fascinating read on wall st. by Michael Lewis - Liar's Poker author

[David Farber <dave () farber net>]

Begin forwarded message:

From: Rahul Tongia <tongia () cmu edu>
Date: November 13, 2008 11:36:48 PM EST
To: dave () farber net
Subject: fascinating read on wall st. by Michael Lewis - Liar's Poker  
author
Reply-To: tongia () cmu edu

Dave,

For IP consideration

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom#page1

I found it highly illuminating (and a good read).

snippet: "That’s when Eisman finally got it. Here he’d been making  
these side bets with Goldman Sachs and Deutsche Bank on the fate of  
the BBB tranche without fully understanding why those firms were so  
eager to make the bets. Now he saw. There weren’t enough Americans  
with shitty credit taking out loans to satisfy investors’ appetite for  
the end product. The firms used Eisman’s bet to synthesize more of  
them. Here, then, was the difference between fantasy finance and  
fantasy football: When a fantasy player drafts Peyton Manning, he  
doesn’t create a second Peyton Manning to inflate the league’s stats.  
But when Eisman bought a credit-default swap, he enabled Deutsche Bank  
to create another bond identical in every respect but one to the  
original. The only difference was that there was no actual homebuyer  
or borrower. The only assets backing the bonds were the side bets  
Eisman and others made with firms like Goldman Sachs. Eisman, in  
effect, was paying to Goldman the interest on a subprime mortgage. In  
fact, there was no mortgage at all. "They weren’t satisfied getting  
lots of unqualified borrowers to borrow money to buy a house they  
couldn’t afford," Eisman says. "They were creating them out of whole  
cloth. One hundred times over! That’s why the losses are so much  
greater than the loans. But that’s when I realized they needed us to  
keep the machine running. I was like, This is allowed?"



The lingering Q I have for those more skilled at this - how much of  
the current mess is transference of wealth vs. loss of wealth?  At one  
level, isn't it all transfer? Every stock sale has two parties, etc.  
Of course, some transfers may be outside the US.

Of course, one has opportunity costs - if one blew a billion dollars  
of R&D on a product that failed, then that money paid salaries,  
contractors, etc. Went somewhere. But not long-term value.  If Wall  
st. is about capitalism which is about *allocation* of capital, I want  
to know not only where it went (an accountant will tell me, sometime  
later on) but what good it did.

Rahul

--

************************************************************************
Rahul Tongia, Ph.D.
Senior Systems Scientist

Program in Computation, Organizations, and Society (COS)
School of Computer Science (ISR) /
Dept. of Engineering & Public Policy

Carnegie Mellon University
Pittsburgh, PA 15213 USA
tel: 412-268-5619
fax: 412-268-2338
email: tongia () cmu edu
http://www.cs.cmu.edu/~rtongia





-------------------------------------------
Archives: https://www.listbox.com/member/archive/247/=now
RSS Feed: https://www.listbox.com/member/archive/rss/247/
Powered by Listbox: http://www.listbox.com