The big fear of the 1980s mortgage bond investor was that he would be repaid too quickly, not that he would fail to be repaid at all.
That's one good sentence from the book, which you can order here. There is an excerpt from the book, on Michael Burry, here. Here is a Felix Salmon review of the book. In terms of policy, Lewis attaches great weight to the fact that the major investment banks became publicly-traded companies rather than partnerships. I liked the stories and much of the inside scoop, but it didn't have the giddy fun of Liar's Poker or Moneyball nor did it have the analysis of some other books.
Do you get a commission if someone orders the book using your amazon link? Just wondering.
Tyler, as a Harvard Ph.D., you may be interested in reading this about Lewis’ new book:
http://blogs.wsj.com/deals/2010/03/15/michael-lewiss-the-big-short-read-the-harvard-thesis-instead/
Mankiw is proud of Ms. Barnett-Hart as an Econ10 success. I hope you have time to read her undergraduate thesis soon (there is a link to it in the WSJ story). I look forward to your comments on her research.
Hi Tyler –
I haven’t read Michael Lewis’ book, and maybe he makes this point, but the reason that the 1980′s
mortgage bond investor feared getting paid too quickly was that typically, the only circumstance
in which there is widespread early repayment is one where current interest rates have fallen below
the interest rate at which the mortgage was struck, leading to a bunch of refinancings. When the bond
investor is paid back too early, he must reinvest that money at a lower interest rate. If the interest
rate is the same, or higher, prepayment is not a concern (but it’s not widespread). Thus, prepayment
risk is actually more of a “this security is very sensitive to interest rates on both ends” feature,
not a “we’re crazy corrupt bond investors” feature.
I know AK, and her thesis is very, very good, by the way – if you haven’t read it, I recommend it. The
data is incredible (she collected it herself). I haven’t seen anyone else, anywhere, using that kind
of data.
Though it’s worth noting that even if everything in Moneyball were true, as soon as other managers caught on (and especially as soon as the book were published), any advantage would vanish. One couldn’t really expect arbitrage profits according to a certain “system” to stick around forever. Sabermetrics did become big in clubhouses, so that makes it hard to tell if his success was luck or not.
There are a few academic papers that found systematic flaws in, e.g., NFL lines. (Road underdogs, for example.) Invariably, the authors did a follow up a few years later and found that the flaws had been corrected.
“..the fact that the major investment banks became publicly-traded companies rather than partnerships..”: that reminds me; isn’t a major lesson of the presemnt depression that we need radical reform of company law? Corporations are the means by which the executives loot the shareholders, and the rest of us suffer massive collateral damage.
And I was planning to buy you this book for your birthday…now I have to look for something else. I should probably not look at CDs or books – it is more than likely you’ve already have or read it
.
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