I read Michael Lewis' The Big Short: Inside the Doomsday Machine (by the way, what kind of terrible subtitle is that?) and highly recommend it as a perversely entertaining and straightforward narrative of how subprime mortgages were bundled into bonds few people understood, given too-high ratings, and then traded for enormous sums of money on the assumption that the booming housing market would go on forever. The book focuses on the handful of people who realized it was all bogus and absolutely could not last. As I read it, I kept thinking about Kurt Eichenwald's Conspiracy of Fools, another good book that tells the story of the bizarre and complex pyramid schemes dreamed up by Enron executives. Everyone thinks they can make money by creating nothing, and indeed even having companies sell their own bad investments to themselves.
And the bonds that had been most ineptly rated were the bonds that Wall Street firms had tricked the ratings agencies into rating most ineptly. "I cannot fucking believe this is allowed," said Eisman. "I must have said that one thousand times" (p. 101).
Indeed, it was the bundling that helps accounts for the disaster. Good mortgages were bundled with bad, and then sold as if they were all good. Further, even different types of bad mortgages could be made to look good.
By assuming that one pile of subprime mortgage loans wasn't exposed to the same forces as another--that a subprime mortgage bond with loans heavily concentrated in Florida wasn't very much like a subprime mortgage bond more concentrated in California--the engineers created the illusion of security (p. 74).
We all know the outcome, and the story of greed and stupidity is not exactly uplifting.
With its personality-driven style, the book only touches on the broader structural issue of how regulation and deregulation created the environment in the first place, though it does not claim to do so. What it also does not delve into is the fact that the "heroes" of the story, that is, the Steve Eismans of Wall Street who spoke out about how it was all a lie, made money only because of massive collapse. Yes, Lewis does bring it up, but there is a broader point to be made about how in many ways these guys aren't heroes at all. They were very smart, but they got rich only because many Americans got screwed. At least Lewis does make the point that nothing has really changed. Once the economy picks up again, something like this will definitely reoccur.