Michael Lewis' The Big Short is, in my opinion, by far the best book written up until now about the origins of the financial crisis. There are so many nuggets in this book, I have highlighted almost half of it. It is a fantastic tale of incompetence and/or dishonesty and one of the big unanswered questions in the end remains: who was incompetent and who was dishonest? It's a question the multiple lawsuits in the pipeline will only provide a partial answer to.
As the Senate recently approved new rules for credit-rating agencies, it's interesting to note that the rating agencies come out really bad in the book. They were badly gamed by the investment banks:
The pretense that these loans were not all essentially the same, doomed to default en masse the moment house prices stopped rising, had justified the decisions by Moody's and S&P to bestow triple-A ratings on roughly 80 percent of every CDO. (And made the entire CDO business possible.)
Not only that but, since rating CDOs brought in the bulk of their revenues (paid by the very investment banks who designed the CDOs), the credit-rating agencies had every incentive to do exactly as they were told and not dig any deeper than necessary. This is the damning email an S&P managing director sent one of his analysts, who apparently wanted to know a little more about the toxic waste in a CDO he was rating:
Any request for loan-level tapes is TOTALLY UNREASONABLE!! Most originators don't have it and can't provide it. Nevertheless we MUST produce a credit estimate.... It is your responsibility to provide those credit estimates and your responsibility to devise some method to do so.
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