The Big Short has gained a lot of publicity given the movie that has been made starring Brad Pitt, Christian Bale, Steve Carell, Ryan Gosling and and others. Before watching the movie I wanted to read the book to try and understand in detail a perspective of what happened that caused the biggest financial crises of our lifetime.
Given I am not in the financial industry I struggled to understand the financial instruments that Lewis was outlining in this book however the impact on the financial markets was evident. Lewis did keep the focus on a few key players in the industry and a few key financial instruments; namely credit default swaps and collateralized debt obligation (CDO). His story along with some key facts that unfolded in 2008 are mind blowing. It is certainly worth reading to get some perspective on what happened and why it happened.
Three Key Takeaways from the book:
1. The key financial instrument that went belly up was a interest-only negative-amortising adjustable-rate subprime mortgage. This was based off credit default swaps (filtered through CDOs) that were used to bed against the subprime market
2. Prior to the GFC, a strawberry farmer earning $14k USD a year was able to borrow $724k USD for a house without a down payment!
3. Thursday 18th September 2008 was a key week for the financial crisis:
– Monday Lehman Brothers filed for bankruptcy
– Merrill Lynch announced $55.2b USD in losses on subprime bond back CDOs and sold itself to Bank of America
– US Stock Market had fallen by more than it had since the first day of trading after the attack on the World Trade Centre
– Tuesday the Federal Reserve announced that it had lent $85b USD to insurance company AIG to pay off the losses on the subprime credit default swaps AIG had sold to Wall Street Banks
Biggest was $13.9b USD AIG owed Goldman Sachs