Book Review
Title: The Big Short: Inside the Doomsday Machine
Author: Michael Lewis
Rating: (5)
Michael Lewis’ books are always great reads and this is no exception. One of the late arrivals about the subprime scandal, it is by far the best read and surprisingly informative. Lewis takes a completely different angle from all the others, focusing on a few small traders that anticipated the collapse and bet against the real estate bubble. John Paulson won big money fame for using credit default swaps to “short” subprime mortgages (making some $20 billion for his hedge fund), but he was relatively late on this trade. He bet big and his timing was perfect. Lewis tracks the earliest traders, all small timers usually with limited Wall Street experience, discovering the wackiness of the subprime market and figuring out how to bet against it. Lewis describes the histories of their bets and how they did it, as well as considering the less-than-brilliant players on the other side. He presents the evidence of the big-time Wall Street firms that didn’t get it. They jumped into the structured finance of turning lousy mortgages into AAA bonds, including the piles of cash they made. The banks maintained huge amounts for their own accountings—this is the part that’s a real puzzle. Of course, the market crashed and the “shorts” made a fortune, while the banks lost big and either failed or were bailed out by the feds. (The morons on the failing side also made a fortune for the most part, demonstrating the insidious world of investment banking and the compensation structure. Morgan Stanley collateralized debt obligation trader Howie Hubler lost MS over $9 billion, the record trading loss on Wall Street, but kept million of dollars in compensation.)
This is a must read for anyone interested in the subprime scandal. It does help to have a working knowledge of the topic. Lewis is great as turning an extraordinarily dull and complicated subject into a fascinating story. He can also coin a phrase. Consider this one: “An investor who went from the stock market to the bond market was like a small, furry creature raised on an island without predators removed to a pit full of pythons” (p. 61). Or consider these: “Across Wall Street, subprime mortgage bond traders were long and wrong” (p. 198); “When banking stops, credit stops, and when credit stops, trade stops—The entire modern world was premised on the ability to buy now and pay later” (p. 222).
