Hollywood to make a film about traders who made a fortune from the 2008 financial crisis
When news broke out last week that a single movie has attracted not one, but three A-list stars from Hollywood it immediately generated interest. But when we saw the author of the book was the one who wrote Moneyball, as well as the names of the actors involved – Brad Pitt, Christian Bale and Ryan Gosling – we were definitely hooked. Nothing to do with the actual cover of the book.
“The Big Short” is indeed an excellent read, providing insights into how and what triggered the crisis in 2008 that affected not only the financial world. Written in a way that doesn’t require complex financial or economic knowledge, it still manages to depict and explain the technicalities, while keeping the focus on how a quiet group of traders saw what was coming.
The story follows four people and their companies and teams that managed to see that subprime mortgages in the U.S. – the loans given to people with low credit ratings – became so widespread that they undermined the whole banking and credit system in the world’s largest economy and by proxy the global one.
The models evaluating these mortgages, the protagonists found out, were based on blindly optimistic models of the credit worth of individuals and ever rising house prices. This vision that banks wanted to see was furthered by credit rating agencies that were supposed to be private and independent, outside of the state and hence governed by free markets to provide accurate assessments. This wasn’t the case and by adding an increasing complication of the financial instruments that were connected to the subprime loans, the picture was obscured even more.
The guys that managed to see through all this and even profit from it, were described before the crash as odd outsiders, because their views and opinions were in stark contrast with the overall opinion of market participants – from retail traders and brokers to hedge fund managers and central bankers.
The first is Steve Eisman, whose attention to detail allowed him to break down all the elements of the mortgages that were given at the time and who realised that there was an opportunity to profit from this, as regulators and rating agencies were so misguided.
Michael Bury is our personal favourite. An ex-neurologist who turned his attention to the markets, while unknowingly suffering from Asperger’s syndrome. His dedication and complete immersion in researching the bond market (that also provide a vast array of information, just like indexes) led him to the same conclusions.
The final contrarians were Jamie Mai and Charlie Ledley who started “a garage band hedge fund” in a shed with an account that had around $110 000. Their current net worth is $120 million.
One thing that shouldn’t be forgotten when reading the book and nodding our head in hindsight agreement is that these guys actually took a big risk. A huge risk to be precise. There was a possibility that they could have lost all and then some. It is their trading process and mental fortitude that has to be admired, as being a contrarian and actually backing it with money is harder than it looks.
What anyone reading the book and trading the markets can take from it, is not only a bit of background knowledge on the mortgage market and banks in the U.S. – it’s the notion that you have to be critical of everything you see. Having a contrary view can be beneficial, especially when the calm before the storm is about to end.
If you’d like to win the book, drop us a line in the comments with anything you’d like to read in the blog – topics, famous traders, investors, CEO’s, or more about the mental side of trading. We’ll pick the winner by the 29th of January.
Our next article will be online tomorrow at 4:00pm GMT and it will have our preview of next week, along with the articles we recommend for your weekend reading.