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5.0 out of 5 stars Liars Poker Squared, March 15, 2010
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This review is from: The Big Short: Inside the Doomsday Machine (Hardcover)
Mike Lewis has the gift for watching America and picking stories that are interesting to the public: in the last ten years Moneyball (the effect of statistical analysis on baseball) and The Blind Side (Importance of Left Tackles in American Football and rescuing an impoverished athlete). But his undying fame was Liars Poker, the story of Solomon Brothers Investment firm where he worked when 24 and made bonuses of about $200,000 without really understanding what he was doing. Possibly the most interesting part of this book is the foreward where Lewis describes how he felt when writing Liars Poker Wall Street provided worthless value to the economy and it was just a matter of years before the market recognized this. Unfortunately he was about 24 years too late. Couple this with his closing lunch with John Gutfruend and you have a great bookend for closure.

Now Lewis presents us with this bookend to Wall Street, how it universally missed the bad securities being issued backed by subprime securities destroying over $1 trillion in wealth. And his vehicle for this exploration is not a complete rehash but rather documenting the very few people (he estimates fewer than 20) that recognized that market crash coming and profiting immensely, people like Michael Burry, a Stanford Medical student who left to manage his own Hedge Fund. Actually there were many more than 20 people that knew this was coming. I began giving speeches in 2004 on "The Coming Crash in Home Prices". But these people he mentioned left conventional wisdom in believing that the subprime mortgages were worthless AND discovered the newly created tools to profit from them: credit default swaps and the ABX index. With the belief and knowledge these investors were rewarded handsomely whereas the rest of us suffered through a very downbeat market. But they deserved it and in Lewis' upbeat writing style he conveys eloquently but simply how the decisions were made and how they profited beyond belief.

There is one problem with this book. The subject was just covered quite well in The Greatest Trade Ever by Gregory Zuckerman which was released in November 2009. I've now read both books and there is an overlap. Greatest Trade is a very fast read and tells the story well focusing on John Paulson. This book doesn't delve on Paulson but does cover Michael Burry who was featured in the other book also.

Since so many reviews seem to be more interested in giving their political view of this tragic occurence, I'm compelled to weigh in on this issue even though I know this will upset some politcally closed minds. We must recognize if it was so easy to comprehend and solve we would have all profited in the manner these investors did rather than suffer through the last two years. We wouldn't have had the meltdown that we had. The smart people on Wall Street would not have overleveraged creating the steep downward ascent in destruction of wealth as we deleveraged. Specifically, I'm startled how many people want to blame politicians and FNMA/FHLMC. As a seller of $1 billion a year to these entities and some knowledge of their loss history as well as debating this issue with a former Vice Chairman of one of these entities who is a neighbor, it is shocking when you hear people talk of the subprime mortgages that FNMA/FHLMC owned. Did they do some such targeted loans? Yes. But half their losses came from their foray into Alt A loans. Coupled with the drop in property value and low equity position (they were leveraged at an unsafe 30 to 1 ratio) their insolvency was guaranteed if there was a downturn. Why were they not managing for this? It wasn't politically motivated. It was profit motivated. Quasi-guaranteed by the govt. they could issue callable agencies, their drug of choice, and arbitrage this money into a higher yielding security which they did. UNTIL the losses started. With 3% equity/custion, the 30 to 1 leverage immediately worked against them. Where were the regulators? Where was management managing risk? As the Vice Chairman said, the problem was property value drop. Well, with much advance notice and concern, WHY WEREN'T YOU MANAGING FOR THIS?????

With that as a background, let's approach the question of should there be a FNMA/FHLMC? I believe there should be. Exactly what do they do? When they are not leveraging for earnings which BTW they started in the early 90s when loan volume dropped and they recognized they needed to do something else to "gin" earnings, they perform their intended function to make borrowing cheap for homeowners. If there were no FNMA/FHLMC for the past two years 30 year mortgage rates for the last two years would not have been 4.25% to 5.25% but rather approximately 5.75% to 7.50%. In addition there would have been a lot more balloon or adjustable rate loans. Now, does America want this higher rate when an effective "NON-Profit" or govt. entity could maintain this function? I think not and I think we need to recognize that the recovery would have been much slower if many people would not have had the availability of this lower cost money to buy homes and refinance to lower rates. Enough with policy and now back to a conclusion.

But Lewis' writing style makes this book and his credibility from having written Liars Poker and the unique perspective of having worked in the industry and left it will make this a big hit. I strongly recommend this well written, important book.
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Showing 1-10 of 10 posts in this discussion
Initial post: Mar 17, 2010 1:31:48 AM PDT
Having read Zuckerman's book, would this book provide some insight in addition to what I learned from Zuckerman? Would it be worthwhile to read both books?

In reply to an earlier post on Mar 17, 2010 6:10:07 AM PDT
R. Spell says:
Depends upon how much time you have. For me, Michael Lewis is a must read. Good writer, good history of works I have followed. BUT, if you are pressed for time or the subject is of secondary importance to you, take a pass. Answered more directly, there is enough overlap that it is not reading for new information. BOTH books do an excellent job with the material. They just happened to have picked the exact same material. Biggest difference is Zuckerman focuses 60% on Paulson which is a fascinating story. Lewis doesn't didn't interview him or discuss materially.

Posted on Apr 10, 2010 5:15:55 PM PDT
I read them both, they are both good books and good reads. I've read most of the books written about the crisis, and will read more. Overlap doesn't bother me at all. I've read I think two books specifically about Bear, and will read Greenberg's book when it is released this summer. I really think Zuckerman's book is more thorough, but Lewis adds some info, and his writing is very good. In any event Lewis is one of the premier financial chroniclers of our time, and his vantage should not be missed.

Posted on Apr 23, 2010 5:56:29 AM PDT
An informative and helpful review indeed! Thanks for sharing your views.

Posted on Jan 31, 2011 10:52:09 PM PST
Last edited by the author on Jan 31, 2011 10:52:39 PM PST
Pauldog says:
This seems to be as good a place to put this as any; I think it uncovers an essential depth beyond Lewis's book, good as that book is:

"Somehow the fiction that profit automatically translates into real accomplishment, into real value for society, prevails no matter how evident its fallacy - no matter how evident the truth that, for example, one can make at least as much money selling cocaine as selling penicillin. Moreover, bubbles, which economists have never found any agreed-upon way to explain, continue to occur, and they always involve the disastrous absence of real value in favor of vacuous, mathematical profit (to which investors easily become addicted). It's about time we faced this fact squarely, and explored the significance of the inevitable disconnect between the mere drive for return on investment and the effort to accomplish something substantial in the world. And then we will need to ask ourselves further: how can we as a society discourage this disconnect rather than strive to maximize it as we have now been doing for many years. " --Steve Talbott

Posted on Nov 16, 2011 11:06:49 AM PST
Max says:
"If there were no FNMA/FHLMC for the past two years 30 year mortgage rates for the last two years would not have been 4.25% to 5.25% but rather approximately 5.75% to 7.50%."

This statement is patently false- the yield spread between a AAA non-agency loan and a Fannie/Freddie conforming loan is a mere 25 to 37 basis points.

In reply to an earlier post on Nov 22, 2011 7:28:16 PM PST
Last edited by the author on Nov 22, 2011 7:38:37 PM PST
R. Spell says:
You could be right however please recognize that over 85% of all originations are sold in govt guaranteed mtg backs. i suspect you are aware that the private label jumbo securitzation is all but broken for 30 year fixed rate as an example.

why? Because rating agencies demand so much more over collateralization for ratings and the sub piece investors demand higher yield, ie, deals aren't getting done as the math doesn't work.

Now, suddenly no govt guarantee and dump the market with all this supply and you don't think yield goes up? It's difficult to state the level but it WILL go up when so much has to be put on balance sheet. the counterbalance would be the massive liquidity in the marketplace which I suspect you are focusing on.

So, while I agree this market has shown resilience even shrugging off USA downgrade, I DO NOT think rates would stay as low as you suspect and think we would see a market evolve into more of a European market, more balloon or adj. rate loans.

In reply to an earlier post on Nov 22, 2011 7:45:27 PM PST
Max says:
Your points are very well taken- however, the spreads I was referring to existed before the housing market was torched. I think there is only one firm out there doing Jumbo securitization, and if I were in their position, I would be demanding more than 25 bps.

In reply to an earlier post on Nov 22, 2011 8:17:35 PM PST
R. Spell says:
Yes, I agree spreads went that tight. I do not feel they can go that tight again. That spread was based upon a securitzation model that no longer exists, ie, percent of AAA available on quality loans as well as yield requirment of subtranche investors. Remember those investors got KILLED. The market can't get there from private investors of these loans so the question becomes when will loan securitization reopen and how tight. I am not optimistic. you obviously more so. We will see.

In reply to an earlier post on Nov 22, 2011 8:46:11 PM PST
Max says:
Oh, I'm not optimistic at all. This will take years to unwind.
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