Last night, I did a post about nine things I had learned from The Big Short. I meant to write about ten things (as the URL of the post implies), but until now I forgot was it was.
It is this – The Powers That Be Can Mask Weakness Longer Than the Shorts Would Like. In other words, they can use their power to hide the truth for a while. The truth will come out, as it always eventually does, but waiting for the truth to emerge can be uncomfortable – – and sometimes even ruinous – – for those depending on the truth for their salvation.
In the case of the short-sellers cited in the book, the "masking" going on was that CDOs, having pretty much no liquid market, were priced by such upstanding organizations as Goldman Sachs. These firms naturally cited prices favorable to their own positions. So an honest broker might declare a given bundle of swaps to be worth 60 cents on the dollar, but Goldman and Morgan were claiming they were worth, say, 95 cents on the dollar, thus making quite-valuable CDO swaps to be purportedly worth not much value at all.
It would be sort of like getting into a huge short position on Apple Computer (AAPL) at $240/share and then suddenly finding Goldman to be the only arbiter of AAPL value. And after you put your short on, iPod sales collapsed, Steve Jobs got run over by a rickshaw, and Macintosh computers were found to randomly erase hard drives without warning……..yet Goldman said the value of AAPL was $239.50/share, simply because they had a huge long position, even though you knew the value was really more like $80. You can imagine the frustration of the shorts.
The dam did finally break, however, and the investment banks finally had to accept reality, albeit kicking and screaming. Except for Lehman and Bear Stearns, the investment banks didn't really get their comeuppance fully, but it's at least heartening near Big Shorts' end to see these bets pay off handsomely for those with the foresight to make them in the first place.
