“The Big Short”: A Book Review

7 Apr

The Big Short, by Michael Lewis, is a heckuva read, with passionate and clever-but-flawed heroes, greedy villains, historical scope and ultimate tragedy of an epic movie. If you’re looking for an intense, focused morality play on the financial crisis circa 2005-2009, start here.

Subtitled “Inside the Doomsday Machine”, Lewis follows traders who — whether through their own quirks, iconoclasm, oddity or Aspberger’s-fueled hyper-focus — saw it coming and put their money where their brains were, placing hundreds of millions of dollars in bets against the subprime mortgage market.  And they kept with those ‘shorts’ despite the disdain of an entire industry, angry investors, and their own feeling that they must be missing something — that all of these smart guys in charge of big investment couldn’t possibly be missing what they saw so clearly.

Amid a compelling business yarn, Lewis’ real contribution was to find a way to help us almost understand the financial instruments cited as the proximal cause of the system’s downfall — credit default swaps, collateralized debt obligations. He educates the reader with careful, dramatic repetition of how these instruments were variously made so esoteric and complex that they hid vast risk both from buyers, their backers — like AIG, who apparently had no idea that they were essentially on the hook for the failure of mortgages that were increasingly likely to fail — and the sellers themselves, who, when AIG stopped backing the these insurance polices on subprime mortgages apparently started backing them themselves. Or something like that.

In the end, The Big Short is a tragedy. The hubris of the great financial firms brings them down, but “down” is a relative term given the wealth and comfort of those at the top. T’he “winners” Lewis follows, like Dr. Michael Burry, find themselves unloved and disregarded for being stubbornly right from the start; or like hedge fund manager Steve Eisman who made a lot of money only to be confronted with the devastation of the colleagues in the subprime bond market he’d bet against.

The Big Short is a bit of living history…it’s not over yet. It’s a story for anyone who enjoys a good business yarn, wants to understand what happened behind all the politics of the financial collapse, or wants to know what it takes (and the price) to stick to your (well-researched) convictions when all the world is against you.

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