A Guest Blogger Review of “The Big Short” by Michael Lewis
The Big Short by Michael Lewis is the story of how a few, very clever people made money out of the collapse of the US housing market in 2008. By 2008, about a trillion dollars’ worth of mortgages had been provided to US property owners in ways that appeared to be safe but were in […]
The Big Short by Michael Lewis is the story of how a few, very clever people made money out of the collapse of the US housing market in 2008.
By 2008, about a trillion dollars’ worth of mortgages had been provided to US property owners in ways that appeared to be safe but were in fact very unsafe. The mortgages – known as sub-prime mortgages – were given to people on low incomes. The mortgage holders paid a specially reduced rate of interest (known as a teaser rate) on their mortgages for, say, two years after which the full conditions of the mortgages were meant to apply. After two years, however, they refinanced their mortgages with another teaser rate for another two years. And so on.
Everything seemed to be OK as long as house prices keep rising at (or above) a certain rate. The debts of the sub-prime mortgage holders kept increasing but so did their assets and their mortgages were not, technically, non-performing. The game of musical chairs could not continue indefinitely, however. At some point, house prices would stop rising (they did) and the owners of the sub-prime mortgages would default on their mortgages (they did, in very large numbers). When that happened, the bonds (containing the sub-prime mortgages) owned by the Wall Street banks lost a lot of their value. The investors, who predicted the crash, made fortunes.
The book, which was on the New York Times best seller list for 28 weeks, is a great read for anyone interested in the events that led up to the financial crisis of 2008, the consequences of which are still with us.
By Michael Clarke, Guest Blogger
Editor’s Note: “The Big Short” can be reserved on the Fingal Online Catalogue.