THE MAN WHO FORESAW A BLACK SWAN.

THE MAN WHO FORESAW A BLACK SWAN. I have posted a number of times about the toxic assets that made the financial crisis so terrible, including here about how it took very intelligent people to design them and the complicated mathematics that underlay them. The Economist (February 13) recently pointed out that “A proper understanding of a typical collateralised debt obligation (CDO), a structured bundle of debt securities, would have required reading 30,000 pages of documentation.” Since the assets were almost incomprehensible, it is understandable that very few people foresaw what would happen to these assets. Michael Lewis has an article in Vanity Fair (April 2010) (based on his new book THE BIG SHORT) about the first person to figure out that CDO’s based on subprime mortgages were vastly overvalued. The man, Michael Burry, made $875 million dollars for himself and his firm by selling these CDO’s short. An investor in his firm would have had a gain of almost 500% over an eight year period during which the S&P 500 was returning about 2%. Michael Lewis is a wonderful story teller (he wrote MONEYBALL). He is also a wonderful explicator. His explanation of how these assets worked (or didn’t work) is marvelously clear.