Category: 2 – BUY it! (All Categories are 1 – Read ASAP!, 2 – BUY it!, 3 – SHELF it, 4 – SOMEDAY it)
Comments: This was a really good read. I have to say this about all Michael Lewis books. His books are a real lesson in writing. He really takes you on a journey with him and beautifully extracts the insight out of it. He doesn’t do many interesting stories and anecdotes. Instead, he runs a few stories in parallel bringing out a central theme or insight. Just fantastic.
Boomerang is about his travels in Europe following the credit crisis. He explores what Iceland, Greece, Ireland and Germany did with the explosion of cheap credit.
Top 3 Learnings:
1. It’s hard to do the right things when conflicts of interest are afoot. Banks, for example, employed analysts who were supposed to give an unbiased view of the markets. However, in the case of Phil Werner, who predicted the Irish property bubble, this didn’t work in practice because Merrill Lynch’s angry clients were the banks who were behind the property bubble.
2. It’s amazing how quickly old financial institutions let go of traditions when a new upstart comes in with a ridiculous idea that seems to make money.
Anglo Irish Bank was that upstart. A property developer could practically walk in the morning and walk out by afternoon with 100s of millions of euros. Soon, all Irish banks had divisions which paid their staff based on the amount of money they lent (talk about bad incentives). Allied Irish even had a department called ABA – anybody but Anglo with salespeople focused on poaching anglo’s customer.
3.The effect of cheap credit had different effects in different places. Americans decide to use it to buy houses they couldn’t afford. The Greeks decided to use it to fund a lifestyle that was definitely beyond their means. The Irish used it to buy more of Ireland from each other. The Germans behaved responsibly within but went crazy in enabling everyone else. In fact, the Germans were the ones who bought all crap assets until the very end. The followed the rules and took AAA rated bonds at face value to devastating effects
Book notes here.