the lack of good prescriptions past blaming investment banks going public. To a certain extent, the argument does make a good bit of sense. Before the banks went public, only financially sophisticated partners made decisions. After going public, shareholders pressured the bank CEO's to do anything necessary to increase profits. Furthermore, the banks had huge incentives to make their balance sheet and accounting as opaque as possible. The shareholders just were not sophisticated enough to dig through the balance sheet and realize that they were really invested in an extremely leveraged hedge fund filled with the most opaque OTC assets. After layer upon layer upon layer of obfuscation of the banks' assets as well as its counterparty risks, the CEO's took the easy way out and focused on paper profits above everything else.

That said, I do not find the partnership argument wholly convincing. It seems like Lewis is using the argument to somehow vindicate bankers. Even after all his crazy antidotes about how bankers had no clue what they were buying and selling, the argument somehow says "the finance people were in fact smart, but the shareholders made them do it." For one thing, going public was not just to get a big payday for partners, although that was a big part of it. Banks were also going into more capital-intensive businesses. After computers really hit finance in the 80's, banks had to find a source of capital to buy all their computerized trading desks, data centers, etc. If Salomon Brothers did not go public, another bank eventually would have. Also, not enough people mention the SEC ending commission minimums in the 70's. For whatever reason, the SEC used to mandate minimum commissions and the banks basically earned very easy money from executing stock trades for institutional investors. When the commissions ended, the banks traditional market-making business had become very commoditized. To keep making decent money, the banks had to create more and more exotic instruments with higher transaction costs and find a way to sell them. If Salomon didn't create the MBS market, with the ensuing CDO market, somebody would have eventually just to earn the higher transaction costs.

The real answer is that some sort of reregulation is needed just like we had with the FDIC and the SEC starting in the 30's. People often respond to this suggestion by saying regulators were sleeping at the switch and regulation caused part of the reason the crisis happened in the first place (especially Basel II risk-weighting of AAA tranches, which I won't get into here). This argument against regulation does not mention that regulation and regulators became very intertwined during the Reagan, Clinton and the two Bush administrations. Neither side had a real incentive to actually limit the activity of banks. The institutions who bought fixed-income instruments also didn't have a real political constituency like the retail stockholders of Enron and Worldcom. There was no political reason to make the fixed income market more transparent. With no political pressure and cushy finance jobs awaiting them, the regulators quickly became "partners" with the banks rather adversaries and past some SEC pressure for SOX compliance, there was very little if any regulation.

With the lack of regulation, the banks became more like the banks of the 1920's. Sure, there was FDIC insurance, but retail deposits up to $250,000 were chump-change compared to the various deposit-like instruments for institutions in the shadow banking sector. The opaque repo market basically functioned as a retail deposit for those wanting to park 100's of millions of dollars. Before the crisis, a bank's word was considered as good as the Treasury's. Instead of keeping their short-term money in cash, Pension funds could park the money with a bank in the Repo market and earn a bit of interest. Same story in the Money Market, which funneled funds through the Commercial Paper market. Both Repo and Commercial Paper had to be rolled over frequently, which was also part of their great appeal to Institutions. They could forgo most interest rate and couterparty risk by getting 100 cents on the dollar in a month rather than years. The banks liked this short-term funding too because it was cheap. Borrowing short and lending long is a pretty good gig if you can get it.

Another short-term financing component were OTC options. I still do not know how exactly banks put the CDS liabilities to Burry, Paulson and others on their balance sheets. Did the CDS payments just count as pure income and retained earnings? Maybe I'll find out one day. In any case, opaque OTC options had an inherent short-term liability in them waiting to explode if the bank bet wrongly. In the worst days of the crisis, all the banks' short-term financing dried up completely and margin calls went through the roof. With 1929-style regulation, it should be no surprise that there was a 1929-style bank run in the shadow sector. It isn't dumb bankers, dumb Germans, dumb stockholders, big bonuses, etc. behind the crisis, it's the lack of FDIC-style regulation and insurance for the short-term financing in the shadow sector.

I would also guess that 1 out of 10 people who started reading this review are still reading. If you're still reading, then I sincerely appreciate it. It also shows why my argument has not gotten a lot of airtime. The deposits in the shadow-banking sector don't make for great political speeches or even great books, but it's the argument that makes the most sense to me. Without drastically regulating the shadow banking sector like the retail banking sector was regulated in the 30's, we will be doomed to repeat the crisis. Before the Great Depression, a banking panic happened about once a generation. Bankers remember, control risk for a time and then the next generation of bankers bets other people's money again, causing another panic. Before the Panic of 1929, we had the Panics of 1819, 1837, 1857, 1873, 1893 and 1907. In the era of post-1980 deregulation, we have now had the Panic of 2008. Sadly I do not think Dodd-Frank goes far enough and it probably won't be our last.
Comment Comments (3) | Permalink | Most recent comment: Nov 24, 2015 12:04 PM PST


Monkey Business: Swinging Through the Wall Street Jungle
Monkey Business: Swinging Through the Wall Street Jungle
by Peter Troob
Edition: Paperback
44 used & new from $2.48

3 of 3 people found the following review helpful
5.0 out of 5 stars Still a Must Read for anybody considering I-banking., September 3, 2010
Verified Purchase(What's this?)
I got this book yesterday and read through it quickly that night. First of all, it is hilarious. The critic review on the covers says "funniest book since Liar's Poker." I disagree, this is funnier, even though Liar's Poker was funny in its own right. Caveat Emptor, though, the humor is bawdier than most anything I've heard in a locker room. The language itself is a testament to the investment banking world and how it desensitizes junior bankers.

To many, the book will be most startling in just how unglamorous the Investment Banking life actually is. Even the rainmakers at the top of the heap, the managing directors, don't necessarily live a glamorous life. While junior bankers have to grovel to the MD's, the MD's themselves spend their lives groveling to clients and the buyside, trying to justify their existence with pretty pitch books and fonts that are just right.

The most amazing thing about the banking life, though, is not the hours. It's how useless most of those hours are. From what I gathered, the associates and analysts do maybe 4-8 hours a day of real, productive work. The rest of the hours are spent making mindless changes for MD's, only for the MD's and Vice Presidents to change their mind and throw out a lot of that work. Associates spent a lot more time in meetings and travel than I expected, typically just to bring pitch books and give a formidable presence for the bank.

In other words, Monkey Business reads somewhat like a long MBA case study about a mismanaged company who promotes top performers rather than good managers (although it is far, far more interesting than a case study). The MD's have all the hallmarks of bosses from hell. They don't understand what junior bankers actually do and they motivate by crucifying for mistakes and missed deadlines while taking all the credit when there's success.

From the long hours and the constant mistreatment, it's easy to see how investment banks precipitated the worst financial crisis since the Great Depression. During the peak of investment banking, 2003-06, bankers were so desensitized that they had no idea how to think or build value for the economy. Everything was about money, everything was about selling and sounding good and not truly working on behalf of their clients. While most of these shenanigans happened in the trading side of I-banks and not the banking side, the same culture permeated throughout, the almighty dollar before EVERYTHING else.

My only real disappointment was the new post-crisis afterword. Most of the afterword was fine, tying up the loose ends and showing the investment banking can actually lead to good buyside or senior banking jobs, if you're willing to sell your soul for a few years. Rather, I was disappointed that he focused on the trading that led to the crisis, something well-known at this point. I was more interested in why banking still hasn't changed, why analysts and associates are still so poorly treated and why there's so much motion with so little relative value produced.

Read this if you're interested in how businesses work and if you want a good, if very vulgar, laugh. DEFINITELY read this if you're an Ivy undergraduate or MBA student considering wads of money I-bankers may be throwing at you. Realize that there's more to choosing your offer than the salary and if anything could possibly offer a career path half as attractive as the eventual buyside job after banking, take it.


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