Quants and The Big Short

At the rate they’re coming out, I think there will be more books written about the last financial crises than World War II. I’m probably exaggerating, but the recent crises in Greece tells us things are far from over.

I’m pretty interested in these books, partially because they illustrate what may be the most diabolical, wide-sweeping crimes committed against the well-being of Americans ever committed, which has, for all intents and purposes, gone completely unpunished.

Before anyone gets their panties in a bunch about “Well, those Americans who over extended their credit and over borrowed deserved it!”, I’m not talking about those people. I’m talking about the ones whose 401Ks and portfolios which were destroyed though no fault of their own – indeed, they may have done everything exactly right.

The criminals here aren’t so easy to find. We do know that they’re somewhere in the finance industry — from salesman that sold — yes, sold — homeowners loans they couldn’t afford to the banks which bundled them up and sold them, to the ratings firms which rated those bundles “AAA”, to the people that insured the, to the banks that got them insured and shuffled off of the balance sheet so they could make more loans — they’re somewhere in there. Yet they haven’t been locked up, or deported, or even relegated to soup lines – indeed some of them are collecting more money now than they did before. It boggles the mind.

The first of the two books here (I’ve read many before on this topic) is The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. This one is kind of a hard slog at times, but explains what I think is a really interesting part of Wall Street not everyone understands.

I had started to write you a nice long post about my views on this book, but I realized the Amazon customer reviews do a much better job than I could. So read those instead.

And then read Quants, and skip the bits where it gets slow. You’ll learn a lot.

Michael Lewis is the consumate storyteller, and The Big Short: Inside the Doomsday Machine is his latest “story” about Wall Street and, well, our money.

Except this is kind of a detective story, where the detectives are the people that knew something fishy was going on, and took advantage of it. The “fishy” thing being that Wall Street was packaging up loans which would probably never be paid off with a few good loans as a package, getting the whole thing rated (by Standard and Poors, or Moodys) like it was gold, ”selling” the package, and then selling ”insurance” that the package would of course be paid off.

The detectives knew this wasn’t true, and convinced the market that they should be allowed to “short”, or bet against these bogus packages, which, once they figured they out they could make money from it, Wall Street was more than happy to oblige.

Along the way, however, the detectives had a change of heart, and started telling people “Folks, something’s not right here. This market is irrational.”. Unfortunately, these words apparently went to the same place the warnings about Bernie Madoff went.

Even scarier, some of the criminals — the people selling these “packages” or CDOs — knew they were bogus, and didn’t mind a bit that their investors would get screwed in the end, as long as they got their commissions.

Again, I’ll shut up now, and refer you to the 351 customer reviews of the book, and encourage you to click here to buy it.

  1. #1 by GregD on 2010.05.19 - 11:13 pm

    Crimes committed without punishment is another word for how stupid even the brightest tech minds are about our Federal Reserve system, which as you know I’ve been bitching about for about 4 years now. #fail

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