Two books on crisis events that I never even heard about

The first is by The Greatest Trade Ever by Gregory Zuckerman. This is essentially a story of how a group 'mavericks' who believed that the country was gripped in a frenzy of the housing bubble were determined to short the market and how they figured out how the way to do it. The title of the book refers to the short selling done by John Paulson a hedge fund manager with very little knowledge of the mortgage market although it is also a story of market incompleteness – mortgages couldn't be shorted directly, nor could their securitized versions. Neither could credit default swaps until the contracts became more or less standardized (at least that was my reading of it) and the emergence of the ABX index eventually made it easier to short the market. Those who were able to profit from the subprime crisis believe of course that had they been able to directly short the market, the bubble would not have been quite as frothy. This is also a story of how Deutsche Bank led by Greg Lippman shorted the market even as his counterparts were going long. There are also other stories of traders trying to stay liquid as the markets moved against them in their short positions. All in all a good read.

The second is The Quants by Scott Patterson. It details the meltdown they suffered in August 2007 (something that I wasn't even aware of) as well as the history of hedge funds – mainly Ed Thorp's role in developing quantitative methods to exploit mispricing in the convertible bond market for corporate bonds. I view the role of the quants as peripheral to the crisis although the book explains how stock prices can rise in the midst of a crisis as the Dow was doing. The quants have to buy massive amounts of stock to return to the prime brokerages the stock they borrowed as they attempt to unwind their positions, if I understand this correctly. The book also offers small glimpses into the their world and it would seem that all of the characters have a penchant for gambling (card counting in Vegas seems to be an induction rite while in college) and graduating to high stakes poker after they have made their billions. The book started off really badly (for me) though:

Peter Mueller stepped into the posh Versailles Room of the century- old St. Regis Hotel in midtown Manhattan and took in the glittering scene in a glance. It wasn’t the trio of cut-glass chandeliers hung from a gilt-laden ceiling that caught his attention, nor the pair of antique floor-to-ceiling mirrors to his left, nor the guests’ svelte Armani suits and gem-studded dresses. Something else in the air made him smile: the smell of money. And the sweet perfume of something he loved even more: pure unbridled testosterone fueled competition.

Fortunately, the prose got better (or at least not worse) later.

These two events caught me somewhat by surprise, especially since I thought I was keeping tabs on the crisis. I had heard of John Paulson's trade long after the fact when he had to testify