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Tuesday
Nov252008

Nobody coulda foreseen the subprime mortgage meltdown—except for a lot a people who blew the whistle years ago.

This is an absolutely riveting account of the inflating subprime bubble told mainly from the perspective of industry insiders who understood there was no there there and bet heavily against these securities and the equities of firms that created, rated, and owned them. It describes how the volume of credit default swaps exploded because they were the "side bets" that allowed speculators to short mortgage backed securities and other collateralized debt obligations at much lower cost than borrowing and shorting the actual securities. Then the sellers of credit insurance packaged and subdivided the swap contracts to mirror the "shorted" securities. Normally the longs hate the shorts, but in this case people who were long on the MBSs and CDOs loved the short sellers because it increased the volume of activity on which they earned large fees while their clients were being walked over a cliff. Not only is the piece informative, it's a fun read by the author of Liar's Poker and has names and dialogs of knaves and fools as well as truth-tellers.

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