
Michael Lewis’s ‘The Big Short’? Read the Harvard Thesis Instead - tortilla
http://blogs.wsj.com/deals/2010/03/15/michael-lewiss-the-big-short-read-the-harvard-thesis-instead/
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mrduncan
I posted this about a month ago, didn't seem to get much interest then
unfortunately. In any case, here is a link to the actual thesis:

"The Story of the CDO Market Meltdown: An Empirical Analysis." -
[http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOme...](http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOmeltdown.pdf)

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tortilla
Weird. Wonder why my submission didn't get caught by the duplicate check?
Looks like both have the same URLs.

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mrduncan
I believe that there is a time limit on the duplicate check, that way items
can be re-posted after some time has passed. I'd guess it's probably 30 days.

For those wondering, here is the original:
<http://news.ycombinator.com/item?id=1201079>

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eavc
You were just ahead of your time (but only by a month, that's better than
missing by centuries like some people).

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gizmo
> Ah, the innocence of youth.

Ah, the smug certainty of a Wall Street Reporter. Let's not forget how
miserably the WSJ (and all other media) have failed to pick up on the gross
fiscal abuse on wall street. Some modesty would be in order here!

Besides, the student's suggestions are rather uncontroversial. She merely
suggests that "to change wall street you have to change the incentives". How
can any sensible person disagree with that?

The attitude that... "of _course_ the people at Wall Street are going to screw
everybody over for profit; what did you _expect_?" oozes from those last
remarks. Urgh!

~~~
gruseom
I hardly disagree about the WSJ in general but I read the end of this article
differently. The author's final question is a good one: why on earth did she
take a job working for the very people whose irresponsibility her research
exposed? Her answer, assuming it's sincere and not quoted out of context, is
indeed naive: she's doing it to change the culture of Wall Street. Well, I
agree with what I imagine the author's implicit points to be: (1) the odds
that Wall Street culture will change because she took an analyst job are
infinitesimal, it doesn't matter how brilliant and well-intentioned she is;
(2) this is the kind of grandiose fantasy you have at that age.

Sadly, many young people overestimate how resilient they will be to a culture
they abhor, which is how they get sucked in and assimilated. The risks to the
beast are negligible compared to the risks to her soul (if this were a movie
we'd all be yelling Nooooooooo...) and she's not unusual in underestimating
this.

On the other hand, it's easy to understand why any "large New York investment
bank" would want to hire her: anyone who can figure out what they do that
masterfully will be useful in doing more of it.

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farmerbuzz
"The reasonable man adapts himself to the world; the unreasonable one persists
in trying to adapt the world to himself. Therefore all progress depends on the
unreasonable man."

-George Bernard Shaw

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jquery
As much as I used to love this quote, I now see it as a non-sequitur.

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gruseom
Interesting you should say that. I wrote a comment last night (and then
decided not to post it) that went like this:

That's one of those lines, like the opening sentence of Anna Karenina, that is
written so authoritatively that you just take it for granted when you read it,
but when you stop and think, there's no reason to believe is true.

(The reason I didn't post it is because I don't accept that the quote, even if
true, invalidates what I said about naive people getting sucked into the
beast. Disputing whether the quote is true makes it seem like I'm conceding
that point, which I ain't. I'm the last person to defend the "reasonable
man".)

Edit: Shaw was great though. "Animals are my friends and I don't eat my
friends" is Wilde-worthy.

~~~
jquery
Thanks for the great reply. Love that last quote especially. :)

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derrickchen
Just finished Big Short and it's good - like anything by Michael Lewis. It's
the only thing I've read that completely tied together the hedge funds, the
investment banks and AIG for me.

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ctkrohn
It's not the most complete book on the financial crisis, but it's not trying
to be. It is certainly the most entertaining though.

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T_S_
Here's how to turn the Big Short into a bunch of little shorts and save us all
a lot of trouble in the future: Require the banks to report each and every
line item that they are long and short. A line item is simply there aggregate
position in any security, loan or derivative.

The banks already have this information, obviously. All they need to do is
publish it--daily. In the past this would have been "infeasible". Now it would
cost them little to release it electronically and it would be feasible for a
small shop to analyze the risk for an entire bank. If available, the
information would lead to an industry of small analyst/investors buying and
selling bank stocks, eventually providing better information about the bank's
risk than the banks themselves. Under this regime, the regulators can go back
to sleep or continue surfing the web.

Until now many would claim this information is the banks' by right and not
ours. Is it? You and I effectively disclose this information for our houses
and loans. It is deemed necessary for credit markets to function. We have no
inherent right to keep it a secret. Banks are just bigger versions of us with
thousands of assets and liabilities, playing with taxpayers' money it turns
out. Their rights are determined by us and not nature.

~~~
megablast
There are a couple of companies that already do this for the banks. They get
all the information on longs and short trades throughout the day, from all the
big investment firms, and produce a market snaphshot. One of these companies
is called Dataexplorers.

You can pay money to get this data now.

I am not sure how this would stop anything?

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bd_at_rivenhill
Dataexplorers appears to be focused on the securities lending business, which
is a tiny segment of the market compared to what the parent is proposing.
Also, I see nowhere on the site where they claim to "get all the information
on longs and short trades throughout the day, from all the big investment
firms, and produce a market snapshot", can you please provide a reference to
the place where this claim, or a similar one, is made? Most likely they are
simply analyzing all long and short trades in the market on a given day to
provide information about expected lending fees, which is a far cry from being
able to assemble an accurate picture of the securities held by various
financial institutions for their own accounts.

~~~
megablast
I used to work for them. We would recieve a huge list of the millions of
trades that the big investment houses did, every single day. They only show a
market snapshot, and try to make it impossible to determine what any
individual company was doing - that was very important, for obvious reasons.

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fname
You can read most of the Prologue to the book, which sort of ties this article
together on Amazon -- [http://www.amazon.com/Big-Short-Inside-Doomsday-
Machine/dp/0...](http://www.amazon.com/Big-Short-Inside-Doomsday-
Machine/dp/0393072231)

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va_coder
I think it's great that she investigated the issue and wrote a well put
together article, but the heart of the problem has been known for a while:

* No money down loans

* No proof of jobs required

* Fannie & Freddie bought this junk

* Repeal of Glass Steagal

All the talk in the world won't change the fact that the solution requires
legislators and law enforcers to have a strong backbone and prosecute those
who committed fraud.

~~~
mattobrien
Fannie and Freddie actually lost market share as the bubble really got going.
They were prohibited from getting into most subprime, and tried to get around
their regulations.

Wall Street was the driver in buying up these shitty mortgages to put into
MBS/CDOs -- and quite a few big banks bought mortage originators so they could
get bigger margin on these deals. Unfortunately for them Wall Street couldn't
find buyers for all of this toxic crap and/or were too dumb to realize how bad
some of this stuff was (ie Citigroup). That's why you had a bank run on Bear
Stearns, once people realized the collateral they were using in the repo
market was effectively worthless.

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va_coder
Fannie and Freddie bought a lot of subprime. I had friends that worked there
and told me so and I've read about it. Over the long term Fannie made a lot of
people rich. Read Beating the Street by Peter Lynch. He made a fortune off
Fannie. Taxpayers will pay, unfortunately.

[http://www.washingtonpost.com/wp-
dyn/content/article/2008/08...](http://www.washingtonpost.com/wp-
dyn/content/article/2008/08/18/AR2008081802111.html)

Without Fannie and Freddie and the backing by the US taxpayer Wall Street
would not have taken as much risk.

~~~
eavc
Maybe, but the underlying problems were the bad ratings assignments, shady
conflicts of interest, and companies figuring out they could drive demand
while betting against that demand.

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LiveTheDream
From Michael Blum's letter to Bernanke: "CDOs are like love. When they're
good, they're great, but when they're bad, watch out."

The linked paper itself is quite easy to read, though at 115 pages I didn't
make it through the whole thing and resorted to skipping around. I'd love to
see the tables of results put in perspective with a better visualization.

~~~
wmf
Were there any good CDOs? An interesting aspect (in retrospect) of _The Big
Short_ is that some people spent huge effort determining which ones were worth
shorting and other people seemed to make just as much money indiscriminately
shorting all of them.

~~~
LiveTheDream
From the thesis:

 _J.P. Morgan’s CDOs consistently underperformed, while those from Goldman
Sachs were among the top performers_

Also:

 _CDOs rated by Fitch generally had less defaults than those without a Fitch
rating. However, this result is not conclusive, as a number of other factors
could be responsible for the lower level of defaults in Fitch-rated CDOs._

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eavc
What an inspiration this young woman is!

~~~
chasingsparks
This is sure to get down-voted, but the first thing I noticed after reading
about her supposed brilliance was -- she's very pretty.

~~~
eavc
And a world-class amateur violinist. And apparently something of an idealist.

I hope she continues to do good work with her many gifts. While the cynic can
argue she'll get crushed by the system, occasionally good people can get in
and make positive change happen.

~~~
pw0ncakes
She could kick ass as a quant, but I don't see her moving up the ranks in IBD
or M&A. She's (1) very intelligent, which works against you in that sort of
conformist environment, (2) a woman, and (3) not from the "right kind of
family" (I know nothing about her background, but she actually worked in
college). In other words, she's just too good to be an investment banker.

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aresant
I got about 10 pages into the paper and then that there's a good reason that I
didn't get into Harvard.

Anybody up for compiling a summary?

~~~
eavc
Go listen to the "This American Life" pieces about Magnetar and about the
financial collapse. They are enjoyable and make good snapshots to get some of
the same information/ideas.

[http://www.thisamericanlife.org/radio-
archives/episode/355/T...](http://www.thisamericanlife.org/radio-
archives/episode/355/The-Giant-Pool-of-Money)

[http://www.thisamericanlife.org/radio-
archives/episode/405/i...](http://www.thisamericanlife.org/radio-
archives/episode/405/inside-job/)

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pw0ncakes
It's really sad that someone as talented as she is ended up at an investment
bank.

If she's an analyst, instead of a direct promote to associate at the very
least, I think I'm going to barf blood.

~~~
zackattack
it's a standard, socially acceptable, not-very-risky-if-you-come-from-the-
right-pedigree path to wealth/power.

