The Big Short: A book summary

For someone like me who is extremely interested in the world of business and finance, the movie “The Big Short” has been a game-changer and so is the book it’s based upon. Michael Lewis’ “The Big Short” is a riveting tale of the events that unfolded leading to the big crash of 2008. Lewis’ storytelling acumen brings this esoteric topic alive by viewing the  financial crash thru the lenses of few major characters who caught on to the madness happening on Wall Street. The human side of the events will be best experienced by reading the book, but my summary below tries to capture the general mechanics of the reasons and nature of the crash –

In early 2000s, many banks started lending money to ‘subprime’ lenders or basically folks who were unlikely to afford repayment. The loans were mostly mortgage loans (for buying homes). The soaring demand for these loans was driven by the perception that home prices will always go up and so making repayments would be easy. Even at risk of higher default (non-repayment), wall street sanctioned more and more of these loans because of the higher interest rates.

To get risk of default off their hands, the banks packaged these subprime loans into a “mortgage bond” and sold them off to other investors. These investors now received the mortgage repayment as interest on the bond that they had bought. Also if any loan  borrowers defaulted, then the investors holding the mortgage bonds would lose their principal money. The investment banks played a big part in facilitating these transactions between buyers and sellers of mortgage bonds, thus earning money on commissions. They also bought these bonds themselves.

To create even more ambiguity around these bonds, a new product called CDO (Collaterized Debt Obligation) was created. A CDO consisted of many of these subprime bonds put together to create the illusion that a CDO will be “diversified” across many underlying securities. In reality, most of the subprime bonds in a CDO were exposed to similar risks. A drop in incomes or home prices would lead to a wave of defaults in most of the bonds in a CDO at the same time, thus rendering the CDO to be worthless.

Investors looked at rating agencies like Moody’s and S&P to verify the safety of these bonds or CDOs. These agencies are responsible for giving a bond a rating based on how safe it is from threat of default. Despite the very real risk of default in these bonds/CDOs, Moody’s and S&P often rated them as triple/double A which were their safest designations. Multiple factors contributed to this – alleged influence/pressure from investment banks to give their bonds good ratings and also some structural weaknesses/blind spots.

E.g. one of the blind spots was that financial models used the average FICO credit scores of the borrowers in a bond to determine ratings. But these bonds were cleverly constructed to have just enough high FICO score borrowers to offset the many subprime borrowers to take the average above the thresholds needed by Moody’s/S&P.

Many wall street firms also acted as “CDO” managers which advised investors to buy CDOs based on their AAA/AA ratings. These managers earned millions in commissions for selling off these CDOs based on crumbling subprime loans.

Some market analysts like Michael Burry, Steve Eisman started digging into the details of all mortgages involved in these bonds and discovered that many of the borrowers had little chance of repayment. One representative was of a cherry picker who had $14,000 annual income and was being given a loan to buy a house worth $724,000. To benefit from this, these guys wanted to find a way to bet against these bonds/CDOs. To do it, they asked Wall Street banks to sell them credit default swaps (CDS) against these bonds. A CDS is basically like taking out an insurance for your car. You pay the insurance company (bank in this case) a fixed premium and they will pay you a big amount if your car is destroyed in an accident. The car in this case was a subprime mortgage bond/CDO and the “accident” was a default. The interesting thing was that Mike, Steve or the others were not needed to own the underlying bond unlike a regular car insurance buyer.

Presented with an opportunity for easy premium money, wall street banks like AIG sold multiple CDS on the same bonds, thus creating a huge potential liability if even one bond failed. They even packaged the CDS into new CDOs called synthetic CDOs and sold them off to eager investors. By this time you can see how the mortgage market had gone completely crazy with wall street trying to create one complicated security on top of the other to profit from it.

Soon most of the investment banks held billions of dollars worth of these bonds/CDOs, often bought with borrowed money which multiplied the risk. In 2008, when ultimately the subprime loan defaults started mounting up, the big banks started reporting huge losses. Bear Sterns collapsed and was bought up by JP Morgan at bargain basement prices. Lehmann went bankrupt. Merryl Lynch reported upto $50 bn of losses in subprime portfolios and was taken over by Bank Of America. The stock market collapsed and the U.S Govt had to step in to bail out billion dollar losses with tax payers’ money.

The worst part was that the investors, home owners and the general public bore most of the fallout while most of the big players on Wall street walked away with millions of dollars in commissions still intact.

Can something like this happen again ? As long as wall street incentives are aligned to doing more deals than ensuring investor good and the regulators continue to look the other way, we can unfortunately never rule out another 2008.


In defence of India’s bullet train!

Firstly, let me get a few things straight. The recent Mumbai stampede was a disastrous incident. I have traveled quite a bit on the Mumbai local trains and so sympathize with the daily challenges faced by the commuters. It’s true that there has been a long standing neglect by the railways/local governments on this issue. They should be held accountable for this incident and frankly for all other incidents around the country like the derailments.

But that doesn’t explain the huge outcry over the bullet train project. Using it as a sacrificial lamb only serves to deflect the blame from the real causes of the damage. In spite of the Mumbai incident, the bullet train project has several advantages  –

1) Increased collaboration with Japan which is highly necessary considering its tech prowess and to balance out China’s growing influence.

2) Shortening travel times will result in big growth in industrial collaboration in MH and Gujarat.

3) The financial deal that Japan has given us is pretty generous with plenty of time for repayment  and Japan providing the initial capital.

4) We will getting access to some amazing tech which will spur so much growth in high quality engineering jobs and industries in the manufacturing sector.

5) Japan has had this system since the 1960’s and there have been zero accidents till now. With that kind of expertise, I am confident that the Japanese can help us replicate that safety record pretty closely.

There have been numerous analyses from the financial angle with some baffling assumptions of fixed ticket prices for 20-25 years and no mentions of ancillary revenue like advertising and catering. Further on, folks need to remember that this is not a corporate project which needs complete repayment within 10-15 years to be viable. Even if the government absorbs some loss, that’s still acceptable as long as the system produces safe and productive results.

An expensive new technology always seems like a luxury at first. Even all the metro projects in India were opposed and now they are the lifelines of cities. Saying that “Hey, lets wait till we repair all roads and eliminate all poverty” is futile because such a situation is nothing more than wishful thinking.

Investing in quality infrastructure will only pay richer dividends and help solve some of the problems mentioned above. Short term improvements are crucial, but let’s keep a long term outlook folks; that’s how we can realize the dream of a modern prosperous India that we all aspire for !

Book review of Trevor Noah’s “Born a crime”


Being a fan of late night comedy talk shows, I am a fan of many fine speakers like Bill Maher, Stephen Colbert and Seth Meyers. My favorite though is Trevor Noah, a South African comedian, who hosts the “Daily Show” on Comedy Central. What has impressed me most about Trevor is how he goes beyond mere slapstick comedy and puts in some emotion and character into the news so that it is more relatable. Recently he published his first book “Born a crime – Stories from a South African childhood” and in many ways it is even more impressive than his talk show.

Trevor Noah was born in South Africa during the apartheid regime when state sponsored racism against black people was rampant. The title “Born a crime” comes from the fact he was born to a black mother but a white father in the times where inter-racial sex was punishable by law.

This ‘crime’ results in a childhood filled with cat and mouse encounters where Trevor’s mother tries to hide him from the society which could take him way at any moment. South Africa’s tyrannical white rule is lifted when Trevor is still a child. Suddenly exposed to the new free world, the mischievous and restless young spirit inside him sets forth to hustle and grab every opportunity that comes his away; all with the support and encouragement of his fearless and rebellious mother whose relationship with her son forms the foundation of this book.

Autobiographies or self memoirs is not my preferred genre, but this book has a very refreshing and serene feel to it right from the first chapter. The book is filled with candid and expressive stories, ranging from setting up a pirated CD shop, being thrown from a moving car during an attempted kidnapping, dealing with an abusive step-father, to pitfalls of high school dating and many more.

This could have turned out to be a grim and sad narrative. But every story sparkles with Trevor’s incisive wit and subtle sense of humor elevating them to a moving but still enjoyable read. What impressed me was how Trevor goes about narrating important incidences in his life instead of just going in a chronological fashion which could induce boredom.

The book paints a very heartfelt and sometimes deeply moving portrait of a witty young man faced with racism and abuse, but with the adventurous spirit to rise above it. If you are looking for some storytelling which is compelling and humorous, have a read guys !

Where’s the science, President ?

When I first started this blog with my friend about 2.5 years ago, it was with an intention to put forward our ideas about science and math. I remember the high school days when we used to discuss vague topics in science, often baffling people around us. Never do I recollect talking about politics though. This blog followed the same trend with scores of articles about astronomy, statistics, economics but hardly any political commentary.

But the extraordinary events going on in the name of the great 2016 American Election have made me sit up and take notice. Everyone of us has an opinion about Donald Trump. I am not here to do any general Trump bashing. Much of that is available on youtube and probably in a more entertaining manner than I might present things here. The angle which I want to cover here is the amazing disregard for science and math that this presidential race has shown.

I have been living in the U.S. for more than 3 years now. Many things have surprised me about this country, but one aspect that has been reinforced is the level of scientific progress here. Countless researchers are involved in working on ground breaking technologies and discoveries all over the country. U.S accounts for more than 30% of scientific publications in the world annually. Equally impressive is the staggering number of students assisting in the endeavor.

But judging from how the presidential campaign is going on, one would hardly think that science is even a subject taught in high school. Right from the primaries, the focus has been on immigration and economics. In the primary debates, the only scientific topic that came up was climate change. It is perhaps the most important concern facing humankind right now. But most of the candidates treated it how a child treats the last 2 problems of his/her homework; they just want to finish it off quickly so that they can go out and play with their buddies.

A look at Hilary Clinton’s webpage shows only a tiny section about climate change as a representative for science. Donald Trump’s page doesn’t even have a mention about it.The whole point of this election has become about two grownups coming close to retirement age squabbling like 10 year old kids over petty issues. Important topics like space exploration, new manufacturing techniques and renewable energy development have been left in the dark.  We can make the world a better place if we give greater impetus to these, but they are almost absent in the hate and blame rhetoric that has characterized this election.

My other big concern is about how numbers and statistics have been blatantly disregarded. Much of this blame has to fall on Trump. Trump has often sought to use his cult of personality to make statements which are blatant lies. One of the many examples of this is how he claims that U.S. unemployment is growing worse. He once claimed that U.S. employment stands at a grand total of 42%. For people who believe in him, that might set big alarm bells ringing. Upon closer examination, his numbers actually include anyone who doesn’t have full time 40hr employment, and that includes high school, college or graduate student, a stay-at-home parent, a job-training participant and even retired senior citizens ! Factor all that out and the harshest number that you can come up with is 16%. That is more than 2.5 times smaller than Trump’s claims. Facts should be the cornerstone of our social lives and if we get blinded by rousing emotions and charisma of the person in front of us, then it can paint a very wrong picture of our society.

Now you might think that a President has nothing to do with science. Let’s leave all that to the universities and industries, shall we ? Well, that’s way off the mark. Let me redirect your attention to Mohamed Nasheed, former president of Maldives, a tiny island nation in the Indian Ocean. Realizing that rising sea levels due to climate change could potentially sink his country, he launched a huge campaign to battle against climate change. He lobbied with leaders of countries far more powerful than Maldives to implement pro-climate measures. He also implemented policies to make Maldives a carbon-neutral nation by 2020. Today he is regarded as a climate change hero all over the world for his tenacity.

If any of the two candidates shows even a fraction of the regard for science as Nasheed showed, U.S could go a long way in helping solve not only the nation’s but the world’s problems, Instead of spreading communal hatred and mistrust, people need to be encouraged to believe in the power of reason and scientific truth. J.F.K’s words in 1961 about sending a man to the moon may have been driven by the cold war, but they revolutionized NASA and has led to a huge boost to space technology which is positively impacting lives all over the world. This once again shows what strong political will can achieve. As Carl Sagan once said, “The earth is but a pale blue dot”; Instead of wasting time on communal tensions, we can let science and math guide our way into a better future.

God gave us integers !


Mathematics has become such an integral part of our lives that we hardly stop to think about it. We check our bill at the grocery store;  even without realizing that the basic math we are doing is actually a great power we have to understand nature.

On one hand, mathematical constructs like series, functions, calculus sound like something which is fit for textbooks and in the hands of engineers and scientists. But the history of mathematical discovery is very rich and diverse; the various branches of algebra, geometry, calculus, probability, statistics etc have had very different origins.

Pascal and Fermat, two Frenchmen basically developed the modern theory of probability in a series of letters to each other. Pascal was a mathematician and Fermat a lawyer, both concerned with the question of fairness in splitting up the prize money of an unfinished game of chance. They calculated the probabilities of outcomes and gave the definition of expected value.

Calculus was formulated by Isaac Newton because the prevalent rules of math weren’t enough for him to explain his work in acceleration and gravitation. Calculus allowed him to explain gravity in quite a beautiful fashion and his science became the bedrock of physics for many centuries to come.

On the other hand, there are many mathematical concepts developed just for sake of logic with no immediate practical relevance in mind; but these turn out to explain physical phenomena in nature which are discovered years later. E.g. the brilliant Indian mathematician Ramanujan published numerous equations and theorems in his brief lifetime in first 2 decades of the 20th century. His work has pervaded many areas of modern mathematics and physics. This begs the question, is math a human invention or is it a discovery of some underlying principles of nature…just like other sciences ?

A perspective that can be useful is to see how math is essential to understanding the complexities of nature. Just consider the simple action of throwing a ball in the air in front of you. Newton’s laws will give us pretty much the exact position where the ball will land. So one might consider math as some sort of tool created by us which gives us the info we need.

But nature is not always as simple as throwing a ball in the air. When we consider complicated systems like nature, we start realizing that our basic laws do not seem to useful in predicting outcomes. So does math have a boundary in which it can’t operate? Well, that’s really not the case; math can actually help us understand why nature behaves so erratically and cause what mathematicians call “Chaos”.

We don’t even need a system as complex as the weather to understand chaos. Let’s consider a simple expression f(x)=1-2x^2. To introduce complexity, we loop this expression by itself in the foll way :

f[x]= 1-2x^2 ; f2[x]=f[f[x]] ; f3[x] = f[f2[x]] … f25[x] = f[f24[x]]…

Let’s graph values for this functions for many iterations. We will use a starting value of x=1/π but once with 16 decimals and once with 15 decimals. The results are presented in the graph below.


We see a very surprising trend after about 60 iterations. Even though the difference between two x values is very small, the function values start fluctuating wildly. Thus we can see how even a small difference in the initial conditions can affect the final result. This is known as the butterfly effect. It is said that a butterfly flapping its wings in one part of the world could possibly kickstart a series of events which can lead to a tornado on the other side of planet. Such is the fine margin that nature operates on. It’s important to highlight that this type of chaos generated is completely deterministic unlike truly random events.

Well one might say that we could avoid such chaos by simply using a perfect value for the inputs in our calculations. But as we will show, that is often not possible. Let’s take the example of the number π.

π is defined as the ratio of the circumference of a circle to its diameter. It is calculated by integrating smaller chunks of circular motion along the orbit. But we can only get results of this integration by approximating it to the best possible decimal. π is an irrational number, meaning the digits after the decimal place do not follow any pattern infinitely. The only way to get a value of pi is to approximate up to as many decimal places as our computing system allows.

Thus there is always going to be an error in measurement of inputs when it comes to any calculation involving π. In applications like space orbits when magnitudes are huge, this can lead to big differences based on what level of approximation that we use for π.

The German mathematician, Leopold Kronecker, once said that “God gave us the integers, all else is the work of man”. It seems to imply that most math is just pure human invention. It might be so on paper, but it is beautifully ingrained in nature and is vital for us to understand it’s mysteries. As we have seen, the best simulator of nature is nature itself and it seems like nature is unaware of its future. But math helps us grasp the depths of this uncertainty; so we can almost say that the closest we can get to nature is through mathematical ‘discoveries’.


Mystery of Pi

Chaos & Self-similarity

26 letters, infinite emotions !

books new

“Hillman shouldn’t be allowed to give you any more books” said my roommate with an exasperated look on his face. I had just returned from University of Pittsburgh’s Hillman library with another book to add to the plenty lying around in my room.

It was the spring semester of 2014. I was just into my second semester in my master’s program with a mountain of work awaiting me every day. But the feel of picking up a paperback often made all the stress go away. It’s been a year on; but as always I’m immersed in a book, finding solace in troubled times.

There is something intangibly good about reading a book. It’s all about building your own world. The world around us today is full of streamed media. Information and content is thrown at us from every device. The news anchor excitingly debating the day’s stock market rise, the youtube video showing us viral images, the Netflix account on our pc having enough shows to fill 24 hours and more. But nowhere is our mind more challenged than while reading.

Reading a book is like re-writing it for yourself.
–Angela Carter

A good book touches your deepest emotions. The world around us dissolves and we enter our own crazy space. A space filled with the joys and sorrows of the characters of the book. We often live their lives. It’s us flying across the field on a broom, not a young bespectacled wizard. It’s not the eccentric pipe smoking Holmes finding clues, around the house it’s us. It’s not the world leader telling the tale of his journey; it’s us living it. It’s not the pirate journeying across the seas, it’s us riding on.

This connect is unique; and that’s because a book forces us to think for ourselves and not just drink in images.  Every reader can interpret the story in his/her unique way; can enjoy the book with their own flow. That’s what makes a book such a treasured possession.

The Clock Ticks On ….


Let us rewind our clock to the very start of the twentieth century. It is a nice, cool day in Switzerland. A young clerk from the government patent department is sitting in his office. His table lies strewn with applications aplenty. But he is undeterred by the pile of work in front of him. He is lost in his own world. The world of time. His journey excites him. It causes him to dream. It is a journey unlike any other.

Remember the grand old clock on the bedroom wall? Remember that incessant ringing of the mobile phone alarm, that worry in your mind when you were late for an important exam? Small moments, but they all point to the existence of our life’s biggest overlord – Time.

Time is so deeply intertwined into our daily existence that we hardly pause to think about it. When was the last time you stepped back from your day and pondered what these moments of time really meant?

All of us have tried to control time. Let your mind wander to those wonderful last moments you spent with your loved ones. Maybe you haven’t met some of them for a long while. But still those memories are as fresh and refreshing as a cool early morning breeze. Don’t you pine for those moments to come back? You would probably want them to last a lifetime.

Let’s step back and think. What would a world without the flow of time be? A world where you could lock in that wonderful embrace for as long as you want. A world where you could stay a child forever… in the care of your loving parents. A world where you could live forever. A world where you could lie back on your favorite chair and read that book for whatever time you feel. Travel the whole world without worrying about moments ticking down to the end of your life. Seems like utopia, doesn’t it?

Now let the rest of the story unravel. Come out of that embrace and you will see that the rest of the world has moved along. You wanted to go to that nice place along the river. But it is no longer there. The friend you wanted to catch up with.. he has moved on to newer pastures.

If you leave your parents, you will see the world of opportunities you missed out while you were still a child. The world outside has evolved from the one you left.

An infinitely lasting world means nobody dies. Nobody leaves an imprint on our minds. They are always around. There are no lasting legacies and no fond memories. No history will be unique. No story enchanting. Everything that has happened will happen again. The hands of our watches will tick away for infinity. But will we have truly lived? It’s hard to tell.  Maybe it’s the flow of time which makes the world as we experience it.

We are back to Switzerland. Many years have passed since the clerk first let his mind roam into the farthest reaches of time and space. In just some days, his ideas are about to transform him into a superstar. His signature grizzly moustache and the fuzzy hair will cast a huge shadow on the world.

Albert Einstein may have revolutionized the way science perceives time. But even after all these years, I wonder if we really have unraveled all the mysteries of time… What do you think?