The Big Short : Inside the Doomsday Machine (Hardcover)--by Michael Lewis [2010 Edition] ISBN: 9780393072235

by Michael Lewis

Hardcover, no date

Call number

330.793 LEW



Michael Lewis (no date)


The author examines the causes of the U.S. stock market crash of 2008 and its relation to overpriced real estate, bad mortgages, shareholder demand for excessive profits, and the growth of toxic derivatives.

Media reviews

Thinking about the subprime crisis with the benefit of da Vinci’s distance, it struck me anew how Darwinian and predatory the whole system is. One constantly has to ask, Cui Bono: “Who benefits?” And Ubi Est Mea: “Where’s mine?” One of Eisman’s traders was constantly obsessed with how
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the party on the other side might screw him (though “screw” was not the word used). That is probably a good attitude to have on Wall Street.
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4 more
By focusing so precisely on the particular, Lewis makes the objects of his scrutiny stand for the whole of the financial world: its obscurantism, under-regulation and wildly short-termist institutional profiteering; the bank bosses’ reluctance to scrutinise the mechanics and risks of their most
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profitable divisions; and the general refusal to understand the connection between the profits made and the dangerous actuality they were based on: in this case, the deliberately over-complicated financial “instruments” and the poor Americans who were about to default on their mortgages.
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In his new book, Lewis is neither obnoxious nor charming. The skies have fallen. The market Wall Street created in the housing debt of the very poorest Americans, so-called "sub-prime" mortgage bonds and various derivative securities, which fell to bits in 2007 and all but engulfed the world in
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2008, is the greatest financial fraud since the 18th century. Men and women who once made us laugh now make us shudder. In other words, The Big Short is not half the fun of Liar's Poker, but it is more important.
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Lewis is a gifted chronicler and debunker and demystifier of the world of finance.
No one writes with more narrative panache about money and finance than Mr. Lewis, the author of “Liar’s Poker,” that now classic portrait of 1980s Wall Street. His entertaining new book does not attempt a macro view of the financial crisis, but instead proposes to open a small window on the
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calamities by recounting the stories of some savvy renegades who cashed in on their conviction that the system was rotten.
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User reviews

LibraryThing member Carmenere
Once upon a time there were an attorney, a neurologist and a couple of guys working out of a garage with barely $100,000.00 in a Schwab account. These men, independently yet concurrently, took to studying the stock market and all found that something didn’t look right with the somewhat new
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subprime market. Logic and common sense told them that although burgeoning, this bubble would, at some point, burst and burst big. How long, they reasoned, could banks continue to extend credit to less and less credit worthy customers with 0% down payment, no evidence of income and with an adjustable interest rate mortgage spread over 30 years? How much longer could Wall Street sell these risky mortgages, now, bundled together as bonds, to investors before people would begin defaulting on their loans?
However, this is no fairy tale. Reading how these perceptive gentlemen found a way to work this market, legitimately I may add, to their advantage is a new brand of The American Dream whereby the average Joe can go from rags to riches. But, there is another side to the coin. For there were other average Joes who were being fooled, tricked and persuaded into believing they could own a slice of the American Dream without the knowledge or wherewithal to see that the Day of Reckoning is on the horizon. I would like to read, if it indeed it exists, a book from this side of the coin and learn how they were negatively affected. For, as Edmund Burke said, "Those who don't know history are destined to repeat it."

By selecting likeable and interesting people to focus on, Lewis delivers a fascinating story. To the novice, the Wall Street jargon may be rather baffling but he offers enough background to meet the needs of the beginner while at the same time speaking to the expert intelligently.
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LibraryThing member JollyContrarian
Michael Lewis is one of the most gifted and entertaining writers today - anyone who has read his reputation-forming Liar's Poker will know this (if you haven't, and you aspire to a career in finance, you should), but his subsequent offerings, particularly the singularly brilliant Moneyball have
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also been outstanding. He distinguishes himself from his peers firstly by his thorough insider's understanding of how, when and why finance works (and by extension how, when and why it doesn't) but also a deft turn of phrase and devastating wit. When the subject is the logic-defying but leaden topic of tranched portfolio credit derivative armageddon, both attributes are in good demand. And both, in the shape of Lewis' airy but insightful writing, are in abundant supply.

The rosette for "best book about the financial meltdown" is hotly contested - luminaries such as George Soros, Mohamed El-Erian and Hank Paulson have entered more or less weighty tomes (some excellent, some portentous, some a bit wacky); as have well-respected and deeply learned journalists like the NY Times' Andrew Ross Sorkin and the FT's Gillian Tett.

I thought I had awarded my own best-in-show to Sorkin for his massive and all-encompassing political tome, which manages to encompass the total business perspective across an extraordinarily wide theatre of conflict, somehow holding the whole thing in focus the whole time. A criticism I had seen levelled at that book was that, while it admirably covered the outright red alert state of affairs that prevailed at boardroom level for a couple of years after the credit crunch, it failed - didn't really even try - to explain what, economically, caused all this mess in the first place.

Here, therefore, is the ideal companion volume. Instead of viewing the battle from Operations HQ by reference to the crisis meetings of Wall Street's and Washington's Masters of the Universe (the image that comes to mind is beetroot-faced generals strutting about impotently while the Andrews Sisters push military units around a big map with snooker cues), Lewis takes us right into the heat of the combat, like a journalist embedded with a crack squad of advanced position infantry men as they dodged sniper fire and the general fog of war armed only with a Rusty Humvee and some tarpaulin (think Generation Kill as opposed to Downfall).

This strategy enables Lewis to tell some interesting human stories - the rag-tag collection of fellow travellers he introduces us to are, as befits players in a tragic farce - idiosyncratic outsiders and loners - but through their experiences Lewis offers uncommon colour as to what it is like at ground level engaging with Wall Street.

Along the way you will learn, with great clarity and simplicity of image - exactly what mezzanine mortgages-backed CDOs were, why the went wrong, and how the self-fulfilling cycle of CDO creation ratcheted a well-intentioned risk-spreading device into something which was nothing more, really than a glorified ponzi-scheme. And, unlike Bernie Madoff's scheme, which took some time and expertise (if not much) to reverse engineer and figure out, this one - an order of magnitude larger - went on in full, transparent view of everyone.

That said, I do think Lewis over-simplifies, though not in ways that fatally undermine his case - but in ways that are calculated to make the whole market sound as preposterous as absolutely possible; an exertion which really was not needed. The role of AIG and the Monolines, for example, in converting the "towers of dross" into triple A securities, was under-explained. Lewis characterised the insurers as investors: in a sense they were, but actually they were insurers of the performance of these bonds for other investors - yes; exposed to the risk of their default so investors in that sense, but in return lending their own triple-A credit rating to the senior slices of what Lewis compellingly describes as a cow pat pie.

Lewis is especially, and incompatibly, unkind to some investment bankers in particular (a point well made by David Bahnsen in his excellent Amazon review), and having read this, it comes as no surprise that The Big Short should have fuelled the ire of the Senate financial services committee - whose chairman repeatedly referred to it - in its recent hearing on the Goldman Sachs Abacus situation, Goldman being repeatedly implicated within Lewis' pages.

With that in mind it will be interesting to see how The Big Short fares in this year's Goldman Sachs/Financial Times business book of the year (among the judges: L Blankfein)

But if Goldman is bagged, poor Howie Hubler from Morgan Stanley - who had the prescience to short the mezzanine tranches, but catered for the negative carry of his CDS premia by going long the (equally suspect) triple A tranches (ouch) but in ten times the size (ouch to the power of ten) thus losing nearly ten billion on a single trade is utterly excoriated.

Not poor Howie at all, actually, as he (like all Bank employees) got to keep previous (multi-million dollar) bonuses and was simply deprived of his own "forward carry" - a small and asymmetrical price to pay for putting 15bn of his employer's shareholders' money at risk.

Lewis handles the build-up to the final collapse masterfully - especially the lack of faith shown in his motley band of brothers by their own investors even as CDO indices plummeted yet, by some remarkable anomaly, the mark-to-market valuations of their short positions continued to decline - and the denouement when it finally arrives is as striking as you'd expect (Lewis, with a thriller-writer's flair, pegs it to a (positive) CDO forum being held at Bear Stearns, during which Bear's stock price, hour by hour, tanked.

As the dust clears Lewis returns to Liar's Poker, which he regrets has been read more as a how-to guide rather than the cautionary tale he intended. As an odd coda, in the epilogue, Lewis meets his old boss and nemesis (though from the exchange it transpires to be the other way round!) John Guttfreund. Clearly Guttfreund hasn't got over the damage Lewis did to his reputation (to be fair, Lewis was simply the first among many - and Guttfreund did preside over the most catastrophic hedge fund failure of all time well after Liar's Poker was published, so it's a bit glib of Guttfreund to sheet all his troubles back to Michael Lewis), and even now Lewis has not entirely forgiven the old Titan, for ushering in the era of the publicly owned investment bank, which Lewis contends was the sine qua non which made all of this disaster possible.

An interesting thought, whether that impulse, so many years ago, might have led to all this now.
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LibraryThing member hugh_ashton
This is not an easy book to get on with. Don't expect the easy style of Moneyball or Liar's Poker, let alone The Blind Side. For one thing, this is a lot more serious than baseball. Not that Michael Lewis doesn't do a great job of explaining what went on in the back rooms and trading desks of Wall
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Street - but this is all somewhat more complex than simply balancing your checkbook, a fact duly acknowledged by Lewis in many places.

As always, Lewis is a great explainer - in my eyes he is one of the best non-fiction writers going. Not only does he have a gift for bringing the tiny significant details into the limelight and explaining them to the layman – he also has a gift for getting inside people's heads and explaining what makes people tick. Lewis is one writer I would like to meet and learn from.

What the book brings home is the absolute failure of an unregulated financial sector. It's not a failure of capitalism per se, but it shows that all systems need governance, and that the so-called "free market" of the 90s and 00s is as much of a disaster as Soviet-style state control. And if anyone wants to attack this viewpoint, may I humbly suggest that (a) you verify your credentials as a derivatives trader or (b) show that you have read this book before doing so. If you don't understand at a basic level the way in which the elements of the whole crazy alphabet soup of the financial world etc. all worked together, then you have no right to bleat about how "the government" caused the collapse of Wall Street. True, there was pressure placed upon lenders to lend. But there was no pressure for those who weren't even lenders to make up and trade synthetic derivative products for billions of dollars, knowing at heart they were junk.

Read this in conjunction with other books, such as Gillian Tett's "Fool's Gold" and so on in order to get an understanding of the mess that we are in now.
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LibraryThing member TheAmpersand
An absolutely riveting "financial thriller" that describes how three groups of investors, working independently, managed to win big betting against an overinflated housing market. Lewis, who's intimately familiar with the subject of monetary misadventure, uses these intertwined narratives as a tool
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to make an extremely complex subject accessible to the lay reader. "The Big Short" is, among other things, the clearest explanation of the Crash of '08 that I've read to date. CDOs, mortgage bonds, floating ARM loans: they're all explained here in gruesome detail. The book also provides fascinating portraits of its oddball investor heroes. It seems that making money off real estate derivatives was such an intoxicating experience for Wall Street that it took a slightly cracked outsider to see how doomed the market really was. In more personal terms, it's gratifying to see these talented eccentrics – most of them late bloomers without any formal training in finance – beat the Wall Street pros and make a bundle doing it. Lastly, "The Big Short" is a stunning indictment of Wall Street fecklessness and irresponsibility. Say what you will about those Occupy Wall Street folks beating on drums in downtown Manhattan: "The Big Short" will make you want to heave a brick through the window of an investment bank and hide your own money in a mattress. After finishing Lewis's book, you'll never look at modern capitalism the same way again.
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LibraryThing member hugh_ashton
I think this is the best one that Michael Lewis has produced so far, in terms of content. I started it the evening I got it, and woke up early the next morning to finish it. Maybe Moneyball was a little more accessible – after all, second- and third-order derivatives are, almost by definition,
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complex and baffling – but in the long run, it doesn't really matter whether the Oakland Athletics or the New York Yankees win their league or division. It does, however, matter a lot if the financial industry creates a trillion dollars of worthless "Monopoly money" and then persuades the government to exchange it for real money on a one-for-one basis.

Once again, Lewis explains a complex situation through the eyes of edgy outsider contrarians who are out to beat the system by exposing its inherent weaknesses, and we learn, along with them, of the shameful excesses and actions of these "blue-chip" institutions.

If the book has a fault, it's that it's not hard enough on the government regulators and organizations who gave the taxpayers' money to these banks. I'm guessing that the publisher got a few cold feet, and the legal section advised some parts to be snipped out. After all, if you stressed Hank Paulson's previous ties to Goldman Sachs and then in the next paragraph explain how the Treasury gave preferential treatment to Goldman Sachs, you might just be laying yourself open to some sort of legal threats.

That aside, I recommend it to anyone who has an interest in how the financial world got royally worked over by a small gang of ruthless con-men.
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LibraryThing member Avolyn
This book is presented to us in a reader friendly manner that makes this complicated story of true events easy to follow and the dots easy to connect. The recession of 2008 impacted nearly everyone in the United States and made its presence known all over the globe from the trickle down after
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effects that were spread out to other nations as well. There were many factors that contributed to the events of 2008 but there were key mistakes that were made and key shifts in the world of investing that played a major role and contributed greatly to these events.

Even if you are not familiar with investing or not of a financial background, this book will be easy for you to follow and a worthwhile read. I'd recommend this book to just about anyone and I feel it is an important read and book to have in your library.
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LibraryThing member publiusdb
Michael Lewis can tell a story like no other. Anyone who can take the financial crisis of the last few years, find a story in it that centers around subprime mortgages and shorting the market (if you understand what that means and how to do it, you're more than a step ahead of me and about anyone
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else I've mentioned it to over the last couple weeks), and then make it interesting to the lay reader deserves to be read.

In many ways (if not all ways), the stock market is a giant enigma to me, which brings to mind how Winston Churchill once described Russia: "I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest." If there is a key to the enigma, with that riddle wrapped in a mystery inside it, that is the stock market, perhaps the key is found in the self-interest of the individuals participating in the market. Not just the stock and bond traders that made up the named characters of "The Big Short," but even the home buyers and owners that took out second, third, and fourth mortgages, bought two, three, and four "investment" properties, the loan originators who sought them out and offered no interest loans, and the banks that sliced up the loans to fill tranches (there's another cryptic word for you) for trading as bonds to and between the financial houses on Wall Street.

In other words, as Gordon Gecko might say: greed. Greed of bonds traders, floor traders, home buyers, loan originators, strawberry pickers, and house cleaners. Greed by just about everyone involved, from the top all the way down to the bottom.

Lewis, known for his writing in "The Blind Side" and in "Money Ball," with "The Big Short: Inside the Doomsday Machine" returns to his original stomping ground covered in "Liar's Poker: Rising Through the Wreckage on Wall Street." Finding the few who saw the crash coming, he pulls together a narrative about those who anticipated the crash and saw it coming. While so many were getting rich off trading subprime mortgage based bonds, a few individuals realized that the underlying assets to the housing bubble were not stable and predicted that as interest rates on adjustable rate mortgages became due, defaults would sky-rocket and the bonds' values would crash.

And then they bet against it, cashing in lucratively when the predicted defaults began.

What makes the story fascinating, of course, is the attention to the often colorful and more than slightly eccentric personalities that comprised the handful of individuals in the story. The stock market is difficult to understand for a simple reason--its workings are data driven and few pay the price to understand the numbers and analysis behind the market. In contrast, those who did, and those who got lucky, were often driven by a narrow-minded focus the data. From an neurologist turned hedge fund manager diagnosed with Aspergers in the midst of the story to a couple of young college grads who all but lucked into it, to a loud mouthed malcontent who made a habit of sticking it to the big wigs on Wall Street who lost investors money to the crisis, the "The Big Short" is replete with Lewis's deft story telling.

Whether you are interested in finance or just looking for a great story, "The Big Short" is worth the time to read. I listened to it in the car, and often found myself sitting in the driveway waiting for the end of a section. More, it introduced me to concepts and interests that I'm exploring further in other books. Read in conjunction with "Too Big to Fail," which I read last year, it provides an up close look at what was going on and why our economy is dragging through the longest recession in a generation.

One last observation: one aspect that this book noted that continues to shock me no matter how many times I hear it over the last four years is how people with little or no credit history or ability managed to get so much financing. From immigrant strawberry pickers in California with $750,000 mortgages to house cleaners in Brooklyn with four and five town homes, obtuse financial incentives to originators and investors alike distorted the market in ways that were dangerous to all of us. While I look forward to other financial histories for other perspectives, Lewis seems to make clear that it wasn't so much the free market that failed, but the financial incentives that were built into it. In the end, the old adages "if it's too good to be true, it probably is" and "there's no such thing as a free lunch" seem even more relevant today than ever. Be careful when the snake oil salesman comes calling. He may not have your best interests at heart, and he may not even know it himself.
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LibraryThing member rsubber
Lewis has the inside story from a couple investors who realized what was happening with subprime mortgages and credit default swaps and derivatives, and very successfully went short on mortgage bonds and brokers and banks that were dealing in them. The revelations about the criminal and immoral
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behavior of the mortgage lenders, bankers, brokers, rating agencies and regulators are deadening and disheartening. Powerful interests flouted the law and did what they wanted to do to make lots of money, putting an entire nation and the world at risk. The scope of the crime made it impossible to escape the financial meltdown, and most of those responsible kept their money and stayed out of jail. Lewis made it possible for me to get a satisfying understanding of the financial instruments and the convoluted criminal process of creating them and hiding them. Very readable, arcane financial stuff in only a few places.
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LibraryThing member rivkat
For an example of something that didn’t need to be a conspiracy, see the recent economic collapse due to the securitization of obviously bad debt. Lewis follows several men who saw that the house of cards was nothing but bad paper and ultimately made billions of dollars from betting on the
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collapse. What’s striking is how public they were: they didn’t hide their insights, or the facts underlying their reasoning, in the slightest. They were yelling and screaming! Other people were making too much money to care, though, and plenty of people simply didn’t understand the alchemy that appeared to turn crappy debt into rock-solid securities. It’s a frustrating story, especially when the government appears near the end only to prop up the people who made all the mistakes in the first place.
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LibraryThing member billiecat
On page 243 of this book, Charlie Ledley explains to an old professor of his what happened clearer than anybody has in the thousands of pages of reports, articles and lawsuit complaints I have read: "“I remember he started by asking me ‘do you know what a mezzanine CDO is?’ And he started to
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explain to me how it all worked”: how Wall Street investment banks somehow had conned the rating agencies into blessing piles of crappy loans; how this had enabled the lending of trillions of dollars to ordinary Americans; how the ordinary Americans had happily complied and told the lies they needed to tell to obtain the loans; how the machinery that turned the loans into supposedly risk-less securities was so complicated that investors had ceased to evaluate risks; how the problem had grown so big that end was bound to be cataclysmic and have big social and political consequences." That's it in a nutshell. So if you are going to read Lewis's book to try to understand what happened, I've relieved you of that obligation. But if you were going to do that, you were going to read it for the wrong reasons anyway. It's a fascinating, infuriating, expertly told tale, but ultimately it's the story of how a bunch of guys got rich for being smart and a bunch of other guys got rich for being dumb or crooks, when the deep, convoluted mess that was our economy burst like a suppurating wound in September 2008, and the great mass of society got stuck with the tab. That same Charlie Ledley, one of the less-reprehensible-than-the-dumb-guys-and crooks smart guys, when he pauses from making money off the disgrace, sees the implications of the scandal - "Either the game was totally rigged, or we had gone totally fucking crazy. The fraud was so obvious that it seemed to us it had implications for democracy. We actually got scared." Everyone is still scared, but nothing seems to have changed. As another prophet, Howard Beale, once said: "I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell, "I'm as mad as hell, and I'm not going to take this anymore!"
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LibraryThing member phebj
This is the true story of a handful of investors who bet a relatively small amount of money in the mid-2000s that the housing market would collapse. It took approximately 2 years for their bets to pay off but they made a ton of money. They placed their bets by buying exotic financial instruments
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(specifically, credit default swaps on collateralized debt obligations, or "CDOs," backed by triple-B or lower-rated tranches of mortgage bonds) that the vast majority of people, including the Wall Street firms that sold them, didn't fully understand.

Most people couldn't conceive of housing prices falling everywhere in the country at once and, as a result, Wall Street firms didn't have to do much to convince the rating agencies to give triple-A ratings to securities backed primarily by subprime mortgage bonds. Those triple-A ratings then gave everyone else an excuse to ignore the risks they were running. "Wall Street investment banks had somehow conned the rating agencies into blessing piles of crappy loans; . . . the machinery that turned the loans into supposedly riskless securities was so complicated that investors had ceased to evaluate risks." (p 243)

Lewis describes most people on Wall Street as stupid rather than corrupt. "One of the reasons Wall Street had cooked up this new industry called structured finance was that its old-fashioned business was every day less profitable. The profits in stockbroking, along with those in more conventional sorts of bond broking, had been squashed by Internet competition." (p 172) The problem was that Wall Street CEOs didn't really know their balance sheets anymore and therefore did not understand the risks their banks were taking (and the regulators knew even less). As Lewis says, on page 177, "far too many people were taking far too many financial statements on faith." And, "the rating agencies had abandoned their posts . . . they were almost surely rating CDOs without knowing exactly what was inside them."

Lewis thinks Wall Street firms took a wrong turn when they started to go public because that's when "they transferred the ultimate financial risk from themselves to their shareholders. . . . The shareholders who financed the risk taking had no real understanding of what the risk takers were doing. . . . All that was clear was that the profits to be had from smart people making complicated bets overwhelmed anything that could be had from servicing customers, or allocating capital to productive enterprise." (p 258)

He also takes aim at the system of incentives on Wall Street that made even people on the wrong side of the housing market bet rich. "What are the odds that people will make smart decisions about money if they don't need to make smart decisions--if they can get rich making dumb decisions?" (p 257)

And finally he points out that Wall Street firms may have disdained the need for government regulation in good times but insisted on being rescued by the government in bad times or, as he puts it, "success was individual achievement; failure was a social problem." (p 210) At the end, he quotes John Gutfreund, the former head of Salomon Brothers and his former boss, as saying "It's laissez-faire until you get in deep shit." (p 264)

This is a well-written and very entertaining book but also a very disturbing one. The investors Lewis focuses on may have been smart but it's hard to see them as heros. They were able to see reality when most people couldn't or wouldn't and were rewarded by making billions of dollars but they made that money because the housing market collapsed and alot of people suffered.

Wish this book had an index and a glossary and that the descriptions of the exotic financial instruments were a little clearer (but maybe that's impossible). I did really like it and would highly recommend it, but I think it would be easier to understand if you read a book about the big picture first (such as Chasing Goldman Sachs). 4 1/2 starts.
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LibraryThing member Schmerguls
This 2010 book tells of the people who saw that the securities backed by bad mortgages would become wothless and devised a way to short those securities. One is appalled to see how wong so many supposedly smart honest people were--and the horrendous losses which the companies they ran sustained on
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account of their dumbness or crookedness. I found it scary to realize what they did and the danger they were to the country.
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LibraryThing member dougcornelius
In The Big Short, Lewis uses two people who saw the problems with the subprime mortgage industry to act as the lens for the story. Michael Burry is a one-eyed hedge fund manager with Asperger’s syndrome. Burry liked to remain isolated from public opinion and human contact. He focused on hard data
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and the incentives involved in the human behavior in the financial markets. Steve Eisman was another money manager. Eisman was convinced that the subprime mortgage market was full of corruption and exploitation.

Lewis points out how Wall Street was gaming the rating agencies. They knew the agencies were looking at an average credit score of the borrower, not each individual borrower. So they would package a barbell of loans. Throw together a bunch of credit scores that are horrible and very likely to default. Then sprinkle in enough loans with high credit scores to get the average credit score just right.

The rating agencies has flawed formulas and Wall Street knew it. After all, Wall Street helped create the formulas.

The rating agencies gave bonds full of floating rate loans a higher rating than those with fixed interest rates. The flawed logic was that borrowers would be just as likely to make payments at 12% as they were at 8%. Obviously, the bigger problem was that borrowers couldn’t make the payments at 8% in the first place.

Eisman and Bury both saw the flaws in the system and made big bets against sub-prime mortgage bonds using credit default swaps. They saw lots of subprime loans being made with loan interest rate teasers that would reset in two years. The borrowers couldn’t afford the property at the teaser rate and would clearly default when the rate reset unless property values continued their astronomical increases.

Lewis did write a great article in Vanity Fair on Iceland’s Financial Metldown. That story paints a similar of tale of over-exuberance in the financial markets.

The Big Short does a great job of explaining how loans are packaged into commercial mortgage backed securities (CMBS) they sliced up into tranches and sold as bonds, repaid by the cash flow from underlying mortgages. The tranches that get paid first receive the highest rating of AAA, labeling as nearly risk free as US Treasury bonds.

Then Lewis focuses squarely on collateral debt obligations (CDOs) that repackage the lower rated tranches of CMBS into new mortgage bonds. As with the CMBS, the tranches that got repaid first received the AAA rating. That was the alchemy, turning garbage into gold.

If you want more detail on the market for subprime mortgage-backed CDOs read the thesis from A.K. Barnett-Hart, a Harvard undergraduate: The Story of the CDO Market Meltdown: An Empirical Analysis. Lewis cites her thesis as being more interesting than any Wall Street research on the topic.

I recommend that you add The Big Short to your reading list and move it to the top of the list.
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LibraryThing member JonArnold
If you’re looking for an understanding of exactly what happened in the financial markets to cause the stock market to crash in 2007, The Big Short is as close as you’ll come to a coherent explanation. While you’re unlikely to understand exactly what the CDOs which caused the crash were, their
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nature isn't particularly important- they’re only the MacGuffin of the story. Lewis explains them as best as possible in English, but as the nature of the story here tells you that Wall Street’s obfuscatory jargon succeeded in concealing their true nature you may end up none the wiser.

The Big Short is essentially a modern version of The Emperor’s New Clothes, with the part of the boy who dared to point out the nudity taken by the unlikely figure of Michael Burry, a medical student with one eye and Asperger’s Syndrome who had gained a very minor financial celebrity with some smart blogging. Initially no-one listens, but in a testament to Richard Dawkins’ theory of the meme it gradually spreads through Greg Lippmann, the founders of Cornwall Capital and finally Steve Eisman. The bulk of the book is about the inexorable spread of the realisation that Wall Street had come up with a means to package junk bonds (those unlikely to retain a high level of payment) as triple A rated bonds, and that when those junk bonds inevitably went belly up there was a fortune to be made. Lewis, as proven with the likes of Liar’s Poker, Moneyball and The Blind Side, is expert at finding the story and building tension as investors who see their money being bet against conventional market wisdom start getting itchy trigger fingers and start wanting their money back as Wall Street appears to be colluding to hide the scale of the CDO problem. As we now know, eventually the market collapses, taking down Lehmann Brothers and Bear Stearns and essentially resulting in many of the other firms being bailed out. But the lucky few who’ve seen the Wall Street emperor’s covering his dignity as well as Ron Jeremy does make it out not only alive but rich. Essentially, they’re rewarded for their foresight in stepping away from the herd.

As with Liar’s Poker it’s Lewis’ ability to capture the nature of the characters involved and his eye for telling detail that makes a book about financial trading amidst mainly conventionally unlikeable characters compelling. Eisman, Lippmann and Burry wouldn’t exactly be the first candidates for representing their country at the United Nations. But even they appear best buddy material compared to the likes of Howie Hubman and Wing Chu, brash upstarts who smugly collect their money whilst the going’s good with sub-prime mortgage bonds... and end up walking away millions of pounds personally richer despite having orchestrated some of the worst losses in Wall Street history.

That ends up being the real sting in the tale. Despite nearly bringing the whole economy crashing down, after Lehman and Bear Stearns fail the US Government jumps in to prop up other banks, Secretary of the Treasury Henry Paulson (a former CEO of Goldman Sachs under whose reign a huge number of the eventually toxic CDOs were created) ending up essentially giving the banks cash... which they end up using to go back to business as usual. It’s as pointless as having tipped that cash into the Atlantic Ocean – it’s simply ended up propping up what’s been comprehensively demonstrated to be a corrupt, flawed system which ends up rewarding failure and complacency as much as success and foresight. It’s a disquieting note on which to end the story, the thought that the system which failed so badly is still there having learned none of the lessons it should have.

Thematically, this feels like the sequel to Liar’s Poker, as well timed as Gordon Gecko’s equivalent filmic return. And like that pair of films, this seems like another warning about the state of Wall Street. On this evidence any putative third instalment of either might simply be a survey of the devastation of a financial atomic bomb.
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LibraryThing member GShuk
Great story from the view of those who saw the sub prime mortgage coming and made money from it. It explained part of the financial meltdown in an easy to understand way. He also tries to explain credit default swaps and collateralized debt obligations.
LibraryThing member bragan
I have a confession to make: I really do not understand money. Oh, I can handle my own household finances just fine. I know how to balance a checkbook, and all my bills get paid on time. But once you get into the abstract realms of money as a business and start talking about stocks and bonds and
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other, more esoteric financial doings, my mind tends to seize up and my eyes to glaze over. It's not that I'm stupid -- I did manage to earn a degree in astrophysics -- but somehow whatever part of the brain is necessary to understanding Wall Street, mine appears to be missing. (Or, as I like to put it: "I know this isn't rocket science. I understand rocket science!")

Nevertheless, being someone who lives on the planet Earth, and thus being affected by the latest economic debacle, I do want to at least try to understand what happened. I eventually managed to glean at least a sketchy and basic idea about the origins of the subprime mortgage crisis, largely thanks to a couple of well-produced segments on NPR's This American Life, and I was hoping that reading this book might illuminate things a little further for me.

Well, the answer to that is yes and no. Lewis' description of the events leading up to the crisis and the people who saw it coming doesn't assume any expertise or Wall Street insider knowledge on the part of the reader, but it's not exactly the "...for Dummies" version, either. A lot of the details went over my head, and I'm still not sure I could adequately define some of the basic concepts. But if it hasn't exactly given me a clear understanding of what happened, it's at least made my murky understanding a lot broader and deeper, which is something. And Lewis' writing is good. The portraits he paints of some of the personalities involved are interesting, and the sheer insanity of the whole thing does come through loud and clear.

I'm rating this one 3.5/5, but I feel I should note that that's an extremely personal assessment, based on how much I got out of it. I'm pretty sure that anyone with even slightly more of a head for this stuff will find it more rewarding than I did.
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LibraryThing member justindtapp

This book is primarily about greed. I would sum up the moral of this book with Proverbs 22:16:
He who oppresses the poor to make more for himself
Or who gives to the rich, will only come to poverty.

Lewis (The Blind Side, Liar's Poker) is one of the best nonfiction writers of our time, a fantastic
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storyteller. If you've not read his long-form article in Vanity Fair on the Greek debt crisis from last year, it's very much worth your time and you'll see why any efforts to keep Greece on the euro will ultimately fail.

This tells the story of some of the very few people who called the housing bubble correctly, put their money where their mouth was, and made hundreds of millions of dollars.

Michael Burry (this video posted by Bloomberg today tells his story), a former neurosurgeon turned California hedge fund manager who discovers he has Asperger syndrome during the course of his story. His Aspergers explain why he was so successful at consistently being ahead of the market, but also why he burnt out emotionally.

Steve Eisman, a cynical bond trader who also probably has some mental disorder, who often confronted CEOs and other people he saw as villains. He saw shorting the housing market as part of a greater crusade.

A trio of normal guys who start fund called Cornwall Capital, basically betting on "Black Swan" events, even when they didn't know what they were doing.

These guys didn't get famous like John Paulson, but Paulson might not have existed without Burry originating the idea. But these guys pioneered the market for credit default swaps on housing-related CDOs. For Burry and Cornwall, they got to experience the rough treatment that outsiders get from firms like Goldman Sachs-- who basically cheat their customers when they can. (What are you going to do, sue Goldman Sachs?)

The underlying greed of those making money off of housing is the central theme in this book.
"In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000."

The loan is an adjustable rate loan made by someone-- a bank or a mortgage broker-- who knows the migrant won't be able to repay, but the lender doesn't care. Because he has already sold the loan to an investment bank and gotten paid a nice commission for it. Reproduce this transaction thousands of times over in the U.S. Lenders even start making interest-only loans where the borrower never pays down any principle. A stripper in Vegas somehow gets five home equity loans...The investment bank takes the loans and packages them into asset-backed securities (ABS), a pool of mortgages of varying quality which it convinces Moody's or S&P to rate AAA.

Moody's and S&P get paid fees for doing this, so they have an incentive to rate as many assets as they can, even if they think the underlying loans are junk-- that's not their problem. Next, another investment bank might buy several of the ABS and strip out some of the worst tranches, repackage them into a CDO. Even though the underlying mortgages are of low quality, the ratings agencies again rate the CDO as AAA. Maybe because their models say that the low-quality loans are from various regions of the country, and U.S. home values have never all fallen at once (no one was alive in the 1930s, right?). Or their models were flawed in other ways -- rating a floating-rate mortgage higher than a fixed rate, assuming someone could make payments just as easily at 12% as 8%, etc. Maybe because the fees they're raking in help their bottom lines and boosts their stock price--they are publicly traded companies. Maybe because they're incompetent (the smartest guys on Wall Street don't work at the ratings agencies).

When there are no more loans to be made, CDOs are re-created synthetically, multiplying the amount of people who are basically betting on these assets. But very few people recognized that these assets would go bust when rates adjusted upwards in a couple years. Their trading desks kept billions of dollars worth on their books. Their risk management models only speculated that maybe 5% of the underlying loans would default. Everyone is basically passing the buck-- we collect our fees and commissions now, worry about the rest later.

Guys like Burry and Eisman bought millions of dollars worth of credit default swaps on these CDOs, insurance that would pay out if the assets became worth less. When they finally did, the biggest financial companies in the world paid up and went bust.

At one point in 2006 Eisman is invited to a subprime conference in Vegas organized solely to promote mortgage-backed securities and convince investors to stay in the market. He is basically awestruck by how how dumb everyone is and how "the world has turned upside down." The guys creating the CDOs, the trading desks buying them up, everyone seems to be drinking the kool aid that these are safe bets.

"Something must have come over Eisman, for he stopped looking for a fight and started looking for higher understanding. He walked around the Las Vegas casino incredulous at the spectacle before him: seven thousand people, all of whom seemed delighted with the world as they found it. A society with deep, troubling economic problems had rigged itself to disguise those problems, and the chief beneficiaries of the deceit were its financial middlemen. How could this be?"

There is a lot of profanity in this book, Lewis wants the world to see that Wall Street, where he used to work, is not holy. The "villains" of the story, the mortgage brokers, the CDO sellers, the traders and CEOs who lost their companies billions betting on CDOs, mostly walk away with their bank accounts intact, and keeping the millions in bonuses they earned along the way. The taxpayers took the ultimate fall along with, of course, those who lost their homes.

Despite the profanity, I have made it a required text in Money & Banking. The students will see that they will be confronted with incentives that may conflict with Christian ethics. Would you really care what the adverse consequences for others might be so long as you're making millions of dollars? Would you pass the buck? They will also see that it's not true or that simple to say "everyone knew the housing bubble would burst," or "it was all the government's fault."

I give this book 4 stars out of 5. What I really gleaned from the book is the importance of the ratings agencies in all of this. There are so many accounting rules and laws in our financial system that revolve around capital cushions and the value of assets, and if something is rated AAA and is really BBB-, that causes a lot of problems. It doesn't appear to me that those problems are very easily solvable.
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LibraryThing member Periodista
As good as it gets. This is not a book you pick up because Lewis usually has an entertaining spin and attitude on any subject. You have to be truly interested in the mechanics behind the 2008 economic crash. I'd read God-knows-how many news stories and didn't realize that credit default swaps were
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*insurance* on the bond bundles of crapulous mortgages. And AIG was the initial insurer. How could so many layers of people--AIG!--be so stupid? Well, with one or two exceptions, you won't learn who was stupid and who was plain evil.

Lewis focuses on the stories and chaacters of some of the few people who had the foresight to see disaster early on and bet against it. (This took an incredible amount of work!) There are two investment fund managers--one in New York and a California medical doctor with Asperger's--and a pair of young amateur semi-doofuses investing for themselves and a few friends. The pros are not quite the assholes I would have guessed. The first actually tried to warn about the dangers of subprime mortgages when they surfaced small-scale in the 1990s and he kept saying so publicly in the 00's even as he was buying up the swaps. The Asperger's guy would rather go long on equities. Lewis clearly hates the Lehman Bros types and the top executives of investment banks for packaging the crappy bonds in the first place much more. Not to mention the ratings agencies.

You will be disappointed, though, if you are looking for answers about the laws and regulations, or lack of, that made the whole mess likely. Where was the regulatory oversight? I was especially disappointed by the quickie wrap-up re Washington's rescue response. OK, you couldn't let all these banks and houses fail. Lehman's collapse sent the world economy into a tailspin. But the government should have retained more control in the ones it helped out. Why not at least fire the top executives? There must have been a lot of pro and con arguments goings on, within the White Houses, and among economists. You get no sense of the rationale for what was done.

Lewis is really sloppy with his terms at this point too, talking of the govt giving handouts and bailing out banks, leaving the impression these were straight giveaways for God knows what. But they were loans that have been paid back, right? I supposed the book would have been much longer with that kind of information. Politics and policy have never been Lewis's strong point--which is pretty weird for someone that lived in D.C. But I'd like to read a book that explains that! Maybe Too Big Too Fail?
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LibraryThing member nosajeel
A fast-paced, well-told story of the subprime meltdown and a few of the short sellers who predicted and profited from it. The account is almost entirely journalistic and relies heavily on the cooperation of the heroes that it portrays. Less finely drawn are the stock villains, the Wall Street
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traders who make large bets on the other side, the middle-men who pass on CDOs without holding any them themselves, and the ratings agencies.

Michael Lewis has an amazing eye for detail, pacing, and ability to tell multiple perspectives of a story through people's lives. Although the book comes from a clear perspective, it has almost no analysis and draws little in the way of conclusions -- except to argue that investment banks should not have gone public, which whatever your perspective seems at most to be a small part of the story -- especially since the agency problem portrayed by the book seems like it would be equally difficult to address at a partnership (i.e., a trader with a good year followed by a spectacularly bad year walking away with a large paycheck while management has little ability to understand and/or supervise their trades).
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LibraryThing member Tonestaple
I would have given this 3.5 stars if that were possible as this is a good but incomplete story about the financial debacle of 2008 and three men who made a fortune off of it by seeing it coming. It's absolutely worth reading, if only for the moment when one of the main characters realizes that the
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Chairman of Bank of America is "an idiot." In addition to that one moment, it contains many moments of dark humor and information one would never find in newspapers.
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LibraryThing member gbelik
This book got me about as close as I'm going to get to understanding credit default swaps and collateralized debt obligations. Normally, my eyes glaze over and my mind wanders at the very mention of finance, so this book gets kudos for just keeping me interested. Lewis achieves this by
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personalizing the story, following several individuals who are pessimistic about the mortgage bond market and its spinoffs and who bet against banks and brokerages who are putting together increasing incomprehensible financial instruments. They ultimately make lots of money as the economy goes up in flames.
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LibraryThing member Jordan.Hunt
One of the easier to read books on the financial collapse that originated in the subprime mortgage market. That said, this book is still a challenge for those who don't have a background in economics. I left the book with a somewhat hazy general picture of what happened, though some of the details
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left me scratching my head.

Lewis takes a unique approach- by telling the story of investors who predicted the collapse and actually put their money where their mouths were, Lewis simultaneously develops credibility and a readable narrative.

In a nutshell, the subprime mortgage fiasco was the result of a new lending paradigm. Unlike the traditional model involving a bank that gives loans to vetted customers, this new paradigm saw mortgage companies sell their loans to banks who then resold those same loans to fund managers. The connection between lender and lendee was lost- no one knew the status of the people in the homes, and no one cared because faith in the U.S. housing market was unshakable.

There is more here. Credit default swaps and other funky things. Just know that you don't need to understand everything to walk away feeling like you understood something. Highly recommended.
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LibraryThing member DougJ110
Insightful and funny. Michael Lewis is always a pleasure to read.
LibraryThing member jcbrunner
Arriving very late to the party, I finally read Lewis' The Big Short. I enjoyed both his Liar's Poker and Moneyball. His talent of drawing quirky portraits is again on display. The Big Short might also be called "The Revenge of the Nerds". In Lewis' tale, it is only the outcasts, the socially
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misfits and cranks. who discover that the US real estate market has run amok, fueled by easy money provided both by the FED and Wall Street whose greedy investment bankers eagerly sold their clients toxic sludge with Triple A ratings, signed by Moody's and Standard & Poor's. Lewis' tale is a good yarn of David vs. Goliath (where Goliath is rescued by government life support). The banks, the rating agencies and the regulators thus are allowed off the hook far too easily.

The crisis of 2008 happened because criminal activities were not checked by the watchdogs whose sole job would have been to keep those criminals in check. As Lewis shows, the bosses in the rating agencies were not unaware that BBB tranches could not magically all be turned into AAA tranches. They signaled and made clear to their employees that they wanted this fraud to proceed (and were compensated for their sale of their reputation accordingly by the investment banks). The retail banks knew that "liar loans" were not worth the contract paper they were signed on. They willingly handed on unsound risks to dumb investors (often European) who believed in the "made in the USA" quality label, despite much prior experience with the shoddy quality of US cars which should have cured anyone from such an idea. Lawyers and regulators also, for a fee, looked away, actively directing the Titanic onto the iceberg. Instead of paying the price for their folly, the criminals not only were allowed to keep their loot, government handed them huge amounts of money. In directing his focus on the few who stood on the right side of history, Lewis allows the culprits to get away. Just like Liar's Poker became a manual for junior Gordon Geckos. The Big Short might train the next generation of real estate crooks.
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LibraryThing member jawalter
A little bit nauseating, but undeniably brilliant. Lewis explores some of the same territory covered by This American Life and Planet Money in their great deconstructions of the 2009 financial meltdown, but manages to make it feel fresh and interesting.

Admittedly, the book does tend to get a bit
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too technical at times, but it's almost as if that's part of the point. What happened in the subprime mortgage market does its level best to defy explanation, as people we expect to be very smart managed to do very dumb things. In a lot of ways, The Big Short reminded me very much of the other Michael Lewis book I've read, Moneyball, which has a very similar story of the small group of people who are able to recognize flaws and oncoming changes in a system and use that to achieve an advantage on the entrenched group of people who refuse to acknowledge that the present or future will be any different than the past.
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