In my review of Michael Lewis's The Big Short, I argue that it is ultimately a book about the factors that conspire to lead us into either dazzling rightness or staggering wrongness. To an almost eerie degree, Lewis's otherwise rag-tag protagonists embody the qualities you need to have if you care about being right. I don't mean if you care about looking right or feeling right. I mean if you care about trying to assemble, to the best of our flawed human abilities, an accurate picture of the world. Herewith, five reasons the guys in The Big Short were able to foresee the coming financial calamity -- and how the rest of us get stuff right, too.
- They were all outsiders -- in fact, in personality, or in both. As a result, they were neither unduly awed by authority nor unduly swayed by society. They didn't give a damn what Ben Bernanke or the CEO of Goldman Sachs had to say, and they either didn't know or didn't particularly care what the masses in the financial mainstream were thinking. Being a few thousand miles from Manhattan helped; so, probably, did Asperger's Syndrome (which one of the main characters is diagnosed with, and which is often characterized by a certain obliviousness to other people's thoughts and expectations).
- They were empiricists to an astonishing, almost Cartesian, degree. They cared about facts. They devoured facts. Lewis describes one of his characters, Michael Burry as "the only human being on earth who read [the prospectuses for subprime mortgage bonds], apart from the lawyers who drafted them." (Compare that to the supposed consumer-loan experts who, when asked to estimate the amount of subprime mortgages in their own financial products, guessed figures between 10 and 20 percent. The actual number was 95 percent.) All of us incline toward bending the facts to fit our theories. These guys, to the best of their abilities, adjusted their theories to respect the facts.
- Notwithstanding this appetite for knowledge, they had a healthy respect for the unknowable. Lewis writes that his protagonists were "predisposed to feel that people, and by extension markets, were too certain about inherently uncertain things." The past, they understood, did not perfectly predict the future. The unknown, the uncertain, the unlikely: any of that could occur. Other people dismissed some possibilities (the collapse of the global economy, say) as simply unthinkable, by which they usually meant too alien and painful to think about. But these guys did not believe in unthinkability. See point #2: thinking -- Kelvin-scale cool thinking -- was the coin of their realm.
- Accordingly, they constantly questioned their own convictions. Most of us gravitate toward trying to verify our beliefs -- that is, if we bother investigating their validity at all. Lewis's protagonists gravitated toward falsification. For chapters on end, we watch them pleading with Wall Street insiders to explain where they (the protagonists, that is) have gone wrong. It is only when no one can do so that they begin to suspect they are right.
- Finally, and most interestingly, they know about all the above strategies and deliberately employ them; they think about how they think. "I hated discussing ideas with investors," Michael Burry says, "because then I became a Defender of the Idea, and that influences your thought process." After investor Charlie Ledley and his partners made a fortune shorting the subprime mortgage market, they "actually spent time wondering how people who had been so sensationally right (i.e., they themselves) could preserve the capacity for diffidence and doubt and uncertainty that had enabled them to be right." Psychologists and philosophers call this kind of thinking meta-cognition, and (as countless psychological studies can attest) it is one of the best things you can do to minimize your odds of being wrong.
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1) The major risk factor is not default; mortgage default rates are low. The major risk factor is that mortgage borrowers will refinance, leaving the loaner stuck with cash that must then be re-invested at low rate of return.
2) Assorted mortgage loans from varying geographic areas can be tranched together as "low risk" because their risk factors are uncorrelated: it is improbable that they will all go bad at once.
Well, the Wall Street "Masters of the Universe" may be excused, in some measure, for assumption 1; historically, back in the day of the 30 year fixed rate mortgage, home loan defaults were rare. Perhaps understandable that not everyone realized that these old rules did NOT apply to teaser rate balloon ARMs with allowable negative amortization...
But, uncorrelated? When the risk is assumed to be refinancing?!?!? WTF! People don't refinance their home loans at random, unpredictable times; they refinance when the Fed lowers the Prime Rate! And, when that happens, EVERYONE refinances at once! Uncorrelated? I don't think so!
in phoenix every office and every shopping center has space available but commercial real estate stocks are going up
owners bought the properties at high prices an now get low rent or no rent
but all is okay for some reason I dont understand
and again, alot of loans will come due at the same time
For a large amount of time in the development of the human species running with the herd was the smart move. Separate from the herd and the predators get you. Now that our continued survival is easier and well established, individuals have the opportunity to split off from the group and not have to suffer mortality based on that decision. However this separation in order to prey on the herd as whole or even individual members of it seems awfully close to a form of predatory action. To glorify capitalists for their ability to separate themselves from society so that they can then prey on society is not a representation of smartness, but a sign of a willingness to eat their own. When people who feel committed to the group as a whole see signs of a problem they try to fix it or raise the alarm for the village on the whole. These are the heroes who fought for civil rights or preached nonviolence or tried to be a force for good in their world. Now if you want hold up people who figured out how to benefit from preying on the group that gave them the ability to become predators, I say you need new heroes
Second, they didn't "prey on society". They made bets that other financial players willingly accepted, and the crisis would have taken place whether they did so or not.
For a large amount of time in the development of the human species running with the herd was the smart move. Separate from the herd and the predators get you. Now that our continued survival is easier and well established, individuals have the opportunity to split off from the group and not have to suffer mortality based on that decision. However this separation in order to prey on the herd as whole or even individual members of it seems awfully close to a form of predatory action. To glorify capitalists for their ability to separate themselves from society so that they can then prey on society is not a representation of smartness, but a sign of a willingness to eat their own. When people who feel committed to the group as a whole see signs of a problem they try to fix it or raise the alarm for the village on the whole. These are the heroes who fought for civil rights or preached nonviolence or tried to be a force for good in their world. Now if you want hold up people who figured out how to benefit from preying on the group that gave them the ability to become predators, I say you need new heroes
subprime homeowners were defaulting in cleveland long before the rest of the country
but nobody wanted to hear about it
too busy making money