Micheal Lewis was the famous writer to the book ‘the big short’ as an analysis of the economic status of the country. He would be said to have been a business man who made use of short stories to drive his point home. The main idea behind the text would be said to be the research of the origin of financial crisis. Some of the short stories involved in the book would be the Wall Street by Danny moss. Michael makes use of the story to show the crisis using characters from the story to make it effective. What is the purpose of the many tales used in the book? They would be said to be relevant to show the interest to investors and clients of the financial sectors. The story of Danny and the Wall Street would also be used to show the same relevance. Michael made use of the book to address the high economic crisis facing the nation during those days. The writer also analyzes the various points in economy that involve and lead to the rising economic crisis in the world. The thesis statement of this paper would be the analysis of the book ‘the big short’ by Michael Lewis and its effects to the business world.
The Wall Street tale would be said to involve Danny as a risk taking business man having been offered a business deal. The deal involves Danny who asks for the owner his share of benefit in the deal as a condition to accepting the offer. This conversation shows the interactions involved in any business between any two persons. The book therefore appears to be economic and business based.
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The summary of the story would be done in various divisions. The first would addition of innovation to the old bond that was considered boring by many clients. A bond can be explained as a promise by various government or organizations that make interests on the lent money. Over the years, bonds have appeared to be used as items of trade in many places. Michael used the story of the Wall Street to discover that financial products would be produced from various other debt based incomes. This would be like credit cards and home mortgages. Therefore, the origin of the mortgage bond would be concluded at this time. Wall Street investments often used mortgage bond as financial product by buying and selling it.
The mortgage bond experiences some problems which would be said to be based on the fact that home owners usually finance their debts again and again during low interest rate periods. This would lead to premature payment of the principal amount of money. In order to overcome this problem the Wall Street came up with an idea. They structured mortgage bonds into tranches where, the high layer represented the last mortgages to be paid off while the low layer represented the first paid mortgages. This would help handle the problem facing the bonds since the people who wanted high pay backs invested in the low layers and vice versa for the people who demanded for lower pay back.
Michael appears to dwell on risk takers business men and this could be said to be evidenced by engagement in subprime mortgages. This would be said to be the new strategy of conducting profitable business through mortgage bonds. What are subprime mortgages? These would be defined as the mortgages of higher risk but eventually give heavy profit. This demand for subprime mortgages by the Wall Street investment led to the attraction of lenders. They would convince people to make sure they acquire their own a mortgage. This convincing by the investment led to their establishment of a new mortgage that would attract more people to join the mortgage eras. The mortgage was called the variable rate that minimal to zero interest rate at the beginning. Later the mortgages changed and rose to higher values that the customers were left worried. The lenders made use of the subprime mortgages and urgent messages to convince the customers to make use of their mortgages for the benefit of the companies. The convincing done by the lenders seemed to accomplish the task of attracting customers. The Americans turned up in large numbers to acquire the mortgages oblivious of the outcomes in the end.
The previous mortgages appeared to grow weaker by the day due to the influence of the mortgage bonds. However, they became riskier and the companies appeared to have a problem in selling the mortgages since they would not be bought because of the fear. This shows the relationship between business and risk taking. People would not buy the mortgages according to the risk they would have to undergo. This would be for the courageous since it would involve going through loss of money if not well transacted. The risky bonds appeared to be rated highly due to the conflict that existed between the Wall Street and rating agencies like Moody’s and Standard & Poors. FICO stores appeared to be the vital borrower of mortgage bonds and, therefore, this assisted in rating the mortgage bonds.
The crisis would be blamed on the lack of business people who had the characteristic of being risk takers. This should be noted to be relevant to business and prevent the crisis by advising the people on the importance of being a risk taker.
The investment, Wall Street still required and felt the need for more profit and would have to rethink their strategies in order to earn more profit from the lower tranches. A strategy would have to be implemented for the success of their mission. They decided to change the packaging of the lower tranches into hundreds of different bonds all together. They would then attempt to convince Moody’s to grant them higher ratings to the collection as one large bond. The strategy was put in motion and succeeded. This led to the invention of collateralized debt obligation also known as CDO in the business sector. The attempt get high ratings from the ratings agencies succeeded as they acquired triple A ratings. This would be said to be the highest rate to be in existence. This was the breakthrough for the Wall Street investments. They then earned the permit to sell CDOs to organizations that run under the bylaws that they should only perform with products rated triple A.
The story also informs on the foreseen collapse of the mortgage financial investment through the vision of young man by the name, Mike Burry. The company had acquired and made fortunes of money from the transactions of the business they offered. This young man made use of critical analysis of the mortgage bonds and came to a conclusion that there would be a collapse in the company. Many would not believe, since such news appears to break the heart they would not choose to believe him. In order to benefit from the foreseen collapse he asked for an insurance of incase the collapse came true. Many other individuals who believed in the vision also requested for insurance. A large number of people demanded for the insurance, thus the invention of the ‘credit default swap’.
What credit default swap is as mentioned above? This would be defined as the policy of insurance on an item that an individual does not have to possess as his or hers. The insurers made profits only if the CDOs and bonds appeared not to default. However, if the collapse occurred as foreseen, Mike and the other people who had taken insurances would receive fortunes. The people would not recognize the identity of the insurers until after much information was revealed. It was discovered they were the AIG group that heavily insured the CDOs and mortgage bonds as a way to earn large sum of money. The AIG did not involve regulations in their transactions and this was considered as an important factor in the transaction.
Later, the mortgages appeared to be experiencing shortages. This would mean disaster for the investment as they would end up broke. At the beginning they assumed the idea of running out of mortgages. They then realized the intensity of the situation when it dawned on them that they would even have CDOs. Wall Street investment always had a plan up their sleeves in case of any emergencies. They changed their income streams from mortgage bonds to credit default cards. This appeared to be an excellent decision since the credit default cards would bring high profit just like the mortgage bonds. The dependence on credit default cards led to the packaging of the new income streams into the CDOs, making business run as usual. This helped the investment largely as it did not collapse yet.
Eventually, in 2008 analysis showed that the Wall Street investment bank appeared to be earning unfavorable profits. As this happened, they still had mortgage bonds and CDOs waiting to be sold in large numbers. In the final end, the whole process collapsed as foretold by Mike Burry. From this collapse there came up the crisis which appeared to spread through many other financial firms. For example; real estate costs started to drop, investment banks counted their losses, the Lehman brothers became bankrupt and many other problems came up. This led to the collapse of several financial institutions making the world market appear to be in panic. Even AIG, which had been ranked as the worlds largest financial investments collapsed. Americans helped in paying the loans which was a huge sum of money that even our next unborn generation would not afford to pay back. According to Micheal, this was the end of; the big short’ as it shows the collapse of the Wall Street investment banks.
The most and probable cause of the collapse would be the Wall Street investment bank. The bank would not consider the consequences that would come along with the acquiring of heavy profit. The bank just went on and on in making profit from mortgage bonds until they reached exhaustion. This would be said to be the mistake the bank made by accepting the use of alternative income streams to package in the CDOs. This would lead to the poor balance of trade as it appears to have happened in the bank.
Why the CDOs were considered toxic? This question can be said to be common in the study of finance in that according to Michael Lewis, the CDOs were considered toxic. This would be said to mean that the deal with the CDO would be considered dangerous. Only the mighty risk takers would pull through with dealing with the CDOs as a way of earning profit.
Charles Ledley would be said to have been a friend to the author of the book in that they compiles the book together. They even shared some ideas of the books contents. However, Charles appeared to have this belief that he would not let go since he believed it was the ultimate promotion to the investment. He believed that the best way to earn more profit on Wall Street would be to find out whatever Wall Street did not expect to happen. They would then place a bet on the chances of the event happening. This had proved successfully in their earlier attempts. Considering the collapse as an unlikely event for the investment, the theory of Charles would succeed too. It would have reduced the chances of the collapse occurring if a bet had been placed on the possibility of the foretold collapse. The various investments and individuals would have placed a bet on the chances of collapse occurring after the mention by the yong man. This would have led to people earning fortunes of money eventually.
In conclusion, the crisis in financial sectors appears to have been handled effectively by the author with the use of the short stories. It clearly shows the involvement and events that led to the crisis. It makes the reader understand the instances that led to the crisis and that it would have been prevented. This shows that the financial crisis occurred as a result of poor management of the financial institutions involved. The author analyses the stock market and the foreseen collapse to come up with the final result of the collapse. The book can, therefore be said to be a guide to the financial roots.
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