This book is about how several hedge fund investors, including Kyle Bass from Hayman Capital engaged in credit default swaps to make a fortune during the subprime crisis in 2008. This meant betting against the subprime mortgage bond market. First, the crisis hit banks like Bear Stearns. Later, it hit countries like Iceland. Governments can actually default. The warning signs were clear. Kyle analyzed the countries which he thought would default, including Iceland, and placed bets against them.
Iceland went bust in October 2008. Their debt at the height of the crisis amounted to 850% of their GDP. When the Icelandic Krona was strong and interest rates were high, people started to borrow in Yen or Swiss Francs. Once the krona plunged, citizens were in for a lot of trouble. During the crisis, the streets were empty and so were the stores. Prices shot up when the krona plunged as shops had to import goods from overseas. Their biggest mistake was to buy as much assets as possible using borrowed money. This was ok as long as asset prices kept rising. Banks traded fake capital at inflated asset valuations. The Icelandic investment bankers made inappropriate and risky decisions and didn’t know what they were doing. Iceland ignored reports from other countries, like Denmark. The banks sold each other stuff, borrowing huge sums of money and relending them to the public. The public, in turn, bought all messy assets as well. Icelandic people are generally very ambitious. Iceland ignored help. PhD holders don’t want to fish or smelt aluminum for a living.
I have never in my life slept so little, because I was so eager to learn. I slept two or three hours a night because I was sitting beside him (fishing legend). .. The reach of the trawler. The most efficient angle of the net. How do you act on the sea. If you have a bad day, what do you do? If you’re not fishing at this depth, what do you do? If it’s not working, do you move in depth or space? In the end it’s just so much feel. In this time I learned infinitely more than I learned in school. Because how do you learn to fish in school? – Stefan Alfsson, an Icelandic fisherman
The author visited Greece. Greece bonds were rated as junk and had to be bailed out by IMF and the other members of the European Union. The government borrowed 30 billion euros of money and spent it on areas like paying the civil servants excessive salaries, pension schemes etc. The education system is very inefficient as well. Bribery is also prevalent throughout the country. In the case of Iceland, it was the banks sinking the country. In the case of Greece, it was the country sinking the banks. Many items were kept of the government’s balance sheet. There was no statistics department or independent check on the government finances. People were not fined for not paying taxes. The authorities take about 7 to 8 years to resolve a case of bribery. Almost everyone in Greece engages in some form of bribery, cheating etc. The real structure of their society is akin to ‘every man for himself’. Greece joined the European Union in 2001 after being suspected of manipulating their figures in order to meet the EU requirements. They were eventually discovered in 2009, after a change in political ruling party.
This is the secret of success for anywhere in the world, not just the monastery. The idiot is bound by his pride. It always has to be his way. This is also true of the person who is deceptive or doing things wrong: he always tries to justify himself. A person who is bright in regard to his spiritual life is humble. He accepts what others tell him – criticism, ideas – and he works with them. – Father Arsenios
The Irish banks went bust. The banks borrowed foreign money to conquer Ireland, buying up property in their own country. As a result, hoards of people are leaving the country. Unemployment rates spiked. Interest rate spiked. Budget is a severe deficit position. Ireland was tremendously successful from the 1990s to the early 2000s. The young, immature bankers didn’t realize that a housing bubble was emerging. The housing prices kept rising and were bound to fall one day. Banks started offering loans without performing adequate customer due diligence checks. The important people in Ireland went down with their banks. Their housing bubble was also not as complex as America’s. There were loads of unoccupied new property projects. The Irish government created ‘TARP’ and nationalized Anglo Irish bank, thereby guaranteeing depositors and bondholders of their investments. There was a major issue with the government paying off foreign bondholders using money borrowed from the ECB. Unlike Greece, there was hardly any public unrest. The big property developers were spared from bankruptcy and instead could aid the government in resolving the crisis.
Are Germans willing to bail out countries like Greece? There is a feeling of rage, indignation among Germans on the European financial crisis. The two main options for Greece is firstly to slash their size of the government or undergo major structural reform. To the Germans, it is politically unacceptable to bail out other countries in the EU. Public dissatisfaction is at an all-time high. Germany have become so powerful that the rest are relying on their financial power. The people are very frugal and will not live beyond their means. Living beyond their means is seen as unacceptable and unbecoming.
The German government gives money to the European Union rescue fund so that it can give money to the Irish government so that the Irish government can give money to Irish banks, so the Irish banks can repay their loans to the German banks. They are playing billiards. – Henrik Enderlein
Why should you pay twenty million to a thirty-two-year old trader? He uses the office space, the IT, the business card with a first-class name on it. If I take the business card away from that guy he would probably sell hot dogs. – Klaus-Peter Muller, Commerzbank chairman
Even the US government bonds was not triple A rated at one point. Municipal bonds are not doing well and state treasurers are not aware of how their situation. Different municipals performed differently, and some were a lot worse than the others. The state of California had excessive pension schemes and sacrificed on other important areas of the economy, like the education system. The amount of tax collected could not sustain the pension scheme. Eventually, parks had their funding cut. The cities pay eventually when the state as a whole is not performing well. The people of San Jose refused to believe the state they were in, even though the state was flirting with bankruptcy. The state was in so much debt that even forcing public workers to take pay cuts won’t work. Service-level insolvency or cultural bankruptcy is when the libraries and communities centres are closed because they can’t afford to open. Greed was the main problem. Americans look at short term reward, neglecting the long term consequences. They are tempted by the chocolate cake that appears before their eyes. Self-regulation is hard as humans are generally greedy. Self-regulation can work if the environment punishes the institution/people for being greedy.
My approach has been I don’t care who is to blame. We needed to change. It’s got to be about the people. Teach them respect for each other, integrity and how to strive for excellence. Cultures change. But people need to want to change. People convinced against their will are of the same opinion still. – City Manager of Vallejo, Phil Batchelor
There was once a lone pheasant in the gardens of Blenheim Palace who avoided being killed by the hunters. He was affectionately known as Henry by the tourists. Being the only survivor in an unregulated environment, he faced no competition for food. Henry kept eating till he was fat. Even when he was fat, he just ate and ate. Eventually he became too fat to fly. Then one day, a fox ate him. – Peter Whybrow, a neuroscientist, on the greed of Americans