Questions for Sunday

Here are a couple high level questions and then some specific ones based on references to the book.  For some I’ve just included a quote – we can just see what people’s reactions are.

1.      Who takes the most blame for the subprime crisis?  Break out some percentages.

a.      Investment banks

b.      Mortgage originators

c.      Ratings agencies

d.      Government regulators

e.      Politicians & legislators

f.       The Fed

2.      Who is/are the most impressive of the characters portrayed here?

a.      Burry

b.      Eisman

c.      Lippmann

d.      Cornwall

3.      What could have been done to prevent this problem?

a.      Should we have?

b.      Were the bailouts necessary or should we have let our financial system burn to the ground?

4.      This book hinges on the psychology of the market, the herd mentality, and how being a “contrarian” is the only way to really beat it.  When Michael Burry had executed perfect CDS trades, but they were working against him (in the short-term b/c market was frothy) his investors completely lost confidence in him and acted somewhat irrationally by demanding their money back. 

a.      Does this clearly show how markets are NOT efficient, at least in the short-medium term?  Even great investors like Greenblatt got scared and couldn’t understand that his manager was making exceptionally great trades.

b.      “All of them were almost by definition, odd (p 107) Is being normal or thinking normally a weakness when it comes to markets?

5.      “Someone asked him if he believed in the free checking model. And he said turn off your tape recorders.” He explained that free checking was a tax on poor people - in the form of fines for overdrafting.  Banks that used it did it to rip off poor people even more than they could if they charged them for checks.  (p 20)

a.      Is this a fair criticism?  Should people know their own limitations?  Is this a deceptive form of usury?

6.      “At worst: if you bought CDS on $100MM subprime, you might shell out premium for 6 years - call it $12MM.  At best: Losses on the loans rose from 4% to 8%, and you made $100MM. The bookies were offering you odds of somewhere between 6:1 amd 10:1 when the odds of it working out felt more like 2:1. (p 66)

a.      Why didn’t more people see this/understand this seemingly obvious arbitrage?

7.      “The long answer was that there were huge sums of $ to be made if you could somehow get them re-rated as triple-A.  This is what GS had cleverly done.  They persuaded the agencies that 100 ground floors of subprime (all triple-B) that they were a diversified portfolio of assets!” (p 73)

a.      Is this borderline deception?  Should the agencies have done their homework?

b.      Discuss the poor incentive structure for the ratings agencies

8.      “In Bakersfield CA a Mexican strawberry picker with income of $14K and no English was lent every penny he needed to buy a house for $724K? (p 97) Discuss.

9.      “There weren’t enough Americans with shit#y credit taking out loans to satisfy investor demand for the end product”.  So they had to make synthetic CDOs – bets on the underlying assets. (p 143)

a.      Should this be allowed in a market, especially one that does not monitor counterparty risk?

b.      Is too dangerous to have exist in the system?

10.   Ratings agencies - “Their model for home prices had no ability to accept a negative number.” (p 171)

11.   Probably my favorite quote by Eisman, “We have a simple thesis.  There is going to be a calamity, and whenever there is a calamity Merrill is there”. (p 174)

12.   Howie Hubler – “Morgan Stanley would sell $6Bn of his $16Bn in triple-A CDOs.  It was a decision that wound up costing MS nearly $6Bn.” (p 210)

a.      How much of a problem is it for shareholders and bondholders alike to know that a single mid-level trader can have this kind of impact on an entire firm?

b.      These CEOs market believers say deserve $20M or more b/c of supply demand dynamics.  But nearly all if not all of them had NO CLUE what was happening inside their firms. And now they are being paid MMs again now that the firms have recovered.  What do we think of this model? 

c.      And Hubler was able to keep tens of $MMs

13.   Eisman again (p 229) – “I think Alan Greenspan will go down as the worst Fed chairman in history.  He kept interest rates too low for too long is the least of it.  I’m convinced he knew what was happening in subprime, and he ignored it because the consumer getting screwed was not his problem.  I sort of feel sorry for him because he’s a guy who is really smart who was basically wrong about everything”.

14.   Did you like the book?  Why?

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