Tuesday, July 24, 2012

Too Big to Fail and The Big Short

If I ever had to make a list of the top five world events of my lifetime, the great recession (TGR) of 2008 will probably feature prominently (I hope. I don't think I want to live in "very interesting times").

I recently read two books on TGR: Andrew Ross Sorkin's "Too Big to Fail", and Michael Lewis' "The Big Short". Both books are eminently readable.

Sorkin's book deals with the events leading up to the fall of Lehman Brothers, and reads like a movie screenplay. The "dialogues" of the principal actors in the drama are written in first person. I don't know how, and how accurately, Sorkin managed to do that, but it does make for compelling storytelling.

You get a sense for how chaotic those times were, and how the principals involved had to make important decisions under extreme uncertainty and pressure. And how easy it is for many commentators on the crisis to be Monday night quarterbacks.

The book provides interesting  color on people who have subsequently come to be viewed in the media somewhat uni-dimensionally. For example, you learn how Lehman CEO Dick Fuld, stood up for the weak in an ROTC camp in his college days, before coming to be unanimously reviled as an out-of-touch, and perhaps, criminal operator. You learn how unaware of social niceties former Treasury Secretary Hank Paulson was. I never knew that this Republican, former Goldman Sachs CEO was a Toyota-Prius-driving birdwatcher and environmentalist.

I would strongly recommend Sorkin's book for the scene-by-scene portrayal of some very tumultuous  times, and for the fullness with which it casts some of the most reviled people in America today.

If Too Big to Fail is a view from the inside, The Big Short is a view from the outside.

Michael Lewis' book outlines the stories of a few unlikely characters who foresaw the financial massacre a few years earlier, and smartly bet against it. It follows the trail of social misfits like Michael Burry, a former medical doctor-turned-hedge fund manager, who was among the first to figure it all out, only to be hounded by investors during trying times, and Steve Eisman who managed a fund for Morgan Stanley and lamented that he couldn't short his parent company.

Even if these people knew the whole thing was going to blow up, they did not know when. And even if they bought insurance to bet on the outcome they thought was most likely, they could not be sure that when the house was on fire, the insurer wouldn't go bankrupt. As Warren Buffett put it succinctly “It's not just who you sleep with, it's also who they are sleeping with,”

Here's a commencement speech by Michael Burry, and another one by Michael Lewis.

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