>From Yves Smith
http://www.nakedcapitalism.com/2010/03/debunking-michael-lewis-subprime-short-hagiography.html
-----------------------------------------------snip
Lewis completely ignores the most vital player, the one who was on the
other side of the subprime short bets. The notion that “it’s a CDO” is
daunting enough to stop the non-financial reader in his tracks. The
author is remarkably uncurious about who the end investors were for
CDOs.
Listen up. Who really was on the other side of the shorts’ trades is
the important question. And the section in which Lewis finally gets
around to that (more than halfway thought the book, reader sympathies
to his key actors now firmly established) hides the fundamental flaw
in his narrative in plain sight:
…whenever Eisman sets out to explain the origins of the subprime
crisis, he’d start with his dinner with Wing Chau [a CDO manager].
Only now did he fully appreciate the central importance of the
so-called mezzanine CDO – the CDO composed mainly of BBB rated
subprime mortgage bonds – and its synthetic component, the CDO
composed entirely of credit default swaps on triple-B rated subprime
mortgage bonds. “You have to understand this,” he says. “This was the
engine of doom.”…
All by himself, Chau generated vast demand for the riskiest slices
of subprime mortgage bonds. This demand had led inevitably to the
supply of new home loans, as material for the bonds.
Yves here. It wasn’t all by himself, as we will see soon:
….the sorts of investors who handed money to Wing Chau, and thus
bought the triple A rated traches of CDOs – German banks, Taiwanese
insurance companies, Japanese farmer’s unions, European pension funds,
and in general, entities more or less required to invest in AAA rated
bonds -did precisely so because they were supposed to be foolproof,
impervious to losses, and unnecessary to monitor of think about very
much.
Yves again. Note that these are the international equivalent of widows
and orphans, but because they are exotic, presumably elicit less
sympathy. But as we will discuss soon, by this point in the tale,
January 2007, that list of prototypical chumps was out of date, which
has further implications for the real significance of this trade.
-raghu.
--
"Who are you going to believe, me or your own lying eyes?"
- Groucho Marx
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