I've recently found myself a bit obsessed with understanding the root causes of the recent financial crisis. Within the last few months, I've read Liar's Poker and The Big Short, both by Michael Lewis. I've twice listened to the This American Life episode entitled "Return to the Giant Pool of Money" while laboring away on the treadmill. I have found myself, on more than a couple occasions, scouring the internet to read more and more about mortgage backed securities, credit default swaps and other esoteric financial instruments which played a role in the downturn of our economy.

Here are a couple of lessons I have gained from my studies which seem relevant to the practice of law:

1) Examine incentives: One of the factors behind the collapse of the financial markets was the investment banks' thirst to create more and more securities that were backed by poor quality mortgages. The banks would then sell these mortgage backed securities to unsuspecting investors (in most, but not all cases). How were the banks paid? A flat percentage of the money they had under management, and they took their fees up front. So, it did not matter that the securities were backed by poor quality assets, the banks were paid anyway.

2) See the big picture: In Liar's Poker, Michael Lewis chronicles the stories of several individuals who profited greatly from betting that many of these mortgage backed securities would go belly-up. Few, if any, of these folks had specialized training or peculiar knowledge that could not be gained with elbow grease and a willingness to examine public filings. The common denominator was this: Each individual could see the forest from the trees. Common sense told that the market would collapse. Hard work helped them determine when it would collapse and how to capitalize on it.


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