The Big Short by Michael Lewis

At one point in The Big Short, the author Michael Lewis reflects back on his first book about the financial industry, Lairs Poker, and thinks how innocent the deception seemed then versus what he was trying to get his arms around in 2007. It's a little like the trailer for the new Wall Street movie staring Michael Douglas, where he says, "someone once said, 'greed is good' now it's legal." The 1980's greed of Wall Street in Lairs Poker seems so innocent now, but it is also the genesis of everything that went wrong in the financial meltdown of 2007.

At the end of The Big Short, Lewis has lunch with his old boss at Soloman Brothers, this is the man who took the brokerage public. At one point he seems to admit this was the beginning of the end, when the brokerages stopped gambling their own money and started gambling with the shareholders money. Since they had a lot less to loose, the risks got completely out of control. This book is a little hard to follow if you don't understand the world of big finance. However, Lewis does a great job of walking you through what was happening and you quickly learn that most people who were involved had no clue what was going on either. Here is the bottom line. At some point in the 2000's it became way too easy to get a home loan. Sub-prime hit the basement with lairs loans, where you didn't have to provide any proof that you had a job, and as soon as you got your first loan you could take out the equity on the (raising) house value and buy a second investment property. The banks didn't care because they sold the loans to financial companies like Bear Sterns and Goldman Sacks who sold them off as bonds or the now infamous collateralize debt obligation (CDO). From here on it gets a little complicated, as no one really knows how to value the CDOs, and the ratings companies don't their jobs to protect the consumer, and the house of cards gets ever higher.

Despite the press reports, there are a few smart people that figured out what was going on, and while everyone one else was betting that house prices could only go up, they bet the other side. The best part about this book is that these few smart people are all interesting characters and their stories are amazing. I know this is hard to believe, but you will not want this book to end. It is truly a great read.