It's a mad-cap world

Venice September 2014

I cannot seem to stop buying books so I am always in a race to plough through them. When I started on The Big Short inside the doomsday machine, a non-fiction written by Michael Lewis, I could not read it fast enough because to me, reading a non-fiction about finance and economics is akin to reading a fiction in French. I have zilch knowledge about trading and the financial market thus I consider finance and economics foreign and complex subjects. I only have a hunch that the entire financial system is a bubble and the market is basically gaming.

One senior lawyer whom I used to work with passed away last Thursday. At the wake, eulogies were made by his beloved wife, his youngest son, a good friend and a young lawyer. His wife talked about how he never wanted a big car or a big house and his material needs were modest. He was an avid tennis player and that went beyond any doubt. I remember how  he used to quip that he had spent more time on court than in court. Apparently the conversations he used to hold with his youngest son were invariably about how to manage money and invest well. His wife, a committed Christian, told those present that towards his last couple years, he had spent his days reading and understanding the Bible and he appeared at peace in his final  days.  May Mr Lim rest in peace.

The Big Short is about a few odd balls who were savvy and possessed  the prescience about the flaws in the mad-cap finance world and they  were the smart hedge fund guys who made colossal sums of money for their clients and themselves.It is apparent  from the book that  the financial system is riggable and trading  is a form of gaming. The book exposes the folly of the system and tell how some of the insiders who work in banking industry had no clue about what was going on while it was going on. Lewis tells the story through the eyes of people who pay attention and who knew that a financial disaster was inevitable. These are smart people who knew how to make a lot of money with the system that is screwed up. But is it wrong for these smart people to game the system and ultimately made a fortune off what they foresaw was a financial disaster ? The  amounts of money that these hedge fund guys were betting were mind-bogging. The idea of  a credit default swap on what amounted to a timeless pool of subprime loans seemed delusional. Credit default swaps on subprime mortgage bonds were openly traded and standardized and in turn these bond traders could make money out of credit default swaps by betting massively that subprime loans would go bad. To defray and offset the running cost that were essentially hefty insurance premiums, the Wall Street bond traders sold  triple A –rated  subprime CDOs. The problem was what would happen if subprime mortgage borrowers begin to default in greater than expected numbers as even these so called triple A-rated subprime loans were actually bad ones.

The most compelling character of all is Dr Michael Burry, a trained neurologist with Asperger’s syndrome and one eye. Dr Burry had quitted the medical profession to start Scion Capital, an investment firm. Burry made his money by making huge bets against the Subprime Mortgage market. When his investors lost faith in his strategy to short the housing market and began demanding their money back, Dr Burry struggled to keep his fund alive in 2007  and early 2008.  

The other compelling character is Steve Eisman who hated being a corporate lawyer, he became an equity analyst  and quickly established himself as one  of the  few analysts whose opinions might stir the market. Greg Lippmann , the Deutche Bank hedge fund trader and Howie Hubler a bond trader also saw the folly and fraud behind the subprime mortgage industry. For nearly a decade, Howie Hubler had made money trading bonds for Morgan Stanley. 

In one of the footnotes, Lewis writes,

“It’s too much to expect the people who run big Wall Street firms to speak plain English, since so much of their livelihood depends on people believing that what they do cannot be translated into plain English. What John Mack’s trying to say, without coming right out and saying that no one else at Morgan Stanley had a clue what risks Howie Hubler was running, is that no one else at Morgan Stanley had a clue what risks Howie Hubler was running – and neither did Howie Hubler.

Another way to put the same question: How could Howie Hubler’s bonds plunge from 100 to 7 and the reports you received still suggest that they were incapable of dramatic movement ?"

Michael Lewis  has certainly tried to narrate the stories in a way that the lay readers can understand, nonetheless I still have trouble figuring out the entire financial system except that there are a lot of manipulations and inaccurate ratings. From  The Big Short, we learn about how Wall Street has no qualms about stealing the trading strategies of their clients and peddling them to other customers. We learn about how the bankers hide the reality from ratings agencies and investors about the rising default rate on subprime mortgages. We conclude that  the entire financial system is a bubble and those interested go and figure. Meanwhile I cannot wait to get my hand on the copy of the Existentialist café that I have reserved  with the local Kinokuniya bookstore.  It is by Sarah Bakewell, the next non-fiction book that  I plan to read.