John Keegan

I recently reorganized my bookshelves. I straightened and categorized the books, and I separated out all of the books that I haven't read and that I hope to read sooner rather than later. These are books that I've bought at the store, received as gifts, and unearthed on bookfinding expeditions. There are 31 of them. For a while now, I've had a quite large "to read" pile, and I add titles almost every week, it seems. The problem is that stacks of books are constantly getting pushed aside while I read whatever book I'm most excited about at the moment. There's not really anything wrong with this except that there are books that I really would like to read, but never seem to get around to it. So, since I obviously am not to be trusted, I have decided to take some of the decision making out of my hands: I have set aside a special shelf to hold my new "Reading Queue." On it are all of the books that I own and would like to read but haven't yet. From this shelf full of books, I will randomly select the next one to read. Before I get into that though, here's my reading queue, some of the books that will keep me occupied during the coming year:Without Feathers by Woody AllenThe Summer Game by Roger AngellOnce More Around the Park: A Baseball Reader by Roger AngellGame Time: A Baseball Companion by Roger AngellAn Army at Dawn by Rick AtkinsonThe Sheltering Sky by Paul BowlesThe Hole in the Flag by Andrei CodrescuDon Quixote by Miguel De CervantesParis Trout by Pete DexterThe Count of Monte Cristo by Alexandre DumasThe Last Amateurs by John FeinsteinA Season on the Brink by John FeinsteinLiving to Tell the Tale by Gabriel Garcia MarquezLast Train to Memphis by Peter GuralnickThe Great Fire by Shirley HazzardRound Rock by Michelle HunevenThe Known World by Edward P. JonesBalkan Ghosts by Robert D. KaplanShah of Shahs by Ryszard KapuscinskiThe Price of Admiralty by John KeeganEverything's Eventual by Stephen KingLiar's Poker by Michael LewisThe Coming of Rain by Richard MariusThe Heart is a Lonely Hunter by Carson McCullersLooking for a Ship by John McPheeMoviegoer by Walker PercyFraud by David RakoffThe Man Who Mistook His Wife For a Hat by Oliver SacksEast of Eden by John SteinbeckQuicksilver by Neal StephensonMr. Jefferson's University by Garry WillsOnce I had a full shelf to pick from, the only question was how to pick randomly. I thought about writing down names and picking out of hat, but that seemed like a pain, and I would have had to go look for a hat, so instead I located a random number generator to help me make my choice. I'm going back east tomorrow for two weeks, so I picked three books to take with me: Everything's Eventual, Paris Trout, and Don Quixote. I'm guessing most folks will be pretty busy over the next couple of weeks, and so will I, so I'll probably only post a couple of times while I'm gone. They should be good, though. Look for "My Year in Books" and a post about the books I gave as gifts. Happy Holidays, all.

Last week, Max directed our attention to a major new piece of reporting on the financial crisis: a Portfolio article by Millions favorite Michael Lewis. The author of Liar's Poker, among other books, Lewis is a gifted explainer of an industry badly in need of explanations. In the Portfolio piece, for example, he immerses us in the world of short-sellers who saw the subprime meltdown coming. However, the key paragraph - wherein trader Steve Eisman has an epiphany about how investment banks are leveraging subprime bonds - resorts to a sports metaphor, and thus fails to demystify an elusive instrument at the center of the financial crisis: the credit default swap (CDS)."When a fantasy player drafts Peyton Manning, he doesn't create a second Peyton Manning to inflate the league's stats," Lewis writes.But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. 'They weren't satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn't afford,' Eisman says. 'They were creating them out of whole cloth. One hundred times over! That's why the losses are so much greater than the loans.'I've heard financial insiders inveigh against peons who "don't know a credit-default swap from a turnip," but how are we to wise up, if explanations only come in the form of metaphors (athletic or agricultural)? Grabbing a fig leaf from the N+1 playbook, as it were, I decided to ask a friend in finance to explain the Peyton Manning analogy, as simply as possible. Here's what he had to say (wait for "the rub"):Assume the following: Eisman buys a crappy mortgage security (say, a $1,000 bond from a mortgage given to a strawberry picker who makes $14,000 dollars per year). Say the mortgage rate the strawberry picker pays is 15%. This means he's agreed to pay $150 a year to Eisman. But Eisman is worried that the strawberry picker will default because the guy's house value has collapsed and his income is drying up. Thus, Eisman wants to buy insurance on the $1,000 he's loaned. The way he does this is via a credit default swap.A CDS is essentially an insurance policy on a loan, and here's how it works. Eisman finds a counterparty willing to sell him insurance on his loan (a big investment bank like Lehman Brothers). Eisman agrees to pay the bank a fixed rate every year for protection of the mortgage security he owns (the crappier the loan, the higher the rate). Let's say for the $1,000 loan to the strawberry picker, his rate will be 10%. The bank pays him nothing on a regular basis, BUT, if the borrower defaults, they pay him the full $1,000.So: if times are good and everyone makes payments on time, the payments are structured as follows: The strawberry picker pays $150 per year to Eisman; Eisman pays $100 per year to Lehman (which then uses some of the cash to provision for losses, and uses the rest to make more loans). The strawberry picker gets to keep his house, Eisman keeps $50 per year (loan payment from strawberry picker minus the insurance premium he pays to Lehman), and Lehman gets $100.Got the structure? Now here's the rub.Imagine Eisman never actually had exposure to the loan in the first place. Being the brilliant skeptic he is, Eisman would never lend $1,000 to a strawberry picker with little income. He thinks that strawberry man is doomed to default on that loan, and he actually wants to bet AGAINST him. So instead of giving the loan and buying insurance, he just buys the insurance (hence the often used and rarely understood term "side bet"). To do this, Eisman still has to pay the "premium" for the insurance he's bought, and since it's a risky loan, the rate is high (e.g. $100 per year in the example above). [Though he stands to win $1,000 if the loan defaults.] In effect, Eisman is paying a "subprime-like" interest rate to Lehman every year! That's what Lewis was getting at.I would have used a different metaphor. I would have said it's like a New Yorker buying a bunch of home insurance policies in New Orleans because you are expecting that there will be a massive hurricane coming to wreck them. Now lets say that the insurance company took the money you were giving it, didn't provision for the coming doom, and instead, used that money to lend to more people building and buying houses in New Orleans.That's leverage upon leverage upon leverage. And that's the mess that is unraveling before us.