Report of recent financial crisis and writing a report - Essay Example

The Big Short significantly explains the banking crisis of crisis of 2007–2008 by unfolding the events preceding the crisis, the actual crisis, and the characters involved (Lewis 1-5). Michael Lewis derives that a crazy, fabricated money machine, built on flawed mathematical models that most financial executives did not really understand the caused the crisis leading to loses of several trillion dollars through government bailouts. He establishes that in the late 1980s, Wall Street imagined that it could generate “bond-like” financial products from other debt-based income streams like home mortgages and credit cards.

In this context, a bond represented an income stream based on borrowed money. As such, Wall Street designed mortgage bonds in form of stacked layers to enable everybody to access them. As a result, investors craving for higher returns on their money invested in the lower “tranches” while investors seeking lower returns invested in the higher tranches. Indeed, we can trace the 2008 financial crisis from the development of the mortgage derivatives (Lewis 21-27). With the help of ratings agencies, Wall Street turned subprime mortgages into exotic, toxic financial products that attracted huge turnovers through laundering and reselling.

The subprime mortgages had higher risks attached to them but equally paid much higher interest rates designed for borrowers with lower credit worthiness. As a result, the demand for the subprime mortgages from Wall Street increased leading to increased motivation on the lender for additional subprime mortgages. In addition, marketing for the subprime mortgages increased considerably and more people took up the loans. Indeed, Michael Lewis argues that these financial instruments became opaque and complex everyday overshadowing the fact that their foundation lay on suspect loans that kept rising (Lewis 112-117).

With more people willing to buy the subprime mortgages, the quality of the mortgagees decreased, the risk for Wall Street’s mortgage bonds increased, and it became harder to sell the bonds to investors. Unfortunately, as the unstable foundation of subprime mortgages became weaker and posed a greeter danger to the world economy, the chief executives of America’s premier banks did not foresee it. Indeed, government regulators and treasury officials also failed to identify the eminent danger.

Nevertheless, some investors saw it and used the opportunity to make huge financial benefits from the financial crisis. However, Michael Lewis notes that Wall Street firms had the ability to hide the risk by making the idea complex and using the rating agencies. Actually, the rating agencies that included Moody’s and Standard & Poor’s  helped in giving risky ratings that equaled the US treasuries thus opening the financial market to many of CDO buyers. At this period, Americans bought the mortgages in large numbers without knowing that the mortgage demand emanated from their actions.

Michael Lewis introduces one of the investors who sought to benefit from this financial crisis as Darwinian world of the bond market. He also introduces Michael Burry, who became obsessed with investing and started a fund with the family money. Lewis states that after studying the bond market in 2004, Dr. Burry became convinced