The Big Short: Lessons Learned
What are the Valuable Lessons The Big Short Teaches All Investors and Startups?
The book itself was written as a result of the financial calamity that happened in the late 2000s.
It was a combination of very greedy, avaricious bankers, hungry Wall Street people that really needed to create products that "ate more people's lunches." They did this by what are called sub prime mortgage bonds, and collateralize debt obligations, or CDO's. They created these products and then they dispensed it upon the masses, the people that really had very little understanding of what these documents were. They wanted to buy a new home, there's tons of liquidity in the market, tons of cash, and interest rates were just right to borrow.
What these sub prime mortgages did, and what they did, and how they caused such a calamity on the markets, was by having people sign away their lives, and sign away their rights, essentially, through these mortgage bonds, and to some extent, many of whom should've known better. If a deal's too good to be true, it probably is, and that's what these deals looked like. Wall Street is very much to blame for allow the inherent issues that took place, and by creating these superfluous products, or these products to collateralize debt, and package them in a way that they kept selling and selling. They would create these trenches of really crappy loans.
The characters in the book that included Meredith Whitney, Micheal Barry, Cornwall Capital, Greg Lippmann. There are very few people who are able to stop this greed and this hunger for exploitation. These particular people were the ones who capitalized on these CDO's. They bought what are called credit default swaps. There's a difference between CDO's, which are the debt obligations, and credit default swaps, which are actually insurance on when a sub prime mortgage bond within a CDO would default. The CDS's, credit default swaps would pay off in huge multiples.
How is this story helpful to startup founders and investors of today?
Imagine CDS's are kind of like insurance on the default of these sub prime bonds, sub prime loans that are packaged together and what are called CDO's. Hope that makes sense. I know it can be confusing. We definitely have more information on our site, AngelKings.com for more information on investing, generally, but that's the core of what happened. In 2008, the stock market dropped more than 30 percent and millions of people, millions of people had a run on the bank and lost so much money in terms of collective population that it was one of the biggest calamities in our history. We've gotten out of it to some extent, but there's still many things that need to be done to make sure there is market symmetry to protect for future calamities like this.
Now the second big point is that only a handful of people were able to capitalize on this. To their credit, they capitalized on it, and made money. Reading the book, "The Big Short," you see these stories and these personas of each of them. I don't think they came across as necessarily as greedy. I think they were more angry and so upset with the level and tone of avarice and rapaciousness of these Wall Street bankers in creating these sub prime mortgage bonds and CDO's, that they kept hedging and betting against it as a result of what was a perceived anger against this greed. It's ironic that they're anger towards the greed made them more greedy in buying these credit default swaps.
Meredith Whitney was one of the first who spotted the issues, and Dr. Micheal Barry, and Cornwall Capital, and the rest were able to actually capitalize on it. The last point of the book that's important is, we've had some meaningful reforms, one would argue whether you're Republican or Democrat, we've had reforms, but we still need to be aware that greed exists on both sides. Both as the consumer who wants to get the best deal at all times, as well as for Wall Street, who, when the spreads become thinner, they try to find new products and new ways to make money. I think that's the lesson - greed exists and it's not going anywhere. It's only a matter of time before the next big calamity or market crisis takes place.
If you're a consumer, it you're a startup, you need to have cash accessible at all times. If you're an investor, beware. Read the details, read the fine print. Many investors who had just blindly wanted solid returns by buying up these CDO's, they themselves, were investing in products they thought were guaranteed, but nothing in investing is guaranteed. If anyone tells you differently, they're lying to you. Nothing is guaranteed. It's all speculation. Overall, I thought this was a four and a half stars out of five. It's an excellent book. You should definitely check it out. If you like this book, you've got to check out our book, "Kings Over Aces", which is a best seller on investing and venture capital.