Meanwhile, markets are sliding sideways, as “investors” await news on any more shoes to drop — another Greece, a currency exploding, horrible employment numbers.<\/p>\n
No shortage of great financial writing.<\/span><\/strong> From Andrew Ross Sorkin’s great book, “Too Big to Fail<\/em>” to Michael Lewis’ upcoming “The Big Short: Inside the Doomsday Machine<\/em>” we have not lacked for great financial books. The Lewis book is excerpted in the latest Vanity Fair, <\/em>which, like Rolling Stone<\/em>, publishes a remarkable number of great financial stories. Here are excerpts:<\/p>\n In early 2004 a 32-year-old stock-market investor and hedge-fund manager, Michael Burry, immersed himself for the first time in the bond market. He learned all he could about how money got borrowed and lent in America. He didn\u2019t talk to anyone about what became his new obsession; he just sat alone in his office, in San Jose, California, and read books and articles and financial filings. He wanted to know, especially, how subprime-mortgage bonds worked. A giant number of individual loans got piled up into a tower. The top floors got their money back first and so got the highest ratings from Moody\u2019s and S&P, and the lowest interest rate. The low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody\u2019s and S&P. Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn\u2019t thinking about buying mortgage bonds. He was wondering how he might short, or bet against, subprime-mortgage bonds.<\/p>\n Every mortgage bond came with its own mind-numbingly tedious 130-page prospectus. If you read the fine print, you saw that each bond was its own little corporation. Burry spent the end of 2004 and early 2005 scanning hundreds and actually reading dozens of the prospectuses, certain he was the only one apart from the lawyers who drafted them to do so\u2014even though you could get them all for $100 a year from 10kWizard.com.<\/p>\n The subprime-mortgage market had a special talent for obscuring what needed to be clarified. A bond backed entirely by subprime mortgages, for example, wasn\u2019t called a subprime-mortgage bond. It was called an \u201cA.B.S.,\u201d or \u201casset-backed security.\u201d If you asked Deutsche Bank exactly what assets secured an asset-backed security, you\u2019d be handed lists of more acronyms\u2014R.M.B.S., hels, helocs, Alt-A\u2014along with categories of credit you did not know existed (\u201cmidprime\u201d). R.M.B.S. stood for \u201cresidential-mortgage-backed security.\u201d hel stood for \u201chome-equity loan.\u201d heloc stood for \u201chome-equity line of credit.\u201d Alt-A was just what they called crappy subprime-mortgage loans for which they hadn\u2019t even bothered to acquire the proper documents\u2014to, say, verify the borrower\u2019s income. All of this could more clearly be called \u201csubprime loans,\u201d but the bond market wasn\u2019t clear. \u201cMidprime\u201d was a kind of triumph of language over truth. Some crafty bond-market person had gazed upon the subprime-mortgage sprawl, as an ambitious real-estate developer might gaze upon Oakland, and found an opportunity to rebrand some of the turf. Inside Oakland there was a neighborhood, masquerading as an entirely separate town, called \u201cRockridge.\u201d Simply by refusing to be called \u201cOakland,\u201d \u201cRockridge\u201d enjoyed higher property values. Inside the subprime-mortgage market there was now a similar neighborhood known as \u201cmidprime.\u201d<\/p>\n But as early as 2004, if you looked at the numbers, you could clearly see the decline in lending standards. In Burry\u2019s view, standards had not just fallen but hit bottom. The bottom even had a name: the interest-only negative-amortizing adjustable-rate subprime mortgage. You, the homebuyer, actually were given the option of paying nothing at all, and rolling whatever interest you owed the bank into a higher principal balance. It wasn\u2019t hard to see what sort of person might like to have such a loan: one with no income. What Burry couldn\u2019t understand was why a person who lent money would want to extend such a loan. \u201cWhat you want to watch are the lenders, not the borrowers,\u201d he said. \u201cThe borrowers will always be willing to take a great deal for themselves. It\u2019s up to the lenders to show restraint, and when they lose it, watch out.\u201d By 2003 he knew that the borrowers had already lost it. By early 2005 he saw that lenders had, too.<\/p>\n You can (and should) read the entire piece on Vanity Fair’s web site.<\/a><\/strong><\/p>\n
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