From time to time, I’ll post interesting books and articles that I read pertaining to finance. These aren’t intended to be reviews, there’s plenty of reviews on these books and articles that can be found elsewhere on the internet. I’ll pick out a point or two in the book or article that I find most interesting and add my own thoughts.
The Big Short by Michael Lewis gives an inside look of the 2008 financial crisis through the eyes of a few key players who were involved leading up to and during the 2008 crash. The sheer lack of accountability and corruption that pervaded the industry (and probably continues to pervade today) is simply egregious. Traders on the wrong side of toxic CDOs still came away with huge monetary compensation, despite losing billions of their clients’ and firms’ money, only to get bailed out at the expense of the US taxpayer. The documentary film Inside Job directed by Charles Ferguson, which I also highly recommend, expands on this corruption and excess.
The problem simply comes down to incentives. Towards the end, Lewis discusses how his former boss John Gutfreund really set all this off when he took Salomon Brothers from being a private partnership to a publicly traded company. The firm’s risk thus shifted from the partners at the top to shareholders, many who are left in the dark as banks continue to get more and more complex. When executives, traders, and other employees are held accountable by their shareholders who are at a clear information disadvantage and rely on these same people to provide them such information, who holds them accountable? The regulators? Politicians? These are the same people who depend on the financial donations, support, and backing of the powerful banking elite for their own careers. This is a very simplistic distillation of the interrelationships and I’m not sure what the answer is, but there’s a clear misalignment of incentives which causes a lot of problems, not only in the finance and banking industry, but in a lot of other areas in global economics, governments, and social structures.
The character I found most compelling was Michael Burry. Despite being correct on the crisis and generating unreal triple digit returns for his clients through the duration of his fund, he never received the recognition or any apologies from those who criticized and berated him. I also found his non-traditional finance background and approach to life inspiring and comforting.
JL Nexus 