Sunday, March 21, 2010

Predicting before, or analyzing after?

On 14 March 2010, "60 Minutes" had a piece on a new book by Michael Lewis:

His new book, called "The Big Short: Inside the Doomsday Machine," comes out later this week and it explains how some of Wall Street's finest minds managed to destroy $1.75 trillion of wealth in the subprime mortgage markets.

As to forecasters of the doom, "60 Minutes" featured the work of a physician turned hedge fund guy:

The first one to see that something was seriously amiss in the burgeoning subprime mortgage market was Dr. Michael Burry, a California physician with only one good eye.


Beginning in 2003, he turned to something that no one else in America was doing: reading and analyzing the pools of risky subprime mortgage loans that Wall Street had been buying up and bundling into highly profitable mortgage backed securities, which they were selling to investors around the world.


"There was essentially crappier mortgages being put into these pools. And it didn't seem investors seemed to care and it didn't seem the ratings agencies seemed to care."

Asked if he thinks many people read these prospectuses, Burry said, "I think the lawyers that put them together to an extent maybe."


In effect, Lewis writes, Burry was doing the first real analysis of the creditworthiness of the subprime borrowers and the structure of the complicated Wall Street mortgage securities; the kind of work that was supposed to have been done by bond rating agencies like Standard & Poor's and Moody's, so that investors could accurately judge their risks.

On CuriousCapitalist, Stephen Gandel writes:

In the acknowledgments of the book, Lewis praises a report written by Anna Katherine Barnett-Hart as the best piece of research written on CDOs, ever. By now you may have seen the WSJ story about her. Turns out she is not some high-paid hedge fund analyst, but at the time of writing the report a college senior just trying to earn her degree. Her thesis looks at why so many CDOs performed worse than expected.

The thesis is dated March 19, 2009. [See Michael Lewis’s ‘The Big Short’? Read the Harvard Thesis Instead!]


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