Tuesday, 26 August 2014

Book Review: The Big Short, by Michael Lewis (2010)

An entertaining autopsy of the great sub-prime mortgage recession from the perspective of those who saw it coming, Michael Lewis' The Big Short is a fabulously readable and humorous financial disaster story.

Lewis tracks down the individuals inside the Wall Street banks, hedge funds and private investment firms who took the time to spot the growing insanity of money being shovelled to unworthy borrowers, and the subsequent mortgages being packaged and peddled as AAA investments to unsuspecting investors.

As with many situations requiring uncommon wisdom to stand against the tide, the characters who had the resolve to bet that the mortgage-backed bond industry was a house of cards about to crumble were oddballs and outsiders. Steve Eisman was a caustic lawyer turned equity analyst with a sharp, foul-mouthed attitude that co-workers either loved or hated. Together with friends and colleagues Vincent Daniels and Danny Moses, he founded Front Point Partners. Eisman took a deep dive into researching the sub-prime mortgage world, did not like what he saw, and started betting against it.

Michael Burry was even more of a loner. Fighting a variety of physical ailments including childhood cancer and the loss of one eye, Burry was a doctor before becoming an accidental investment blogger, and then created Scion Capital. He uniquely understood the inherent weakness of junk mortgage bonds labelled as low risk investments, and rapidly growing into a trillion dollar industry built on giving enormous amounts of money to borrowers who could never repay their loans. Burry was the primary instigator behind the invention of the credit default swap for mortgage backed securities, essentially a tool to short (or bet against the viability) of bonds being sold as prime investments.

Greg Lippman was perhaps the one insider who saw the disaster coming. A consummate bond salesman working for Deutche Bank on Wall Street, Lippman took the time to understand what people like Eisman and Burry were saying, and from his vantage position as an insider started the incredible movement towards the large Wall Street firms betting against the very product that they were selling.

And there was the trio of Charlie Ledley, Ben Hockett and Jamie Mai, founders of small time investment firm Cornwall Capital with a talent for betting against whatever Wall Street was peddling. They stumbled into the world of credit default swaps, could not believe the opportunity, and jumped in with two feet.

For every big winner there are also many losers, and Lewis also turns the spotlight to the world of the investment rating agencies being outclassed by the banks, and the clueless CEOs and bond traders who rode the wave of wealth being created from thin air and never took the time to understand their own products or foresee the impending market implosion.

But this is not just a book about who, but also how. Lewis manages the difficult task of transforming the highly complicated and jargon-filled world of finance into a smoothly accessible human-centred story. He does not shy away from the details, but explains the complexities in common language, and repeats the most difficult concepts in various contexts to help the reader grasp the intricacies of an opaque world that set off on a feeding frenzy of money from nothing, and headed towards a cliff at high speed.

And drawing on extensive interviews, Lewis recreates, often with terrific humour, the key meetings, encounters and inner thoughts of the principal players as the disaster detonates, banks disintegrate and the financial markets are shaken to their foundations.

And in the end there is the human toll, as the high-stakes game of betting that trillions of dollars of paper wealth will evaporate causes unimaginable stress, even among the men who made the right call against all the odds and prevailing logic. The Big Short is an incredible true story, and an astoundingly good read.

Subtitled "Inside The Doomsday Machine".
Published in paperback by W.W. Norton & Company.
264 pages, plus Afterword and Index.

All Ace Black Blog Book Reviews are here.

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