I've spent much of this long weekend curled up on the couch reading Too Big To Fail, Andrew Ross Sorkin's history of the financial crisis of 2008. I've wanted to read this book since it came out last year but it took me a while to get to it. I'm enjoying it very much.
As I read about bank after bank waking up and smelling the coffee too late, I am reminded of the risks of chasing returns. In the case of the financial crisis of 2008, the banks were chasing returns in the mortgage markets and the related markets for CDOs and other exotic derivatives. The scary part of the whole thing is they were chasing returns in a market they did not fully understand. Here's a quote from Alan Greenspan that I got from the book:
I've got some fairly heavy background in mathematics. But some of the complexities of some of the instruments that were going into CDOs bewilders me. I didn't understand what they were doing or how they got the types of returns out of the mezzanines and the various tranches of the CDO that they did. And I figured if I didn't understand it and I had access to a couple hundred PhDs, how the rest of the world is going to understand it sort of bewilders me.
To read the full, original article click on this link: A VC: Chasing Returns
Author: Fred Wilson
