Getting ready to call it a night at about page 200. The first part of this book is a pretty clear review of the mortgage backed securities market. Lots of the concepts will be familiar to folks who already watched The Big Short. I learned two new significant things from this portion of the book.
1) I'd heard for years that a big portion of the crises was the result of mortgage backed securities losing value, but had not realized that one of the reasons this became such a big problem so fast was that many big investment banks were borrowing money short term (on as short as daily terms) at lower interest rates to cover the cost of owning many of their assets. So once people starting questioning the liquidity and solvency of a given bank, they could get in big trouble in only a day or two when when they couldn't get new super short term loans to pay back the old super short term loans which were coming due, and couldn't sell the mortgage securities they'd bought with that money to pay back the loans either.
2) European banks were hugely invested in US financial markets, borrowing in dollars with the same short term rates and then using those short term loans to buy bonds and mortgage securities. Because they were both borrowing from the US and then reinvesting in the US, the net capital flows were small (the topic of that elephant quote in my first post).
Because of a divergence in banking regulation, many european banks had an advantage in this business because they were able to get up to 40x leverage (and hence achieve higher returns, all things being equal), while US based banks generally maxed out around 20x leverage. We haven't gotten to this part yet, but I'm assuming that difference is part of why US banks were able to bounce back more effectively than european ones after the crises.
I also learned at least two less important things:
1) I think I finally understand the motivation for creating CDOs/CDO-squareds: it allowed even bigger percentages of the total values of big sets of mortgages to achieve the desired AAA rating than was possible with only standard mortgage backed securities. In The Big Short both CDOs and CDO-squareds are mentioned, but mostly in the context of the marked being a complicated mess that no one really understood.
2) Back in 2007 Jay Z filmed a music video for a song (Blue Magic) where he was driving around NYC with a suitcase of euros rather than dollars and it was widely reported on at the time as a sign of how confidence in the dollar was collapsing.
Based on my 2/7th sample of the book to date, as books about economics and investing go it is so far proving reasonably engaging.