The author did a nice job explaining at a high level all the required technicalities of derivatives like MBSs, CDOs, and CDSs and how really bad incentives all over the industry led to its collapse. I enjoyed hearing about the details of how each of the three traders/investors made their decisions and worked with the banks to put on trades initially that were very unpopular.
Some of my big takeaways:
- The problem isn't the tools (derivatives) but the people using the tools and the incentives (corporate bonus structures and laws) driving those people.
- The system of "laissez-faire until you're in deep shit and then government saves you" doesn't work.
- Smart people can very easily deceive themselves if paid enough money.
- Subprime was a machine to put capital in exactly the wrong place and destroy it.
- TARP created to save bad loans but ended up just being handouts to banks.
- Treasury just bought up worst loans and transferred them to taxpayer.
- Bailouts: Instead of just gifting money to banks, the government should have forced them all into receivership and wound them all down carefully.
Below are my full notes on the book.