Top critical review
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Fascinating, Infuriating, Flat.
on 29 April 2010
I finished this book as Robert Rubin was being grilled by a Senate committee about the financial meltdown. It struck me that the book described just the first act in something fundamental which is happening to the West's financial future.
Zuckerman, a Wall Street Journal reporter, describes the decline of the US property market from the point of view of the (few) winners; those who say it coming and figured out how to profit from the looming disaster. The winners it seems were quite few - John Paulson, a formerly obscure hedge fund manager, Jeffery Green a property speculator and Mike Burry, a fund manager based far from the New York financial scene. They all discovered that the newly developed CDS formed a deliciously asymmetric bet on the housing market - i.e. for a regular sequence of insurance -like payments, at cents in the dollar relative to the assets covered(CDOs), they stood to make vast profits if the unthinkable happened i.e. the US property market declined. It did, but when it did the financial destruction was so great that there was always the possibility that they would not get their money as potentially their counterparties would be bankrupted.
That's where the Western tax payers come in, some of the counterparties were banks and as the banks tottered US and other taxpayers stepped in to prevent them failing, i.e. taxpayers money went to pay off the CDO/CDS transactions. I reckon that at least 1billion of John Paulson's funds 12 billion profit came from the German governments rescue of IKB bank (this last is not in the book).
So the fascination is in watching this unfold. The events are so recent that we still have a sense of the breath-taking audacity of those that felt the property market could crash. The banks, the rating agencies, the math-geniuses who calculated risk all felt it couldn't (hence the low rate charged for CDS's). By concentrating on those who bet against the market, Zuckermann under-emphasizes the fact that almost no-one on the planet held their views. Zuckermann's book excels in telling their story - specifically the difficulty in getting investors to stay with the bet - Paulson was willing to loose up to 8% per annum; Burry had to refuse to return money to his investors for up to two years as the bet was in play. It took real courage to wait for the market to turn, even if they were correct, they might run out of money before the bet could pay back - Keynes quote - `the market can stay irrational longer than the investor can stay solvent'. There were also worries about being successful - if the bets came off, the scale of the winnings might be such as to jeopardize actually getting the money.
The behaviour of the bankers is infuriating, in seeking CDS coverage for CDOs (which might just be an extra source of income) bankers could be seen to be betting against products they were selling to their clients. While this may or may not be the case, the fact that there was enough money sloshing around to encourage various investors to create CDOs in the first place, is even more infuriating, as I cannot see
a useful social purpose to it. I can understand the provision of mortgages as a useful social purpose, i can understand insurance,; but to me the speculation that took place here was of no use to society, who ever `won' the bet. And of course the most infuriating of all (which brings me back to Rubin), is that
those that `lost' the bet were not those who took out the CDOs, but rather the taxpayer. Why was this allowed to happen?
The book itself leaves out mention of the counterparties - what possessed those who generated and purchased CDO's? There is an interesting description of a confrontation between Paulson and Stanley O'Neal (ex CEO of Merrill Lynch) which exposes O'Neal as not being aware of the existential risk his own bank was holding as CDOs. But otherwise the book has little to say about the guy's who lost. It is both deferential and stylistically quite flat in describing the winners. Somehow Paulson is seen as a bit of a loser in the hedge fund community prior to his big bet , despite a lifestyle most would see as opulent.
Through Zuckerman Paulson is allowed to make self-justifying statements about how he never misrepresented what he was doing; statements which might be pre-emptive in light of the SEC investigations of Goldman Sachs (though in fairness Paulson has not been indicted). Michal Lewis' book `the big Short' does not interview Paulson at all.
So overall, a fascinating partial account of the latest trauma of Capitalism. The book could do with being more critical, more analytic., less deferential. From a full reading of the text, I'm not sure that the irony in the title was intentional A more comprehensive account would need to cover the irrational `group-think' among bankers, rating agencies and regulators. Nonetheless well worth a read. Also, for about fifty pages I think I understood what a synthetic CDO was.